Fewer jobs filled but that won’t stop the RBA lifting rates yet

The Reserve Bank should keep lifting interest rates to lower inflation despite a surprising rise in the unemployment rate last month, market economists say.

The number of people employed fell by 11,500 instead of rising 20,000 as economists expected. Picture: AFP

The Reserve Bank should keep lifting interest rates to lower inflation despite a surprising rise in the unemployment rate last month, market economists say.

Australia’s sharemarket rebounded, helped by lower bond yields as market pricing of the peak RBA cash rate cooled after the January labour force survey showed the unemployment rate hit a seven-month high of 3.7 per cent. That went against expectations it would stay at 3.5 per cent.

The number of people employed fell by 11,500 instead of rising 20,000 as economists expected, driven by a 43.280 fall in full-time jobs, while part-time jobs rose 31,784, the ABS said.

But while market pricing of the “terminal” cash rate cooled to 4.1 per cent despite surging to 4.20 per cent in the past week after a consistently-hawkish interest rate outlook from the RBA, a related dip in the Australian dollar below $US69c was short lived and most economists weren’t swayed.

ANZ revised up its RBA terminal rate forecast to 4.1 per cent, joining BofA, Deutsche Bank, Goldman Sachs, Morgan Stanley, NAB and TD Securities.

“We don’t think the weaker January labour market data will derail the hiking cycle,” ANZ economists said.

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ANZ senior economist Catherine Birch. Picture: Arsineh Houspian

Labour demand indicators remain very strong, and we expect a return to solid employment growth in February.” ANZ doesn’t expect the RBA to cut the cash rate until November 2024.

Seasonal factors look to have played a major part in the surprisingly weak jobs data.

“Labour demand remains very strong,” said ANZ senior economist Catherine Birch.

There were 444,200 job vacancies in November – double pre-pandemic levels – and almost 90 per cent of firms couldn’t hire enough workers in the December quarter, according to NAB.

The ABS’s observation, that more people than usual with a job indicated they were starting work later in the month – after the survey reference period — was “aligned with the lower number of people entering employment compared with the past few years in January,” Ms Birch said.

ANZ expects a return to solid employment growth in February. It sees the post-pandemic recovery in inbound migration helping the matching of workers to vacant jobs and also lifting demand growth.

Goldman Sachs chief economist Andrew Boak. Picture: Jane Dempster

NAB’s Taylor Nugent calculated that if the larger-than-usual number of people “waiting to start work” – but not yet counted as employed – was the same size as January 2020, and the rest were employed, jobs would have risen by 61,000 and the unemployment would have been 3.6 per cent.

“We think that’s readily reconciled by the larger-than-usual number of people who put off starting work,” Mr Nugent said. “As a result, we think February data should bounce strongly.”

He also noted that the “waiting to start work” category gave a good guide to strong rebounds after the Covid-19 “Delta” lockdowns in 2021 and after Omicron and similar seasonal impacts in January 2022.

“In short, we need to wait for February data for a clear read,” he said.

Similarly, Goldman Sachs chief economist Andrew Boak, said the January Labour Force Survey “should be taken with a large grain of salt”, due to a number of Covid legacies – including the pent-up demand for job switching that’s now finally being realised.

“In our view, these caveats and the broad sweep of strong alternative labour market indicators, suggest conditions in the Australian labour market remain robust and consistent with accelerating wages growth,” Mr Boak said

RBC chief economist Su-Lin Ong. Picture: Hollie Adams

Employment growth has probably peaked, but the labour market is not as weak as the headline data suggested last month, according to RBC chief economist Su-Lin Ong.

“There has been a moderation in trend employment generation, the trend unemployment rate looks to have troughed, and participation peaked, but all at historically strong levels,” Ms Ong said.

“We doubt if today’s labour force will derail RBA hikes in the coming months,” she added.

“A loosening in the extremely tight labour market is needed if inflation is to eventually return to target, and the early signs of this will be welcomed.”

But Betashares chief economist David Bassanese said the softer than expected labour market report, along with the recent weak report on retail sales and slump in consumer confidence, suggests the economy may be beginning to finally buckle under the weight of interest rate increases.