Download the report for the full picture:  Australian Markets Weekly 25 February 2020

Analysis – A broad range of indicators point to unemployment edging higher

• The labour market is a key influence on monetary policy.  There is a close relationship between the unemployment rate and the cash rate and Governor Lowe has emphasised the importance of achieving full employment, taken to be the RBA’s 4.5% estimate of the NAIRU.
• To gauge the risks around the outlook, we constructed a leading index of unemployment based on the predictive power of a very large number of official and surveyed indicators.  Unfortunately, the index provides only a near-term lead on unemployment, acting more as cross-check on the unemployment rate, which has been volatile of late.
• The index suggests unemployment is likely to edge higher in the near term, breaking out of the recent 5.1-5.3% range, with the economic shock from the coronavirus placing additional upward pressure on the jobless rate depending on the duration and severity of the outbreak.
• This contrasts with the Reserve Bank’s forecast outlook of a gentle decline in the unemployment rate and is consistent with NAB’s view that an underperforming economy will see the bank ease monetary policy further.

The week ahead – AUGDP partials; NZ ANZ survey; COVID-19; Chinese PMIs 

• Australia/NZ.  Pre-GDP partials kick off with construction work done on Wednesday and the CAPEX survey on Thursday.  Construction is expected to fall again in Q4, while firms’ investment plans for 2019-20 are likely to be mixed, with a mining pick-up largely offset by non-mining weakness. Credit figures on Friday assume more importance given the RBA’s renewed financial stability concerns, but should show continued slow growth. In NZ, Thursday’s ANZ business survey, taken during February, will be the first local economic report to give a decent insight into the implications of COVID-19 and the emerging drought.
• International.  COVID-19 is the focus with more cases outside of China, particularly in Japan and South Korea. In China, the focus is the speed at which production ramps up given the gradual lifting of internal virus-related travel bans. Progress has been slow, although there are reports that migrant workers have started to return to the eastern provinces. That said, pollution levels suggest industrial activity is tracking 20-30% below this time last year, pointing to a significant hit to Q1 GDP. The official Chinese PMIs out this week are expected to show sharp declines in February.  As for US data, the focus is on consumer confidence (Tuesday) and durable/capital orders (Thursday); the latter should be affected by the woes at Boeing.

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