Australian Markets Weekly

e week commences against the backdrop of Friday’s stronger-than-expected US non-farm payrolls report for November (which included favourable diffusion indexes and temp help trends signalling ongoing stronger outcomes).

By

Labour markets and the NAB business survey

The week commences against the backdrop of Friday’s stronger-than-expected US non-farm payrolls report for November (which included favourable diffusion indexes and temp help trends signalling ongoing stronger outcomes). This drove further strength in the US$ and a sell-off in US bond markets. The first US rate increase is priced for Q3 2015. With speculation growing of RBA action to reduce interest rates in the New Year, the $A continues to trade heavily – falling another US cent on Friday night and testing US$0.83 this morning (the lowest level in nearly four and a half years). This development will of course be welcomed by the RBA and is a trend likely to be continued with Australia’s major commodity prices sustaining lower levels and Australian-US interest rate differentials moving against the Aussie.

The deterioration in the terms of trade and the release of weaker-than-expected September quarter national accounts last week suggest increased risk that Australia will experience a longer period of below-trend growth than the RBA previously envisaged (which in reality was already quite an extended period stretching to H2 2016). With inflation trending lower (and to be further assisted by recent oil price falls), the RBA has scope to further support the economy, should it so choose. NAB is reviewing its economic, currency and interest rate forecasts and will release revised forecasts on Tuesday with the publication of the NAB Business Survey for November at 11.30am.

Investors need to assess both the implications of the recent further decline in the terms of trade (and associated negative shock to real income) together with the possibility of further decline. We will seek to run these scenarios through our models and report in next week’s Australian Markets Weekly, but can already make a number of observations: (i) these developments seem an unambiguous negative for the A$; (ii) the weaker national income implied will likely act to delay the return to above trend growth (and rate rises); and (iii) the budgets of the Commonwealth and WA in particular will be negatively affected. It will be important, however, to distinguish between the impacts on the non-mining economy and the mining economy, as the latter cannot significantly be impacted by rate policy.

The Mid-Year Economic and Fiscal Outlook is released next week. We expect downwardly revised economic forecasts and an upwardly revised forecast budget deficit track over the next four years. Importantly – and appropriately in our opinion – the Treasurer stated last week that neither the MYEFO nor next year’s budget will seek to tighten fiscal policy to offset the effects of the further weakness in the terms of trade, given the weak state of the economy. This may attract rating agency interest.

The other key events this week are labour market indicators on Monday and Thursday and housing and consumer confidence data for October on Wednesday. The papers are covering the broad-ranging recommendations of the Murray Financial Services Inquiry, details of which were released on Sunday. Customers wishing to hear NAB credit analyst Simon Fletcher’s views on the implications should email simon.fletcher@nab.com.au. The implied impact on lending rates seems sufficiently small to not be significant for Australian interest rate markets or monetary policy expectations.

Some improvement continuing in the labour market

In this Weekly we take a closer look at what the labour market is currently telling us about the Australian economy. Given the many diverse and large shocks currently impacting the economy, we continue to see labour market indicators as important aggregators of the net effect of these shocks on the economy. Given the problems the ABS has been having with its data, it is impossible to have any confidence in the monthly employment data until it stabilises somewhat. My colleague Peter Jolly has constructed an indicator of the pulse of employment, based on the trend in the NAB business survey employment measure and job advertising. These two indicators suggest employment is currently growing at around 12-15,000 per month. Note also that tomorrow the ABS will be announcing the results of a technical review of its methodology together with its own response. This may introduce some changes ahead of Thursday’s labour market release.

SEEK, which has the dominant market share of online job advertising in Australia, released its November job advertising data on Thursday, earlier than is usually the case. This job ads release has more detailed information on state trends in advertising and SEEK has recently also been reporting advertising trends by industry. The data shows a number of important trends, some of which conform to expectation and some of which are a little surprising

  • Job advertisements rose for the fourth consecutive month in November, though as the chart shows, to date this is the mildest pick up in job advertising in the past decade;
  • The rise was driven by another strong gain in NSW, Australia’s largest economy, with a 2.4% m/m gain. This was the twelfth increase in the past thirteen months – NSW seems to be the strongest performing state economy at the present time (a claim reinforced by strong October retail sales data released during the week). Victoria also recorded a rise in advertising (+1.4% m/m) – the fourth consecutive increase – though in general, the Victorian labour advertising market is not growing as robustly as NSW. However, with the two largest labour markets recording positive growth (together accounting for around 56% of employment), there is an encouraging positive tilt to near-term employment outcomes;
  • The trends for Australia’s two other big states, WA and QLD – the states most exposed to the mining downturn – are also interesting. QLD is arguably the weakest labour market in the country as reflected by broadly flat job advertising trends over the past year. This mainly reflects weakness in coal-mining regions. WA, up until the sharp 7.4% fall recorded in November, seemed to be improving a little, in spite of further recent declines in commodity prices. We will keenly watch whether this month’s drop was the beginning of a new downturn related to recent commodity price falls or simply month-to-month volatility in these data as happens from time to time. The data however show the mining states (around one third of total employment) – significantly restraining national employment gains at the present time.

Taken together, these trends provide the somewhat surprising conclusion that at the present time, the net effect of the contractionary forces from weaker mining investment and still lower commodity prices are being outweighed (albeit marginally) by the expansionary impact of lower rates, impacting particularly through housing construction and related sectors.

This suggests any further easing being contemplated by the RBA at the current time would need to be considered as either:

  • designed to give some further assistance to the economy to foster a faster recovery toward trend growth;
  • is seeking to counteract an anticipated further contractionary impact from the recent further fall in the terms of trade.

We will continue to monitor trends in both the NAB business survey and job ads to help guide us as to the size of the net impact on the economy of these divergent and large forces. It will be important to calibrate whether the non-mining economy can continue to offset the drag from the mining economy. And perhaps more importantly for rate markets, whether there are any signs of second-round effects from the further deterioration in the mining economy back into the non-mining economy. Either way, the main conclusion remains recent developments in commodity prices and rate differentials are supportive of a still lower $A.

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets

Disclaimer