Australian markets weekly

A final word on the Australia-US labour market comparison we wrote about last week. We would not have been surprised to see the US rate lower than Australia’s rate by now before seeing July’s US non-farm payrolls and Australia’s Labour Force report as they had almost converged

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RBA keeps rate steady, then downgrades growth

A final word on the Australia-US labour market comparison we wrote about last week. We would not have been surprised to see the US rate lower than Australia’s rate by now before seeing July’s US non-farm payrolls and Australia’s Labour Force report as they had almost converged. But we did not expect the two rates to converge/cross in the way it happened, and this week after seeing the US rate tick back up a point to 6.2! Now Australia’s 6.4% rate is 0.2% higher than the US rate, even if Australia’s rate was inflated somewhat by an amended/broader definition of what qualifies someone out of work as statistically “unemployed”.

The RBA noted Friday in their quarterly Statement that while “labour market indicators have improved a little since the turn of the year …. overall conditions remain subdued”. Seeing the rate had jumped to 6.4% for July (the Statement was finalised Thursday), they noted that the rate has been “quite volatile from month to month so far this year, while recognising that the measured unemployment rate is at its highest level in over a decade”. Prior to this year, the unemployment rate has not been 6% or above since 2003.

RBA more cautious on the economy’s outlook

Tuesday’s RBA Board meeting came and went with very little fanfare, the RBA re-affirming their view that “the most prudent course is likely to be a period of stability in interest rates”. There was almost no change in words on the economy or hints of forecast downgrades.

Friday’s Statement though was a surprise. The Bank downgraded their outlook for growth in a more sober assessment. They revised down growth by ¼% over the current financial year to 2½% (still described as “below trend”) and also for 2015/16 from “above trend” to “about trend”, also by ¼%.

Disappointments on recent consumer spending growth and non-mining investment led the RBA to the conclusion that soft growth will mean even more spare labour market capacity. There would not be a sustained reduction in the unemployment rate until 2016.

Inflation forecasts were lowered for the year ahead thanks to the assumed flow though from the abolition of the carbon tax, courtesy of the RBA’s use of Treasury modelling, to take ¾% off CPI through the likes of lower power prices in this half year with some additional indirect flow-on effects down the line. Beyond this financial year, inflation is forecast to remain in the upper part of the 2-3% target band.

Clearly, the RBA remains more wary about the economy’s (lack of) transition to stronger domestic demand. Some of this is coming now from dwelling investment, but consumption and non-mining investment remain soft, Federal and State fiscal policy is a headwind to growth, as is the exchange rate at current levels.

Week ahead – NAB Survey, Confidence, Wages

The monthly NAB Survey for July is released tomorrow. Confidence has held up well in recent months, edging higher in June to +8 from +7, and not showing any negative impact from the Federal Budget.

On Wednesday the monthly W-MI consumer confidence data should show some further net improvement. The weekly Roy Morgan confidence data suggest that confidence levels are back at pre-Budget levels, so after gains of 1.9% in July and 0.2% in June, the monthly series has scope for a moderate gain in August. The bounce may be softened by last week’s July unemployment outcome, affecting those responding to the Confidence Survey over the latter part of last week.

Also on Wednesday the Q2 wage cost index is released, which should confirm that wage pressures (and wages income growth) remain subdued. Weak employment growth and rising unemployment has seen modest wages growth since late 2012. Wages rose 0.7% in Q1, and the same outcome is forecast for Q2, keeping the annual pace at 2.6%yoy. The ABS house price series for Q2 is also released (tomorrow); these days the market focuses much more on the monthly RP Data-Rismark release, with July data having already seen the light of day.