What does the jobs data mean for the rates?
With employment data looking quite optimistic, the interpretation of these numbers quickly becomes a matter of interest rates. More specifically, do they increase the likelihood that the Reserve Bank of Australia will raise its key rate at its July 5 meeting?
Or rather, given that almost everyone is expecting another hike, will the increase be bigger now that those ABS numbers have landed?
Here’s what things looked like yesterday:
Prior to the US Fed’s 75 basis point rate hike – the biggest since 1994, Australian investors were pricing the chance of the RBA raising the cash rate by 65 basis points on July 5 as an 87% chance. (Such an increase in the RBA, to 1.5%, would be the largest since…1994.) #auspol pic.twitter.com/UWBfR54i2n
— Peter Hannam (@p_hannam) June 15, 2022
Now some economists, like those at ANZ, were expecting May’s unemployment rate to be 3.8%, down from 3.9%, but that’s really a hair’s breadth. More interesting will likely be the fact that the economy added more than 60,000 jobs in May, when the market consensus would be around half of that total.
More jobs are generally a good sign, but with the share of the working population now at record highs, all else being equal, it suggests that employers are going to have to raise wages to attract or retain staff. (Yesterday’s 5.2% minimum wage award may dampen some of that hiring enthusiasm, though.)
Sean Langcakehead of macroeconomic forecasts for BIS Oxford Economics, recognizes that the employment figures “will add to the wage pressures that have emerged in recent months”.
“The RBA have already indicated that they are confident that wage growth will resume this year [to cut the jobless rate to 3.7%]despite somewhat disappointing officials [GDP] data in the first quarter,” says Langcake.
This data confirms that labor market strength persists, and we expect the RBA to raise the cash rate by 50 basis points in July, with further hikes to follow.
Separately, a ANZ The report just landed suggesting that households will continue to spend even with RBA rate hikes, helped by the confidence they have in staying employed.
“Strong wage growth (4% YoY to 2023) continued very low unemployment rates and the large savings reserves built up in 2020 and 2021 will delay and reduce the negative impacts of higher interest rates and prices on real household consumption in 2022,” says ANZ.
Although there will be a decline in consumption as rates rise, we expect consumption to exceed GDP by 2024.
