Daily Commentary BY THE CURVE TEAM –

Employment Data to Shape Monetary Policy Expectations

24th of January, 2019

Today’s data is likely to shape the near term outlook and have implication for the RBA and their forecasts.

The outlook for the Australian economy and monetary policy has been heavily impacted by the data received over the past month and a half. The run of weak data has seen the market swing from expecting a hike sometime in 2020 to now suggesting a high probability of a cut.

A lack of activity from the RBA since their December meeting has left the market and their expectations to their own devices. There is no denying that the data since that December meeting has on balance been on the weaker side but is it enough to trigger an about face from the RBA?

We need to remember that the RBA operates under a dual mandate of sustainable growth and price stability. One of the key metrics that is linked to both these goals is employment.

The weak data to date is of some concern but not totally unexpected. Most of the weakness stems from the housing market which was exceptionally strong for some time so a reversion to the mean at some point was always inevitable. Further to that the RBA has long wanted to see debt to income ratios improve to reduce financial stability risks.

For now, outside of the housing market weakness and likely pull back in construction and employment from that sector, things have held ok. What they RBA will be watching closely is the employment market. As long as jobs growth continues and their is no increase in the unemployment rate then the RBA is unlikely to make and large shift in their outlook.

That means today’s employment numbers take on greater significance. While one data point doesn’t make a trend, any weakness in today’s result will place increased pressure on the RBA to soften their outlook for the economy and monetary policy.

Should we see a solid number though, the RBA will likely only make subtle changes to their forecasts and outlook for monetary policy and wait to see how the data evolves over the months ahead.

David Flanagan

Director - Interest Rate Markets