Australian Markets Weekly

After several low quarterly increases, we expect Wednesday’s Q3 wage data to show a small up-tick in the annual growth rate from 2.6% yoy to 2.7% in Q3.


Downside risk to slowest wage growth in decades

After several low quarterly increases, we expect Wednesday’s Q3 wage data to show a small up-tick in the annual growth rate from 2.6% yoy to 2.7% in Q3.

We wouldn’t read this as a turn in the trend for wage growth. At best we see wage growth in the 2½-3% area over the next year or so, barely above the mid-point of the RBA‘s target inflation band. The risk to this forecast remains for even weaker wage outturns and further cuts in real incomes.

The key point to make about the labour market is that there is plenty of spare capacity and this is putting downward pressure on wage growth.

In last week’s revised labour force survey, the ABS reckoned the unemployment rate at 6.24% for October. The highest unemployment rate for this cycle, and highest rate since Sep 2002, makes for a weak labour market. But the degree of downward pressure on wage growth is probably even greater than this, at least from a historical perspective.

NAIRU has fallen and now seen at 5¼%

The NAIRU is not observable and is derived by modelling the past inter-relationships between the unemployment rate, wage growth, and inflation.

The upshot of a lower NAIRU is that today’s 6.24% unemployment rate puts downward pressure on wages but in 1993 it would have put upside pressure on wages, given the NAIRU then was 8½%.

The point of this analysis is that while the current 6.24% unemployment rate doesn’t sound all that high from a historical perspective (the average unemployment rate since data started in 1978 is 7%), it is generating a lot of downward pressure on wage growth.

Moreover, as we see the unemployment rate pushing towards 6½% in the next few quarters, and not sustainably falling until late-2015, the risk is that wage growth is even weaker ahead.

Weaker wage growth than the RBA expect

If wage growth did slip below 2½% this would 1) represent a further cut into real incomes and 2) be weaker wage growth than the RBA currently expect.

In Friday’s Statement on Monetary Policy the RBA wrote “Although wage growth is not expected to decline further, with many firms foreseeing a period of stable wage growth, pressure on public and private sector employers to contain costs means that wage growth is likely to remain low for a time and pick up only gradually towards the end of the forecast period.”.

Relevant to the public sector side of the story is that a week ago Australian Defence Force Personnel were granted a 1.5% increase in wages for each of the next three years. Many see this as a new low benchmark for public sector negotiations. If so, public sector wage growth, which was running at 2.8% yoy to Q2 2014, faces downside pressure.

RBA – Market still pricing next move is a cut

The RBA’s cash rate has been at 2½% for 15 months and as we have been saying it’s likely to be stuck there for a long while yet.  Friday’s Statement on Monetary Policy showed the economy is panning out pretty much as the RBA expected and their new forecasts were barely different from those a quarter earlier.

NAB’s interest rate forecast still sees modest rate hikes from Q4 2015, although the risk is this timing slips into the first half of 2016. The hurdle to cut again remains high and the economy would need to be weaker than we or the RBA presently expect.

On market pricing, there was a small trimming of rate cut expectations last week but overall the rate curve remains very flat. The one-year ahead RBA rate expectation is now put at a 4bps cut compared to a 10bps cut a week ago. First full 25bps hike is not priced until December 2016.

$A – Forecast revised lower. Now seen sub US 80cents

Today our FX Strategy team revised their AUD/USD forecasts lower. Full detail is in the Global FX Strategist. The key points they make are:

“The speed with which the USD/JPY run-up has broadened out into a more generalised bout of USD appreciation, means that many of the levels for major US dollar pairs we thought would be achieved only in 2015, are being realised much sooner.

Our expectation that Australia’s Terms of Trade will find a base above its long term average, and that a relative shallow Fed tightening cycle will be a restraining influence on the extent of ultimate US dollar appreciation, means we do not think the AUD will trade back to – or through – its historical post-float average of around 76 cents.”

Week Ahead – NAB Business Survey and China free-trade

Today’s Australian Newspaper suggests the finishing touches have been put on the free-trade agreement between Australia and China and a deal will be signed next Monday.

Interesting week for data in Australia, with the highlights to be October NAB Business Survey tomorrow, consumer confidence and wage data Wednesday.

The G20 Meeting is being held in Brisbane this coming weekend, on 15-16 November.

Offshore, a mix of data but no key events. The data highlights are in China: CPI today, and on Thursday industrial production, retail sales and fixed investment annual growth. Friday’s retail sales are the US highlight.

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