Sunday, 8 April 2012

A Testing Week for the RBA

The RBA belligerence in refusing to cut interest rates so far in 2012 will be tested with some top tier local data this week.

The ANZ job advertisement series gets an update on Tuesday and after some reasonably firm readings in the last few months, a further increase in job ads would be an encouraging sign that the deterioration in the labour market was about to end.  A weak result will spell trouble for the labour market and signal higher unemployment in the months ahead.

There are also readings this week on business confidence and consumer sentiment.  The business sector, outside mining, has been glum and the readings of confidence consistent with a very sluggish rate of growth - or in some industries, falling output.  Mining confidence, of course, is still near euphoric as prices and volumes of their output remain high.  Any slippage in the readings for confidence would be disconcerting.

For consumers, the mix of falling house prices, soggy share prices, a softer jobs market and still reasonably high interest rates have conspired to lock sentiment at levels well below historic averages.  Another result where the index is below 100 points would spell on-going subdued growth in spending from consumers.

The biggy for the week will be the labour force data on Thursday.  Employment creation has slowed to around zero in recent months, in line with the ongoing below trend rate of GDP growth which has been an unfortunate occurrence for the past 3 or so years. 

The monthly employment numbers are extremely volatile – in the last 5 months, the change in employment has been -15,900; +46,200; -37,500; -3,400; +11,800.  We are due to see a +15,000 to +20,000, a result that would still fit with a soft trend.

One way to judge the employment result for the month is to judge what you might expect for job creation with GDP growth at 2.3%.  The last four months show a net loss of 10,200 jobs.  This clearly is overstating how soft the economy is.  More likely, employment is growing by a few thousand a month, on average, as the economy muddles along.  As a result, it would not be unreasonable to expect a rise of 15,000 to 20,000 in March employment as pay back for the prior weakness and to return to trend.  Such a result would be consistent with a soft rate of economic growth. 

All up, the data this week will put the blow torch to the RBA and its judgment that neutral monetary policy settings are appropriate for an economy continually growing below trend.  The RBA will be hoping, as we all will, to see some solid results in the data.  If not, the May rate cut will either need to be 50 basis points or be followed up with several more cuts in the months ahead.

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