Australian Markets Weekly: 22 January 2018

Employment good news to start 2018.

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Overview:

  • Mostly strong data over the holiday period.  Employment was again strong in December, though a continuing surge in participation left the unemployment rate still somewhat elevated at 5.5%. The RBA is likely to see this as indicating spare capacity remains in the labour market.
  • Normally, with over 3% jobs growth over the past year (3.3% to Dec) one would expect the unemployment rate to drop around three quarters of a percentage point, not the 0.3% drop recorded.
  • A number of commentators have suggested the National Disability Insurance Scheme (NDIS) has seen people move from full-time carers (and outside the definition of employment) to part- or full-time employment, thus adding to both measured employment and participation.
  • The rise in participation has been extremely sharp over the past little while. It seems to reflect a combination of stronger participation in the mining states (as commodity prices improve business conditions) and stronger female participation rates. The latter may reflect the NDIS, which commenced from 1 July 2016 and is progressively being rolled out across the states. If people are being reclassified from carers outside the labour force to now being “employees” this would reduce the implications of strong employment growth for monetary policy.
  • Typically, the RBA has prioritized the message of the unemployment rate, which at this stage remains elevated. Further progress on this front is likely to be necessary before the Bank considers removing policy accommodation.
  • Consumer confidence data also show a number of important and encouraging trends – the prior divergence with business confidence has been resolved in favour of business confidence; consumers are also signaling lower unemployment lies ahead; and WA and QLD (together over a third of national output and the main laggards in recent years) have experienced pick-ups in confidence (QLD strongly so).
  • This is also important as modest falls in house or apartment prices that are occurring in some quarters are unlikely to have a significant negative effect on the economy, while the unemployment rate is reasonably low or falling.
  • This week is very quiet for Australian data with nothing major to be released. We’ll focus on the NZ CPI on Thursday to finalise our Q4 CPI forecast (preliminary +0.8% q/q for headline; +0.5% q/q for core) which is released on Wednesday week.
  • In markets, bond yields remain under modest upward pressure – a trend expected to continue – due to stronger global growth, higher oil prices and ongoing suggestions that major central banks will reduce policy support. The main surprise has been unexpected weakness in the US$, which has pushed the $A back above US$0.80. With the shutdown of the US government, $A strength may extend, though we continue to see a lower $A by year’s end.

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