Australian Markets Weekly: 15 May 2017

Labour market outlook to improve.

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Overview:

  • In this week’s Weekly we look at the forward-looking indicators of the labour market ahead of the Statistician’s release of key labour market data of Wages (Wednesday) and Employment/Unemployment (Thursday).
  • Forward-looking indicators suggest improvement in the labour market is likely over coming months. The NAB Business Survey is consistent with employment growing by around 20k a month for the next three months. This pace should also be enough to put downward pressure on the unemployment rate.
  • Nevertheless, a clear gap has emerged between the official employment figures and leading indicators. It is not clear what has driven this divergence. Some of the gap likely reflects the notion of “payback” from the period in late 2015, when reported employment growth ran well ahead of the leading indicators. Structural change is also likely playing a role with the weakness in employment over the past year largely being concentrated in the retail sector. The ABS reports 60k retail jobs have been shed in the past year, roughly equivalent to 5% of total retail employment. Excluding the retail sector, total employment increased by around 200k in the past year – around the pace suggested by leading indicators.
  • Such a divergence has clearly worried the RBA. It is worth highlighting that the April Board Minutes noted that “although forward-looking indicators of labour demand continued to suggest an increase in employment growth…this had been true for some time without leading to an improvement in labour market conditions” and that the labour market (along with housing) “warranted careful monitoring over coming months”.
  • Strong employment figures last month have probably helped alleviate the RBA’s concerns for now. Governor Lowe noted in May “Encouragingly, employment growth has been a bit stronger of late and the forward-looking indicators suggest ongoing growth in employment.” Nevertheless, trends in the labour market will be key to the outlook for Australian interest rate expectations. (Also for the government’s medium-term budget deficit projections, which rely on a forecast significant improvement in wages growth.)
  • Our FX strategy team has today revised the near-term forecasts for the AUD and NZD slightly lower. In the case of AUD this follows the break below the range that has held since early January amid better USD performance and the recent sharp falls in commodity prices. In the case of the NZD, the RBNZ evidently sees things different to the market and we’ve lost faith in NZD recovering to any great extent over the short term. On AUD/USD we now forecast 0.73 for end June (was 0.75) and 0.71 (from 0.73) for end-September – the end-2017 forecast remains at 0.70.

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