Strong jobs data cast doubt over February rate cut, but beware anomalies in the data
Strong employment data cast doubt over the possibility of interest rate cuts starting in February, but economists caution against taking the data at face value amid broad weakness.
Strong employment data have cast doubt over the possibility of interest rate cuts starting in February and reinforced a consensus view that rates will be on hold for the next few months.
However, economists caution against reading too much into the surprising fall in the unemployment rate last month amid anomalies in the jobs data and weakness elsewhere.
Jobs growth of 35,613 compared to 25,000 expected by economists and the unemployment rate dived to an eight-month low of 3.9 per cent versus expectations that it would rise to 4.2 per cent.
The Reserve Bank said this week it’s “gaining some confidence” that inflation is falling sustainably towards its target band of 2-3 per cent after “wage pressures have eased more than expected” and GDP data showed “incomes and consumption had recovered a little slower than forecast”.
But with unemployment averaging 4.0 per cent for the past two months versus the RBA’s forecast of 4.3 per cent for the December quarter, the Bank needs more evidence that inflation is under control.
Annual trimmed mean inflation for the September quarter was 3.5 per cent, a full 1 percentage point above the midpoint of the RBA’s inflation target band.
Surprise strong job market
CreditorWatch chief economist, Ivan Colhoun, said the November unemployment rate “seriously undershoots” the RBA’s forecast and should weigh against an early rate cut.
Economic data “continue to suggest a relatively slow and moderate easing cycle in Australia.”
However, the RBA “has a habit of interpreting the data to fit the policy it wants to enact”.
In that regard, a low quarterly underlying CPI in late January “would be a very important print.”
Moreover, the RBA board’s December statement “positioned the Bank for a potential interest rate cut at the February Board meeting” depending on the data received in the interim, with upcoming data on jobs, retail sales and inflation now “great importance.”
He said the RBA has been “very reactive” to incoming data in recent years, as its models have likely been clouded by large and varied forces impacting economies over the pandemic and post-Covid-19 period.
“The December Board Statement saw the board reacting to weaker growth and slower wages; will they equally react to continuing strong employment growth, or will a low trimmed mean CPI take precedence,” Mr Colhoun said.
“The bank’s priority is returning inflation to target. If the Board gains greater confidence of this from a low Q4 CPI, they can still ease the degree of restriction and thereby preserve more of the labour market gains of recent years.”
Markets lowered the implied chance of a February rate cut to 48 per cent from 66 per cent. However, a first-rate cut of 25 basis points remained fully priced for April.
A second cut was fully priced for July, and a third cut was almost fully priced for November 2025.
The Aussie dollar rose about 0.6 per cent as 10-year bond yields spiked 10 basis points to 4.28 per cent. Shares fell with the S&P/ASX 200 share index hitting a three-week low of 8326.6.
But J.P. Morgan senior economist Tom Kennedy stuck to his call for an RBA rate cut in February, saying that “caution should be used” when drawing conclusions from the latest jobs data.
The Australian Bureau of Statistics noted that there was a “higher than usual number of people moving into employment who were unemployed and waiting to start work in October”.
“This contributed to the rise in employment and fall in unemployment,” the ABS said.
While this may simply reflect strong underlying labour demand, but such a low unemployment rate was inconsistent with other data which showed the economy is operating below potential.
Mr Kennedy said that while the influence of temporary factors shouldn’t be overplayed, some caution should be used when drawing conclusions from the latest jobs data.
After falling suddenly from 4.1 per cent to 3.7 per cent in February this year, the unemployment rebounded to 4.1 per cent over the next two months.
Westpac urges caution
Westpac also cautioned against taking the jobs data at face value.
“We caution that these results rely on some curious developments around labour supply and gross flows within the labour market,” said Westpac economist Ryan Wells. “We saw something similar in late 2023 that proved to be a ‘head fake’, with shifting seasonality also presenting as an issue.”
“There is a risk of an unwinding in December, emphasising the need to contextualise these results within the multi-month trend. We assess this as broadly consistent with a ‘normalisation’ in labour market conditions, as opposed to either an outright weakening or a renewed strengthening.
“That said, the last six months of data does confirm that the labour market remains somewhat tight, suggesting that this ‘normalisation’ process has been slow-going.”
Goldman Sachs chief economist, Andrew Boak, maintained that the RBA will cut in February.
“The continued resilience of the Australian labour market is hard to square away with the protracted weakness in economic activity and softer lead indicators on labour demand,” he said.
“In isolation, today’s update lessens pressure on the RBA to cut interest rates as soon as February.
“However, we think the most important consideration for the RBA is whether surprisingly resilient jobs growth is generating inflationary pressures – and recent updates on softer growth in both wages and nominal unit labour costs suggest this is not the case.
“Given this, and our expectation that trimmed mean inflation will annualise close to the midpoint of the 2-3 per cent target band in 4Q2024 – we see a solid case for the RBA to act on its recent dovish pivot with a 25bp rate cut at its next meeting in February 2025.”
Full-time jobs soared 52,600 in the month, but there was no growth in hours worked.
“The labour market data continues to defy the signal coming from GDP growth and other higher frequency activity indicators,” said CBA head of Australian economics, Gareth Aird.
“The November NAB Business survey was particularly soft and the employment component of that survey was weak, but official data suggests the labour market is not loosening.”
Mr Aird said the recent breakdown in the relationship between non-farm GDP growth and employment growth was largely explained by strong growth in non market employment, which doesn’t make a commensurate contribution to measured GDP because it’s less productive.
But in any case, wages data suggests the non-accelerating inflation rate of unemployment is comfortably below the RBA’s implied estimate of 4.5 per cent. In his view, Australia should be able to run an unemployment rate of about 4 per cent and have inflation within the target band sustainably.
Similarly, Betashares chief economist David Bassanese said a low unemployment rate alone shouldn’t stand in the way of lower official interest rates and the combination of falling inflation and low unemployment could force the RBA to reconsider its view on NAIU.
“It should also force the RBA to reconsider whether the economy is really operating with an excess level of demand,” Bassanese said. But if the December quarter CPI report shows underlying inflation remained stuck around 3.5 per cent, a February rate cut would be off the cards.
“We’d likely need to see a decline in annual trimmed mean inflation to perhaps 3 per cent or less, which seems unlikely,” he said. “Accordingly, my base case remains that the RBA will hold fire on rates at least until May – which would likely be after the next Federal election.”
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