Daily Commentary BY THE CURVE TEAM –

RBA Challenge of Achieving Full Employment Growing

19th of July, 2019

The latest employment data and dovish Fed highlight the challenge facing the RBA at present.

After expecting employment growth to soften for a number of months, the market eventually got it right. The June employment data even missed the low expectations of 9,000 new jobs with the economy only adding 500 new jobs for the month.

The one highlight was a swing from part to full time jobs. However even that wasn’t enough to lift aggregate hours worked which fell 0.1% over the month. The unemployment rate remained at 5.2% but actually edged up from 5.19% to 5.24% when looking at it in more detail. The rise comes even as the participation rate edged down from 66.03% to 65.98%.

While it is widely accepted that changes in the cash rate take 6 to 9 months to work their way through the economy, the deterioration in the labour force data over the past few months highlights the challenge facing the RBA. With the unemployment rate target now effectively being lowered from around 5% to closer to 4.5%, the RBA has its work cut out for it to drive the unemployment rate lower from here.

Complicating the RBA’s task is the increasingly dovish Federal Reserve in the US who look set to do all it takes to extend their own record economic expansion. Overnight Fed speakers were out again suggesting rates are heading lower in the US.

One of the Fed heavy weights, New York Federal Reserve Chairman John Williams, was speaking from a more academic standpoint but fuelled the rate cut expectation fire with his comments. He said that “when you only have so much stimulus at your disposal, its pays to act quickly to lower rates at the first sign of economic distress.” 

His comments, when viewed along side the shift in rhetoric from the Fed, suggest multiple rate cuts in the US are coming.

That is certainly the view of the market. This complicates the RBA’s task as the Fed’s noise around rate cuts it sending the USD lower and putting upward pressure on the AUD. The RBA continued to highlight that the exchange rate is an important mechanism for delivering stimulus and the fact that it is going the wrong way isn’t helping.

It will be very interesting to see what the Governor Lowe has to say about the current situation and the outlook when he speaks next week. His Anika foundation speech next Thursday is titled ‘Inflation Targeting and Economic Welfare’ which will no doubt contain some comments on the current situation.

David Flanagan

Director - Interest Rate Markets