Market calls: don’t buy the jobs data

Recent developments in the labour market are expected to be a key driver of consumer spending, a factor many are looking at for the next step in Australia’s economic growth. 

Interpretation of labour force data, however, has been difficult due to significant issues with the official labour force survey. 

Figures released last week painted a pessimistic picture of labour market conditions compared to other indicators such as ANZ job ads. The measured unemployment rate was 6.2 per cent in October, the highest rate recorded since 2003. Trend jobs growth also remained soft. 

ANZ research is not yet convinced of the robustness of the official figures and continues to place more focus on the suite of other indicators which point to a slow improvement in conditions. 

Offshore, US economic data remain strong and labour conditions are improving. Last week’s indicators were consistent with US GDP growth of over 4 per cent. 

A robust US economy is positive for Australia’s outlook, in part due to correlated capital spending cycles and downward pressure on the Australian dollar as the $US strengthens. 

Slack in the US labour market has also diminished further. Recent data are consistent with the US Federal Reserve’s message that there is now noticeable improvement in the market. 

Importantly for the inflation and interest rates outlook, US private sector wages growth appears to be slowly rising but the major measures remain mixed. ANZ research expects wages growth will lift further over coming months which is critical to its view that the Fed will start to raise rates from March 2015. 

Back at home, the Reserve Bank of Australia continues to expect subdued growth. Inflation remains comfortable despite a slight forecast upgrade. 

On the inflation outlook, the RBA remains very comfortable. Inflation is expected to remain within bank’s target range despite a slight upgrade due to the lower $A. The key here is that wages growth is expected to remain around current subdued rates for a couple of years, limiting any related pricing pressure. 

What that all adds up to is an RBA not interested in any movements in the official cash rate for now. 

On the $A front, more evidence of stabilisation in China is a positive, especially given its impact on Australia’s commodity export prices. Concerns about China’s growth outlook, combined with strong growth in supply, have resulted in iron ore and bulk commodity prices weakening this year. A lower $A is providing some offset. 

The $A hit $US0.8560 last week, well down from the peak for the year of $US0.95 in early July. This is an important point: the $A typically acts as a shock absorber and should not be seen as a panacea to Australia’s growth challenges.