Jobs growth may be slowing, but is it enough to change the RBA's mind?


March 17, 2019 06:21:12

“It’s jobs, stupid,” to paraphrase Bill Clinton — and this week’s employment data may prove pivotal in the debate over where interest rates should be heading.

The week in finance:

  • February labour force figures (Thursday) expected to show unemployment at 5pc and 15,000 job added
  • Nufarm (Wednesday) and Sigma Healthcare (Thursday) release results
  • US and EU manufacturing surveys (Friday) will give insights in the global economy

Continued jobs growth eroding unemployment and pushing up wages is central to the Reserve Bank’s belief it does not need to cut rates.

Those pushing for cuts believe the jobs boom is about to crack under the weight of a mass of signals pointing to a broadening economic slowdown.

A weak set of numbers on Thursday could well see the market price in two rate cuts this year (currently the betting is one) and more pressure on the RBA to shift its neutral stance.

So far the RBA’s conviction has partially held true.

Jobs have continually been added at a fairly brisk pace.

However, the unemployment rate can’t seem to dive under 5 per cent, down into a range capable of firing up wages growth.

January’s barnstorming 39,000 new jobs easily beat the market consensus and they were good quality jobs — more than 65,000 full-time, while there was a net loss of part-time work.

Employment has grown by 2.2 per cent — or around 270,000 jobs — over the past year.

The market has again gone with what appears to be its default position for the monthly labour force data; 15,000 new jobs and unemployment holding at 5 per cent.

Westpac has split from the pack, suggesting jobs will be shed, although this has more to do with volatility than a major capitulation.

“The leading indicators are softening but they are not pointing to a collapse in employment — at this stage,” Westpac’s Matthew Hassan said.

“We believe that employment growth is set to stall through the first half of 2019 but our 5,000

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forecast for February is more about monthly volatility than the start of a new trend.”

Employment conditions weakening

But jobs growth appears to be swimming against the tide and forward looking indicators are sinking.

The ANZ job ads series point to employment growth slipping below 2 per cent, and weak business and consumer surveys make for far-from-happy reading.

The big employment sectors, retail and construction, are falling into contractionary territory.

The employment component of the NAB business conditions survey is still marginally positive, but it has fallen a fair way from the bullish sentiment in the first half of last year.

“The shift is clearly starting to affect businesses willingness to hire and invest,” Mr Hassan said.

Similarly, Westpac’s consumer survey has found pessimism has again trumped optimism, with concerns about job security rising sharply last month.

“Both job loss concerns and rising risk aversion raise the risk of a further move by households to rein in spending and increase savings, all of which would be consistent with our expectation of a significant ‘wealth effect’ drag on demand,” Mr Hassan observed.

In the short term a month’s data is unlikely to change the RBA’s view (unless it is an unmitigated disaster), but the case for cuts are mounting according to Mr Hassan, and may build further after Thursday.

“We still see the situation favouring a first 25 basis point rate cut from the RBA coming in August, once the extent of spill-overs from the housing downturn, on the labour market in particular, become more apparent, with a follow-up 25 basis point cut in November.”

Markets rebound

Global equity markets appear to have picked themselves up and dusted themselves off after a tumble to start the month.

The five straight days of falls were superseded by four-out-of-five positive sessions on Wall Street last week.

Overall, the US gained almost 3 per cent over the week, as did Europe. China was up 2.4 per cent and Japan 2 per cent.

Once again Australia zagged when everyone zigged — down 0.5 per cent.

However, if futures trading is anything to go by, the ASX should make up some ground on opening

Markets on Friday’s close:

  • ASX SPI 200 futures +0.6pc at 6,190 ASX 200 (Friday’s close) -0.1pc at 6,175
  • AUD: 70.1 US cents, 62.6 euro cents, 53.3 British pence, 78.9 Japanese yen, $NZ1.03
  • US: Dow Jones +0.5pc at 25,849 S&P500 +0.5pc at 2,822 NASDAQ +0.8pc at 7,689
  • Europe: FTSE +0.6pc at 7,228 DAX +0.8pc at 11,686 EuroStoxx50 +1.3pc at 3,386
  • Commodities: Brent oil -0.1pc at $US67.16/barrel, Gold +0.4pc at $US1,301/ounce, Iron ore $US87.50/tonne

Oil fades from 2019 high

Oil ignored the upbeat equities view of the end of the week, instead pumping for a global economic slowdown and vigorous US production as its dominant themes.

