Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Aussie jobs data disappoint
Summary: Thursday's Australian labour force data delivered another blow for the RBA with unemployment remaining at 5.2% vs. an estimate of 5.1% for the month of May, well above the level needed to spur wage gains and inflationary pressures.
Again, as in April, the report wasn’t all bad; hiring remains robust and employment rose by 42,300 vs. 16,000 expected, although 39,800 jobs added were part-time, likely a reflection of roles added due to the federal election in May. This could mean some downside risk to next month’s labour force report. The participation rate which refers to the total number of people who are currently employed or in search of a job (the labour force) as a percentage of the working age population rose to 66%, a record high. But the increasing labour force size continues to outpace actual hiring with unemployment remaining at 5.2% in May, well above the level needed to spur wage gains and inflationary pressures.
Looking under the bonnet, substantial spare capacity remains an ongoing issue for the Reserve Bank of Australia, preventing material upward pressure on wages. This is especially problematic for overindebted Australians struggling to maintain household spending whilst battling a negative wealth effect as the property market slumps and economic growth wanes. The RBA has signalled a tighter labour market will be key to returning inflation to target, but currently the level of labour market slack will be a significant impediment to spurring wage gains.
Looking under the bonnet, substantial spare capacity remains an ongoing issue for the Reserve Bank of Australia, preventing material upward pressure on wages. This is especially problematic for overindebted Australians struggling to maintain household spending whilst battling a negative wealth effect as the property market slumps and economic growth wanes. The RBA has signalled a tighter labour market will be key to returning inflation to target, but currently the level of labour market slack will be a significant impediment to spurring wage gains.
Underutilisation is a broader measure of spare capacity than the unemployment rate, including those unemployed and underemployed, and this remained at 13.7%. Underemployment (those employed but wanting to and available to work more hours), another measure of labour market slack, also rose from 8.5% to 8.6% in May, meaning more than one million people in Australia have work but want to work more hours. Almost 30% of 15–24 year old’s are underutilised at present, evident of a colossal policy failure by federal and state government.
Combine stagnant wage growth, labour market slack and an economy heavily reliant on private consumption and you have an ugly cocktail for sub-trend economic growth and underwhelming activity. Get ready for more rate cuts!
Given that the RBA’s focus has shifted to the labour market, yesterday's data was keenly watched. But a more important development this week was actually on Wednesday evening, when RBA assistant governor Luci Ellis whilst delivering a speech in Melbourne gave a significant update on the RBA’s outlook for the labour market. Ellis outlined that the RBA now estimatse the “non-accelerating inflation rate of unemployment” (NAIRU), which refers to a theoretical level of unemployment below which inflation would be expected to pick up, is now around 4.5% and could be lower. This highlights that the RBA is woefully behind the curve, something we have previously bemoaned, and will have to move to aggressively cut policy rates. Something that Ellis confirmed when she went on to say, “If Australia truly can have lower unemployment – sustainably – policy should be used to try to get there.”
Reading between the lines, this raises the prospect of further rate cuts. The RBA forecasts of a 5% unemployment rate in the May Statement of Monetary Policy are predicated upon two rate cuts and if unemployment now needs to fall below 4.5% in order to spur inflation further rate cuts will be inevitable. For those thinking the RBA will stop at 1%, think again. In this environment, as the domestic outlook remains dim and rates head to new record lows AUD downside will prevail.
Combine stagnant wage growth, labour market slack and an economy heavily reliant on private consumption and you have an ugly cocktail for sub-trend economic growth and underwhelming activity. Get ready for more rate cuts!
Given that the RBA’s focus has shifted to the labour market, yesterday's data was keenly watched. But a more important development this week was actually on Wednesday evening, when RBA assistant governor Luci Ellis whilst delivering a speech in Melbourne gave a significant update on the RBA’s outlook for the labour market. Ellis outlined that the RBA now estimatse the “non-accelerating inflation rate of unemployment” (NAIRU), which refers to a theoretical level of unemployment below which inflation would be expected to pick up, is now around 4.5% and could be lower. This highlights that the RBA is woefully behind the curve, something we have previously bemoaned, and will have to move to aggressively cut policy rates. Something that Ellis confirmed when she went on to say, “If Australia truly can have lower unemployment – sustainably – policy should be used to try to get there.”
Reading between the lines, this raises the prospect of further rate cuts. The RBA forecasts of a 5% unemployment rate in the May Statement of Monetary Policy are predicated upon two rate cuts and if unemployment now needs to fall below 4.5% in order to spur inflation further rate cuts will be inevitable. For those thinking the RBA will stop at 1%, think again. In this environment, as the domestic outlook remains dim and rates head to new record lows AUD downside will prevail.
Given that RBA’s communication strategy appears to be shifting with the outlook for policy being much more clearly articulated to market participants in speeches as opposed to post-meeting statements, Governor Lowe’s speech on Thursday next week on The Labour Market and Spare Capacity will likely be a key indicator of whether the RBA will follow up with a second rate cut in July or August and how aggressively the central bank will move to meet their targets.
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