Considering the volatility of unemployment data, the Reserve Bank of Australia will likely keep rates on hold to assess the data flow for some time yet, while holding a soft easing basis, notes BofAML.
Alex Joiner of Bank of America Merrill Lynch in his June 11, 2015 research report “Australia Economic Watch” points out that Reserve Bank of Australia doesn’t cut rates when the unemployment rate is declining.
Employment growth posts strongest rate
Gleaning through the May Labor Force report, the BofAML analyst points out that employment rose by a very strong 42,000 people in the month, beating market expectations of a 15,000 person increase.
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However, the solid result was marred a bit by a downward revision to the previous month from -2,900 people to -13,700:
Joiner notes the participation rate was revised 0.1pp lower in last month’s data and was broadly unchanged in May at 64.7%. He points out that this supported, at the margin, the decline in the unemployment rate:
The analyst notes annual employment growth accelerated to just above 2.0%yoy, which is the strongest rate since 2011.
Joiner also points out that the unemployment rate declined 0.22pp in the month falling to 6.0%, – the lowest since 2014.
The report projects that Reserve Bank of Australia’s forecast for the unemployment rate will continue to grind higher for some time, touching 6.5% by around mid-2016. However, considering the volatile nature of the data and the still large adjustment to occur in the resources investment cycle, the analyst argues that it seems too early to conclude that the unemployment rate has peaked. Interestingly, the unemployment rate is actually significantly better than the RBA anticipated.
Reserve Bank of Australia will be on hold
Reiterating BofAML’s view, Joiner highlights that the RBA is sensitive to turning points in the unemployment rate.
He notes the beginning of the last three Reserve Bank of Australia tightening cycles in 1999, 2002 and 2009 were preceded by the unemployment rate peaking around 6 months earlier. However, Joiner argues that that timeline seems unlikely in this cycle because apparently the unemployment rate peaked in January.
However, Joiner emphasizes that this trend supports BofAML’s assertion that the RBA will not need to trim rates when the unemployment rate is in decline. He believes RBA may tolerate sub-trend growth while the labor market is performing well enough to prevent any marked rise in the unemployment rate.
His general perspective is that the Reserve Bank of Australia will be on hold to assess the data flow for some time yet, while holding a soft easing bias. Joiner says the RBA will probably wait to confirm whether this new labor market trend is sustainable and receive more information on inflation and activity before acting.