However, the slide did come after both the global Brent crude benchmark and US oil hit 2019 highs earlier in the week.

Friday saw the International Energy Agency’s (IEA) monthly oil market report leave its forecast for global oil demand growth unchanged at 1.4 percent this year, or 1.4 million barrels per day.

While the IEA’s view on demand is steady, it suggested the market would see the current surplus slip into a modest deficit later in the year.

The oil analysts at Goldman Sachs see no issues with demand and forecast oil would be back above $US70 a barrel soon.

The investment bank argued short supply was the key as OPEC producers were exceeding their commitment to cut production and Venezuela was an even bigger basket case than first thought.

Iron ore rallies

Iron ore prices maintained their mini–rally, despite a slide in Chinese steel futures on Friday.

The spot price for the 62 per cent content benchmark edged up 2 per cent, above $87, its highest level this month.

“Falling steel stockpiles drove optimism that China’s steel production needs to lift further,” CBA’s commodities analyst Vivek Dhar said.

“Demand was further supported after Chinese policymakers relaxed restrictions on sintering output in the steelmaking hub of Tangshan.

“We expect iron ore prices will spike into the $US90s as supply concerns mount.”

Comments from Chinese Premier Li Keqiang on Friday that additional tax and spending measures would be rolled out to prop things up if needed didn’t hurt either.

Quiet week ahead

The jobs figures are the most noteworthy offering from the ABS this week.

The statistician drops the fourth quarter house price index, but these are bit dated compared to monthly figures from the private sector.

The index should be down another 5 per cent in the three months to the end of the year, or around 7 per cent in the second half of 2018.

But we knew that. It’s what’s up ahead that is interesting bit.


Date Event Comment/forecast



House price index Q4: ABS data, less timely than monthly figures, should show around a 5pc decline QoQ after falling 1.9pc in Q3
RBA minutes Likely to maintain optimistic tone, any discussion on hurdles to a rate rise will be interesting
RBA speech Asst Governor (Financial Markets) Christopher Kent talking about bonds
Consumer confidence ANZ’s weekly measure, likely to confirm monthly data that confidence is slipping



RBA speech Asst Governor (Financial System) Michele Bullock on” the credit squeeze in a post royal commission economy”
Nufarm interim results The drought won’t have helped Australia’s biggest herbicide maker



Labour force Feb: Still solid. 15K new jobs and unemployment holding at 5% despite weakening forward indicators
Demographic statistics Q3: ABS analysis of population; likely to still be growing at 1.6pc YoY
RBA bulletin Q1: Insights into RBA thinking, including impact of falling house prices
Sigma Pharmaceuticals FY results The expected profit of $440m is not the main game. Investors will want to hear about the rejected $1.3b takeover offer from API



Flash PMIs Mar: New CBA surveys. Early insights into manufacturing and services activity. Services contracted last month


Date Event Comment/forecast



JP: Trade and industrial production Feb: Industrial production is sliding. Imports and exports could be down too
EU: Trade balance Jan: Still in a surplus, but narrowing



US: Factory & durable goods orders Jan: Flat factory orders, but durable goods likely to pick up



US: Fed rates meeting No change in rates, but GDP forecast likely to drop & interest rate projection lowered too



UK: BoE rates meeting No change, official rate held at 0.75pc
EU: European Council meets Brexit and climate change on the agenda



US: PMIs Mar: Factory & services activity still expanding
US: House sales Feb: Housing market is softening
EU: PMIs Mar: European manufacturing is teetering on contraction









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