The week ahead

The ECB cut rates and introduced aggressive expansionary measures to lift EZ growth.

The market reaction to tonight’s May non‑farm payrolls data is likely to set the tone across financial markets next week. A rise of around 215k in employment is expected, with the unemployment rate to rise slightly to 6.4%. Such an outcome would be within the Fed’s general expectation about growth trends. Markets also believe that a smaller jobs gain most probably would not derail the Fed’s next “tapering” adjustment at the 18 June FOMC meeting. US bond yields rose during the week, as the growth outlook improved, after reaching unusually low levels at the end of May.

The past week has had some interesting developments. The ECB delivered some reasonably aggressive changes to monetary policy settings aimed at lifting growth and lifting inflation over coming quarters. The introduction of negative interest rates for deposits at the ECB by the major banks was widely expected. But it is still an unusual measure and demonstrates the seriousness of the deflation pressures in the EZ. In contrast to the ECB’s measures, the Bank of England left their cash rate at a record low of 0.5% on Thursday.

In the US, in the past week, there was some confusion over the correction to the ISM data that ultimately showed a continued expansion in the US manufacturing sector. It was positive for the US growth outlook and helped to lift longer term bond yields up from their recent lows.

The data schedule in the US and Europe is relatively light and skewed towards the end of the coming week. In the US the major releases are the May retail sales and consumer confidence data. The focus will tend to be on the upcoming Fed meeting in the following week. In the EU there will be updates on industrial production and the international trade balance. The UK has employment data which, if stronger than expected, could have the markets pondering the timing of the BoE’s expected rate hike. UK markets have priced in a BoE rate hike in QII 2015.

In Australia over the past week we had updates on a large number of indicators. The major one was the QI GDP which came in at a robust 1.1% to push annual growth to 3.5%, the highest in the past two years. Our analysis is included inside. The major driver of the QI result was mining‑related exports. Over the past year, about two thirds of growth has come from that source. Other data showed a stumble in the monthly building approvals. But the pipeline of planned construction remains large and should keep adding to growth. April’s modest retail trade rise still left annual growth at just under its long term average of 5%pa. The small April trade deficit followed a string of strong, upwardly revised surpluses.

In Australia this week, the main release is Thursday’s jobs data which is expected to show a rise of 10k. The unemployment rate is forecast to stay at 5.8%. Conditions in the Australian labour market have improved and the forward looking indicators suggest jobs growth will rise in coming quarters.

In New Zealand, the RBNZ is expected to lift their OCR to 3.25% on Thursday as the inflation risks rise and economic growth lifts. The RBNZ could stay on the sidelines in following months, until December, and watch the flow of data before lifting rates again.

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• In November, full-time jobs fell by 4,200 after rising by 17,600 in October. Part-time jobs rose by 18,100 after falling by 7,400 in October. Full-time jobs have only fallen once in the past five months.
• The unemployment rate decreased from 5.4 per cent to 5.2 per cent in November. The participation rate fell from 65.2 per cent to 65.1 per cent – near six year lows.
• The number of hours worked rose by 0.1 per cent in November after falling by 0.3 per cent in October and now stands 0.3 per cent higher than a year ago.
• Unemployment across states and territories: NSW 5.1 per cent (5.2 per cent in October); Victoria 5.5 per cent (5.4 per cent); Queensland 6.0 per cent (6.1 per cent); South Australia 5.3 per cent (5.6 per cent); Western Australia 4.1 per cent (4.6 per cent); Tasmania 6.7 per cent (6.7 per cent); Northern Territory 3.8 per cent (3.9 per cent); ACT 4.1 per cent (4.0 per cent).

What does it all mean?

