Australian Markets Weekly: 26 June 2017

Employment growth is realish.

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Overview:

  • In this week’s Weekly we look below the surface at recent employment growth, which has picked up to a 25k m/m trend pace, well above the 14k m/m pace required to keep the unemployment rate unchanged. Is it real? Our conclusion is mostly “yes”.
  • We dissect employment growth into its sample components to gauge whether recent growth is “real” or not. We find most of the jobs growth over the past 3-months has been driven by the common sample and not from sample rotation effects as had occurred in the past during months of strong employment gains. However, much of the growth in the common sample has come from changes in response rates (i.e. a person not answering last month but answering this month).
  • While it is likely the unmatched change in the common sample is more reflective of the level of employment, it is not necessarily an accurate representation of recent employment growth and should be read more as a correction to prior weak months when the person failed to respond to the labour market survey. This thus suggests the pace of employment growth may slow in the months ahead. Nevertheless, our NAB Business Survey still points to trend growth of around 20k m/m.
  • An industry breakdown of recent employment growth suggests it is broad-based with employment growing in industries that account for 74% of employment. Interestingly, the mining industry has turned from being a headwind to a tailwind, contributing around 13k jobs on net over the past year after prior declines. The improvement in mining employment is likely to reinforce the RBA’s view of the “transition to lower levels of mining investment…was almost complete”. The two weak points remain in retail (net -25k jobs lost y/y) and agriculture (net -22k y/y).
  • The past week has been quiet in markets. The most significant development has been the flurry of central banks removing expectations of further policy easing and getting the market into thinking about the possibility of removing accommodation. We think Australia will lag this development given elevated underemployment and subdued wages growth.
  • This week also looks quiet. Domestically we get Credit Statistics Friday with little in the way of other local data. Consequently domestic markets are likely to take their lead from international events, with US PCE inflation Friday along with China’s PMIs. There is also a plethora of central bank speakers offering many sound-bite opportunities. Those to watch include Draghi on Monday and Yellen on Wednesday.
  • AUD volatility remains by and large a function of USD volatility, prompting us to nudge our AUD/USD Q3 forecast up to 0.73 from 0.71 while retaining our 0.70 year-end forecast. The US dollar has at least stopped falling with lower yields, having earlier become slightly oversold. Higher wages and/or revived hopes for tax reform are pre-requisites for renewed USD appreciation, which we expect by Q4.

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