Preview: July Australian Jobs Data

Coming up we have some key figures that routinely jog the Aussie and Kiwi.

These are the first employment figures from Australia that have the full effect of the RBA’s back-to-back rate cut, so investors are going to be just as keen as the central bank to see if the policy is having an effect. And, if so, how much?

Governor Lowe has made it quite clear that he believes further reductions in the unemployment rate are necessary to boost inflation back to where the bank wants it. With the RBA open to further cuts (and the market pricing in at least one more for the rest of the year) employment figures are likely to have an impact on the markets going forward.

Looking Ahead and Around

As usual, this one of the last major economic figures for the month. Therefore, based on what we get overnight, we could see the fundamental trend set. Attention is on Australia’s largest trade partner, China, out of which we are expecting a wealth of data over the next few days.

A significant portion of the economic underperformance is being attributed to a lack of capital flows from the world’s second-largest economy. In fact, China has expressed concerns about Australia’s largest export being too expensive and is looking to cut prices. So, despite the RBA’s best efforts, the situation might not improve in the near term.

What We Are Looking For

Projections for the labor sector in Australia are for it to, at best, say the same, if not get slightly worse.

The consensus is that there were 14K net jobs created in July. This would be an improvement over the 0.5K in the prior month. But, expectations are for the employment rate to remain at 5.2% according to the median survey of analysts. There are a substantial number of Australian economists who are projecting the rate to tick up to 5.3%, which would be a disappointment for the RBA.

Lately, job adds have settled into a “normal” range of 10-40K. And it’s beyond those ranges where we’d expect a stronger move in the markets. However, two consecutive months on the lower end of the range, and with such a strong emphasis on employment by the RBA, might be enough to take the AUD down a bit.

A result closer to 40K would be quite unexpected and would help support the currency.

Why We Care So Much

In its latest projections, the RBA said that they expected the unemployment rate to slowly settle towards 4.5%. That’s the level where they consider the economy to be at full employment. However, since bouncing off 4.9% in February, the unemployment rate has been slowly growing.

We’re also in the middle of the Australian winter when, usually, employment is not at its strongest. This would contribute to further expectations of weakness in the next couple of months. A survey of executives showed that they were front-loading investment, meaning that the latter half of the year would have less investment, and therefore less job creation.

The Prices

With sluggish job creation, even though the rate is relatively low (just three decimals over the lowest rate in years), we have less pressure on wage increases. Wage inflation is the primary driver of overall inflation, which is what the RBA is banking on for their fiscal policy.

The worrying part, though, is that hiring in mining and construction, the two largest drivers of wage growth, is in a holding pattern due to lack of spending from China. With talk of the trade war lasting to near the end of this year, that holding pattern could be becoming the norm.