The unemployment rate rose to 4.2 per cent in July, but employment growth remained well ahead of the market expectation at 58,000.
While the data indicates ongoing loosening in the jobs market at a rate consistent with the “soft landing” that the economy is experiencing, most market pundits believe that a rate cut is still a long way off.
Krishna Bhimavarapu, APAC economist at State Street Global Advisors, said: “This data flies in the face of our dovish expectations.”
Looking at the unemployment rate, which drifted a 10th up to 4.2 per cent, Bhimavarapu said: “With inflation coming down and the unemployment rate rising, the RBA may be less compelled to consider another hike, but nonetheless may hold the cash rate at 4.35 per cent longer than we expect.”
Similarly, VanEck’s head of investments and capital markets, Russel Chesler, said Australia’s journey to rate cuts is “beset by many roadblocks”, including a stubborn jobs market.
“The resilience of the Australian labour market is a thorn in the side for lower inflation,” said Chesler.
“While the recent CPI print showed annual inflation tracking in line with expectations, it’s difficult to see how it can fall much further if services inflation – which is being propped up by the hot jobs market– doesn’t come down.”
Comparing Australia’s predicament to that in the US, where earlier this week the latest inflation print showed a continued fall in core inflation, Chesler said Australia’s journey is going to take a lot longer.
HSBC’s Paul Bloxham shared his concerns, reiterating his view that the RBA will be on hold throughout 2024, and that rate cuts are not likely until the second quarter of 2025.
“For the RBA, the wages and unemployment rate outcomes should give them some confidence that the jobs market is gradually loosening and slow disinflation of the economy is still underway (albeit very gradually),” Bloxham said.
“That said, the strong employment print will remind them that it may still be possible that their next rate move could have to be up.”
Unemployment rate rises to 3-year high
The seasonally adjusted unemployment rate rose 0.1 percentage point to 4.2 per cent in July, according to data released today by the Australian Bureau of Statistics (ABS).
The unemployment rate rose to 4.2 per cent in July, with the number of unemployed growing by 24,000 people and employed by around 58,000. This combined increase lifted the participation rate to a record high of 67.1 per cent.
“The employment-to-population ratio rose by 0.1 percentage point to 64.3 per cent, indicating employment growth was faster than population growth, and was just below the historical high of 64.4 per cent in November 2023,” said Kate Lamb, ABS head of labour statistics.
However, although the unemployment rate increased by 0.1 percentage point in each of the past two months, Lamb said the record-high participation rate and near-record high employment-to-population ratio shows that there continues to be a high number of people in jobs and looking for and finding jobs.
“While unemployment increased to 637,000 people in July, the highest it has been since November 2021, it remains around 70,000 people below its pre-pandemic level.
“The unemployment rate of 4.2 per cent was also the highest since November 2021, but was 1.0 percentage point lower than March 2020,” Lamb said.
US headed for rate cuts
US inflation came in at an annual rate of 2.9 per cent in July, dropping below 3 per cent for the first time since 2021.
Following the data’s release, analysts quickly pointed to an almost certain rate cut at the US Federal Reserve’s September meeting.
“The latest US economic data gives the Fed the green light to cut interest rates, in my view. The much-awaited easing cycle is therefore very likely to start at the Fed’s next meeting in September, and the prospect has generated instant excitement across financial markets,” said Franklin Templeton Fixed Income chief investment officer Sonal Desai.
But while a number of investors and analysts are rushing to anticipate a very sharp policy correction in the US, Desai is convinced that policy easing will be only gradual with rate cuts totalling somewhere around 125–150 basis points (bps), leaving the rate at or above 4 per cent.
“The Fed will start the easing cycle next month with a standard cut of 25 bps, rather than 50 bps, which might signal panic and might convince investors that the Fed does indeed feel behind the curve. It also indicates that a moderate gradual easing of monetary policy will likely be enough to keep the economy on an even keel, setting the economy on track to avoid a recession, with policy rates at around 4 per cent,” Desai said.
“Should the economy weaken faster than I anticipate, the Fed would be in a good position to react with deeper rate cuts. And with loose fiscal policy, that should be enough to make a recession short-lived.”
