Australian Markets Weekly: 19 February 2018

Wages key to inflation and monetary policy.

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Overview:

  • Market volatility steadies last week as equity markets make some gains. The AUD opens the week at 0.79.
  • Employment grows further in January, extending the run of continuous employment growth to a record 16 months. Even so, the unemployment rate was 5.5%, still well above the presumed “full employment” rate of ~5%. The labour market still retains a degree of spare capacity, suggesting no immediate undue pressure on wage growth.
  • Last week’s NAB Business Survey for January revealed strong business conditions (at near-record levels), building business confidence at above-average levels, and rising capacity utilisation. Despite such still-positive growth metrics, the Survey reported steady annual labour costs growth at 4%, mainly we suspect from increased staffing numbers, confirmed by the ABS Labour Force release. (Employment growth was steady at 3.3% over the year to January.)
  • Most attention on the local economy this week will be on wages growth, with the Statistician releasing its Wage Price Index (WPI) for the December quarter. We preview this release in the Weekly as well as discussing the evolving outlook for wages growth, a very important element of the inflation story.
  • NAB expects another steady quarter of 0.5% growth in the WPI, for annual growth of 2.0%. Such an annual rate is below the growth rate that would see inflation sustainably move into the middle of the RBA’s 2-3% inflation target range.
  • Last quarter saw steady quarterly wages growth at 0.5% q/q, 2.0% y/y, despite the flow through of the 1 July 3.3% Minimum Wage increase. More of that impact could flow through this quarter; then we’d expect a wage increase more than 0.5% q/q. Q3 was below the market’s and RBA expectations. At 2%, wages growth is still well below the RBA’s 3½% wages growth yardstick that’s consistent with 2½% inflation target.
  • Also out this week are the RBA Minutes (considered we’ve heard a lot from the RBA recently) and Construction Work Done set for a large fall that’s more statistical in nature as last quarter was bloated by significant LNG platform imports.

For more details, please refer to the attached document: