Australian Employment Preview: Worry fullfiled

• National Australia Bank's (NAB) business confidence jumps post-election, business conditions remain at a five year low
• Reserve Bank of Australia's June 4^th 0.25% rate cut to 1.25% was the first in three years
• Job creation has weakened over the past nine months

The Australian Bureau of Statistics will issue its Labour Force Survey for May at 11:30 am AEST, 1:30 am GMT June 13th, 21:30 pm EDT June 12th.

Forecast

Employment is expected to increase by 17,500 new workers in May after April’s unexpectedly robust addition of 28,400. The unemployment rate is projected to drop 0.1% to 5.1%. The labor force participation rate is forecast to remain at 68.5%.

Employment and business

Jobs gains in March and April, 25,700 and 28,400, returned to trend following the February plummet to 11,000, very close to the 12-month moving averge of 26,750.

Reuters

Business conditions remain unsettled. The NAB’s business conditions index fell to 1 in May from 3 in April. This is the lowest reading since zero in September 2014. The 3-month moving average of 3.667 in May was well below the cycle peak of 19.333 in April and May of last year.

Reuters

Business confidence however assumed a sharp rebound to 7 from flat in March and April. It is the largest one single month gain since September 2013. The confidence index had been falling since reaching 12 in February of last year.

Reuters

The surprise victory of the conservative Liberal National coalition headed by Prime Minister Scott Morrison in the May 18^th election is probably responsible for the surge in business optimism.  Morrison who is widely considered to be more business friendly and campaigned against the environmental proposals of Bill Shorten’s Labor Party had been forecast to lose in almost every major poll in the three years prior to the election.  

Reserve Bank of Australia

The 25 basis point reduction in the cash rate by the RBA on June 4th was the first cut in borrowing costs since August 2016. Market generally anticipate two more cuts to December.

The rise in the unemployment rate this year from 4.9% in February, a post-financial crisis low, and matched three times in late 2010 and early 2011, combined with the burgeoning global risks and Australia’s exposure, chief of which is the escalating US/China trade war, prompted the governors to file for rate insurance.

Reuters

The two most recent months of employment, April and May were considerably better than forecast, but the 3-month moving average for newly created jobs has fallen almost 10,000 from 35,150 in February to 26,750.00 in May.

Even though inflation has been declining for three quarters from 2.1% in the second quarter of last year to 1.9% in the third, 1.8% in the fourth and accelerating lower to 1.3% in the first three months of this year, it is the sliding employment growth coupled with the US-China trade dispute with its damaging potential for the global and specifically Australian economies, that probably carried the most weight with the RBA.

Reuters

Australian Dollar

The aussie has been losing ground versus the dollar for close to 18 months.  Though it is off the lows of mid-May it is still near the bottom of its ten year range. The combination of RBA policy, the continuing deacceleration of the Chinese economy and its trade conflict with the United States and, until December, Federal Reserve tightening has kept the Australian Dollar on the defensive.

Whatever time frame you choose, from the July 26, 2011 high at 1.0969, the July 1, 2014 top of 0.9504, or the most recent high of 0.8118 in late January of this year there has been no retracement.

Reuters

With the resumption of a liquidity policy from the RBA, the aussie is likely to remain weak whatever the Fed does in the second half. The historical low for the Australian Dollar in 2001 and 2002 is still a long way to fall.