Chief economist update: Rate cuts coming, but not on race day

Unless a positive shock emerges over the next few months, expect the RBA to continue lowering interest rates and the Morrison government to increase fiscal spending (but only after it's achieved having the Budget surplus immortalised on paper).

Forget about a Melbourne Cup Day interest rate cut!

The minutes of the Reserve Bank of Australia's (RBA) October 1 Board meeting first hinted on this, stating that the stimulatory effects of lower interest rates on borrowing "may not be operating in the same way as in the past, and that the negative effect of low interest rates on the income and confidence of savers might be more significant".

The Australian dollar's surge above US$0.68 - the first time in nearly a month - following the release of better-than-expected employment data sealed the November 5 rate cut coffin, with the last nail hammered in by RBA governor Philip Lowe's statement at the International Monetary Fund (IMF) forum in Washington about his optimism over the domestic economy and therefore, "I wouldn't assume" further rate reductions.

After all was said and done, the odds of another 25 basis point reduction in the official cash rate come Melbourne Cup Day on November 5 have dropped to just 16%.

For sure, the RBA's minutes and the governor's statement are logical and valid.

However, the jury's still out with regards to the latest update on Australia's labour market. The seasonally adjusted headline numbers were good, there's no question about that.

Total employment increased by 14,700 in September. While this is less than market expectations for a 15,000 gain, note that August's head count increased from 34,700 to 37,900; and that all of September's gain was due to the addition of 26,200 full-time jobs (part-time employment fell by 11,400) which bodes well for future spending - as dictated by the "permanent income hypothesis". In other words, full-timers will view their incomes as more permanent and therefore, would spend more.

Likewise, the unemployment rate has declined to 5.2% from 5.3% in August (although this is partly a function of the fall in the participation rate from 66.2% to 66.1% in September).

As we've witnessed time and again, the seasonally adjusted employment estimates make for good monthly betting, its volatility doesn't provide a good picture of employment's general direction. Just try and discern the employment outlook from the chart below.

The ABS' trend employment estimates shows persistent weakening in additions to total employment since mid-2018.

Leading employment indicators - the ANZ job ads dropped by 10.4% in the year to September; the Westpac-Melbourne Institute 'unemployment expectations index' rose by 7.3% (year-on-year) to a reading of 131.8 in October - don't portend good tidings and explain the persistent weakness in consumer confidence and retail spending.

Read more: BudgetMelbourne Cup DayABSANZInternational Monetary FundPhilip LoweReserve Bank of AustraliaWestpac-Melbourne Institute
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