Australia Focus: Jobs, Recovery & RBA

Macro 7 minutes to read
Eleanor Creagh

Australian Market Strategist

Summary:  A summary of recent economic data, recovery trends and the RBA's stance.


Yesterday the labour market data came in weaker than consensus expectations, although hampered by seasonal factors with the Easter Holidays falling inside the reference period and the ABS citing the number of people taking leave over Easter as being unusually high. On the plus side the ABS detailing that the JobKeeper wage subsidy expiration had little to do with the weakness in hiring.

Full-time jobs rose 33,800 but part-time jobs fell 64,400 with overall employment falling -30,600. The first time in 7 months that jobs have declined. The headline unemployment rate fell to 5.5% but this was due to the participation rate declining to 66%. Hours worked dropped by 0.7% in April reflecting the increase in leave taken over Easter.

Of note, the underemployment rate fell to 7.8% which is the lowest level in 7 years. Underemployment (those employed but wanting to and available to work more hours), another contributor to labour market slack, typically accounts for most of the weakness in wage growth, rather than unemployment itself. Numerous recent research concludes that it is underemployment that has been significantly slowing down wage growth as in recent decades, underemployment has had a stronger relationship with wage growth than unemployment.

All in all, a mixed bag on the labour market.

The arguable curtailing of recovery momentum aligning with the drop in consumer confidence in May. Although, it must be noted that confidence is coming off of extremely elevated levels, and it could be argued that the increased number of people taking leave over Easter and declining underemployment is far from representative of weakness in the economy.

All told, the data highlighting that although the recovery seen to date in both the labour market and the economy has been full steam ahead and debatably world leading, there is still a lot of noise and the trajectory will not be linear.

The spotlight remains on the RBA’s ongoing challenge to meet mandated price targets, achieving their goal of a tighter labour market, wages growth and hence inflation. And alongside this their ability to wind back accommodative policy settings. With the borders remaining closed for the foreseeable future and the slow vaccine rollout/uptake there are plenty of hurdles still to overcome pertaining to continued non-linearity in the recovery. And on the other side, the expansionary budget delivered a fresh round of spending, adding to already buoyant business confidence and the potential for handover to the private sector in delivering a self-sustaining recovery.

Governor Lowe has stressed the RBA’s more reactive policy stance/inflation-targeting regime now requires actual, not forecast, inflation to be within the 2-3% target band before raising rates. This likely requires wages growth in the order of 3%, and a headline unemployment rate tracking 4% and below. The last time unemployment was close to 4% was back in August 2008.

Despite those end goals being a long way off the economy continues to track a stronger economic trajectory than forecast. Unless wage growth slows markedly in the June quarter the yearly growth should outpace the RBA’s updated forecasts, providing a read above 0.22%. And with wages currently tracking ~1.84% growth on a biannual basis it would be an unlikely outcome. According to anecdotal evidence wages are already on the rise. In combination with a continued decline in underemployment and emergent skills shortages there is evidence that wages are finally turning a corner. With the borders shut and set to remain so for the foreseeable future, skills shortages that are already an issue will remain, and this is just the cocktail to spark wages growth.

Will this be enough for the RBA set to make a decision on yield control and future bond purchases at its July 6 board meeting?

At present, the economy is far from full employment or full capacity, significant labour market slack remains, promoting weakness in wages and demand and limiting any underlying inflationary pressures. This was an ongoing problem pre-pandemic and as the economy continues the track forward and participation picks up, that spare capacity will remain for some time. In the March quarter of this year, wages have grown 0.6% from the prior quarter and 1.5% over the last year. Well below the 3% touted by Lowe. Although there are certainly emergent trends that remain positive, the reality is full employment is a long way off.

With inflation well below the RBA’s target band and the central bank having missed their target for a number of years, the RBA remains in a difficult position and rates are certainly set to remain at a historic low for quite some time - the onus is on the central bank to keep their foot on the gas. The same logic applies for maintaining the size and scale of their QE programme, with QE3, another $100bn likely to come in July. Another driver against tapering - avoiding unwanted upward pressure on the exchange rate, and stunting policy transmission via the exchange rate channel, whilst the RBA remain far from objectives - full employment, sustained wage growth and inflation back in the 2-3% target band remains a way off.

Although we see no taper and another $100bn in QE, when it comes to the RBA's YCC target, it is less likely this is extended to the Nov 2024 maturity. Were the RBA to extend, this would signal that the bank does not expect inflation will be sustainably back between their 2-3% target until late 2024, and rates would not be lifted until late '24. This would be at odds with recent commentary and any upside scenario that could entail.

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide and Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.