Daily Commentary BY THE CURVE TEAM –

Employment Data Scuttles February Rate Cut

24th of January, 2020

A February rate cut from the RBA seems unlikely after yesterday’s employment data.

The market now has the probability of a rate cut in February at 20%, down from a 50/50 chance prior to yesterday’s data. The fall in the unemployment from 5.2% (5.17%) to 5.1% (5.07%) caught the market by surprise. It saw a number of economists push out their calls for the next rate cut from February to May.

While the decline in the unemployment rate will be a welcome development as far as the RBA is concerned, it didn’t tell the full story.

Employment growth in December was wholly led by part-time jobs, which were up 29,200; while full time jobs were actually down 300. The solid increase in overall employment and an unchanged participation rate at 66% was enough to push down the unemployment rate.

Estimates of full employment, which the RBA thinks will need to be breeched to generate sustainable wage growth, is 4.5%. This means there is still a long way to go. Until we see the unemployment rate fall comfortably through 5%, pressure will remain on the RBA to provide more stimulus absent fiscal support and policy reform.

Market pricing still has a cut fully priced in for August, with the May board meeting 80% priced in. It still seems a matter of when, not if, the cash rate is cut again.

David Flanagan

Director - Interest Rate Markets