• The doomsters have got it wrong – again. More jobs created, more hours worked and fewer people unemployed. Overall the Australian economy is holding up well despite a very uncertain global environment. While there are a number of high profile company failures and job losses, beneath the surface small and medium-sized business are still keen to put on more staff. The anecdotal evidence is that it is hard to attract and retain staff and today’s jobs figures back up these observations.
• It was certainly encouraging to see the lift in overall employment. In fact total employment has increased for three consecutive months, hours worked is on the rise and the slide in the unemployment rate is certainly a confidence booster for the economy. However it is not all smooth sailing. The cynics would look at the fall in full-time jobs coupled with the participation rate – which is holding at near six-year lows – and conclude something more concerning.
• The truth is somewhere in the middle. The labour market is healthy without shooting the lights out. And while it is encouraging that employment grew, more forward looking indicators like job advertisements have suggested that further labour market gains may be more circumspect. In fact internet and newspaper job advertisements have fallen for eight consecutive months, suggesting job growth is likely to flat-line in coming months.
  It is clear that while employers aren’t keen to hire unless they have to, however they aren’t firing existing staff either. While jobs are being lost in some industries, clearly they are being created in other industries. Overall it does seem like a fair proportion of Aussie businesses are holding onto existing staff and waiting for an improvement in economic conditions.
• Over the past year the missing ingredient in the domestic economy has been confidence, however there are anecdotal signs that there is an improvement in confidence. Rate cuts, a pickup in housing activity, rising share markets should provide some level of encouragement to policymakers, households and businesses.
  In a perverse way the unemployment rate fell because more people have given up the search for work. Over the past couple of months a smaller proportion of people are in the workforce – people in jobs or are looking for work – with the participation rate holding just shy of the 6-year lows.
• The Reserve Bank won’t look too deeply into today’s data as figures in coming months will be more telling. But the data is consistent with the Reserve Bank retiring to the sidelines and assess more information. Chances of further rate cuts have receded modestly.

What do the figures show?

• Employment rose by 13,900 in November after a revised gain of 10,100 jobs in October (previously +10,700). Economists had expected a flat result. In November, full-time jobs fell by 4,200 after rising by 17,600 in October. Part-time jobs rose by 18,100 after falling by 7,400 in October. Full-time jobs have only fallen once in the past five months.
• The annual employment growth rate rose from 0.9 per cent to 1.1 per cent in November. The working age population rose by 24,500 in November after lifting by 24,400 in October. The working age population grew by 1.69 per cent over the past year.
• The unemployment rate decreased from 5.4 per cent to 5.2 per cent in November. The participation rate fell from 65.2 per cent to 65.1 per cent – near six year lows. The number of hours worked rose by 0.1 per cent in November after falling by 0.3 per cent in October and now stands 0.3 per cent higher than a year ago.
• Unemployment across states and territories: NSW 5.1 per cent (5.2 per cent in October); Victoria 5.5 per cent (5.4 per cent); Queensland 6.0 per cent (6.1 per cent); South Australia 5.3 per cent (5.6 per cent); Western Australia 4.1 per cent (4.6 per cent); Tasmania 6.7 per cent (6.7 per cent); Northern Territory 3.8 per cent (3.9 per cent); ACT 4.1 per cent (4.0 per cent).
• Queensland recorded the biggest job gains in November (+27,700), followed by Western Australia (+5,400), Northern Territory (+300 in trend terms). Jobs fell most in NSW (-18,000), followed by Victoria (-13,800), Tasmania (-3,200), and South Australia (-1,300). Employment was flat in the ACT in trend terms.

What is the importance of the economic data?

• The Labour Force estimates are derived from a monthly survey conducted by the Bureau of Statistics. The population survey is based on a multi-stage area sample of private dwellings (currently about 22,800 houses, flats, etc.) and a sample of non-private dwellings (hotels, motels, etc.). The survey covers about 0.24 per cent of the population of Australia and includes all people over 15 years of age, except defence personnel.
• If more people are employed, then there is greater spending power in the economy. But at the same time companies may adjust the work hours of employees. If employees work less hours, and therefore get paid less, then spending power in the economy is reduced.

What are the implications for interest rates and investors?
The jobs data will be closely watched by the Reserve Bank in coming months. An array of indicators has suggested that activity levels have bottomed out and showing modest signs of improving. And while policymakers will want to get a better gauge of the impact from the recent stimulatory efforts further rate cuts still remain on the cards.

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