Macro 4 minutes to read

August Jobs Seals the Deal on RBA Cut

Eleanor Creagh

Australian markets strategist, Saxo Bank

Summary:  The August jobs report on top of Tuesday’s dovish minutes seals the deal for the RBA to cut the official cash rate again in October from the current record low of 1.00% to 0.75% as we have previously thought.


Employment growth was robust, and participation hit a new record high rising by 0.1ppt to 66.2%, but unemployment has continued to push upwards since last year and has ticked up from 5.2% to 5.3% in August. This is because the increasing labour force size continues to outpace actual hiring.

The RBA now estimates the “non-accelerating inflation rate of unemployment” (NAIRU), which refers to a theoretical level of unemployment below which inflation would be expected to pick up, is now around 4.5% and could be lower and with unemployment now sitting at 5.3% it is well above the 4.5% needed for the RBA to satisfy its objective of full employment. And well above the level needed to spur wage gains and inflationary pressures. The RBA have previously outlined that they will use monetary policy to achieve their objectives, and the case for continued rate cuts remains, so we see no reason for the RBA to hold back in October.

Wage growth MIA

But the biggest issue in August’s jobs report is the increase in labour market slack which has seen the underutilisation rate, people who are either unemployed or looking for more hours of work, rising again to 13.8%. This spare capacity is a significant impediment to spurring wage gains. Underutilisation will need to fall substantially from the current level of 13.8% before seeing a material uptick in wages, in turn weighing on the ability for the RBA to reach their mandated underlying inflation target of 2-3%. Spare capacity in the labour market will continue to prevent upward pressure on wages from materialising and depress consumption spending, particularly against the backdrop of heightened economic uncertainty on both the domestic and global front. The outlook for consumption, the largest component of GDP (60%), therefore remains under pressure. An over-leveraged consumer who has whittled away their savings and is now devoid of any material pick up in wage growth is unlikely to increase discretionary spending, particularly given recent consumer sentiment surveys point to rising concerns over the economic outlook. Another worry relating to the consumption outlook and potential for private demand to pick up is the limited impact of the tax cuts to date. As the RBA minutes indicated, and we feared, the propensity to spend rather than save the extra cash has been limited. Instead consumers are choosing to deleverage given wage growth is weak and household debt levels remain high. The current low growth environment that Australia has seen since the economy lost momentum last year will be sustained for a prolonged period of time whilst the outlook for consumption is pressured by persistent stagnation in incomes.

Other aspects of the data also add to the case for the RBA to continue to cut the cash rate, as the pace of full-time job creation is slowing, and average hours worked is declining despite rising participation. So, although jobs are still being created and people are entering the labour force, the hours of work are dropping off indicating the quality of job creation is slipping.

Also of concern is the fact that forward looking indicators such as job adverts and vacancies continue to indicate further weakness is yet to materialise in the labour market. The residential construction cycle also remains in a downdraft which continues to pressure the outlook for construction employment and could see unemployment track higher in the coming months.

Meanwhile the RBA are also having to contend with a deteriorating global growth environment particularly in Europe and Asia as the business cycle slows. Additionally, the mounting impact of trade uncertainties, for which monetary policy is ill-equipped to address, will weigh on the RBA’s outlook for rates. The non-linearities that accompany the trade war and its secondary effects are not something that central bank models cannot account for. And even if monetary policy is ill-suited to deal with the by-products of a trade war, whilst international cooperation remains on the decline and Frydenberg lavishes his coveted soon to be surplus, the RBA have little choice but to act.

Disclaimer

Saxo Capital Markets (Australia) Pty Ltd 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 Combined 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.

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) Pty Ltd.
Level 25, 2 Park Street
NSW 2000
Sydney
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) Pty Ltd 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 & Combined Financial Services Guide & 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. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. 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.