Chief economist update: Strength in jobs downs RBA rate cut expectations

There's more bad news for us, Australians all.

The Reserve Bank of Australia (RBA) will no longer cut the official cash rate by 25 basis points - to 0.5% - when it holds its first board meeting for 2020 on February 4.

No Virginia, I didn't say that, it's derived from changed expectations with markets pricing in only a 24% chance of a February rate cut from 60% a day before the Australian Bureau of Statistics (ABS) release the "good news" on the domestic labour market.

Not surprisingly, the Australian jumped by more than half a percent versus the greenback but surprisingly, the All Ordinaries index dropped by 0.7% (sure, lower interest rates helps drive market valuation but stronger employment growth drives sentiment, spending, revenues, profits and stock market prices).

Perhaps, it's the scare du' jour - the coronavirus. But as I've already pointed out in my earlier rant: "Like SARS, the swine flu and many others before them, the coronavirus will not end the world. Instead of hitting the sell panic button, investors should take this opportunity to add to their stock portfolios."

This, or Donald Trump will increase the tariff on the virus entering America.

But I digress.

The ABS 'Labour Force, Australia' report shows that total employment increased by a seasonally adjusted 28,900 in December that followed the addition of 38,500 jobs in the previous month. The unemployment rate declined to 5.1% from 5.2% in November.

The same thing happened on the way to the strong November jobs report (released last 19 December 2019) - markets reduced their bet on a February 2020 rate cut ... and then lifted back up again.

The November stats showed the unemployment rate falling to 5.2% from 5.3% in October, there were more jobs added in total (relative to December) and both full-time and part-time employment gained.

In comparison, all of December's gain in total employment was due to the addition of 29,200 part-time jobs; full-time employment decreased by 300.

For sure, it'll be simpler for the RBA - and the financial markets -- if it were tracking only the jobs numbers to inform its decision on interest rates, but then, as the chart below shows, it would be cutting or raising or holding interest rates steady depending on the monthly seasonally-adjusted employment stats.

As we've witnessed time and again, the seasonally adjusted employment estimates makes for good monthly betting but its volatility doesn't provide a good picture of employment's general direction.

The trend estimates offer a better picture.

The chart shows that while employment growth is not as strong as the headline seasonally adjusted numbers portray, additions to total, full-time and part time jobs appear to have hit bottom and are starting to accelerate.

It gives credence to RBA governor Lowe's statement that "the Australian economy appears to have reached a gentle turning point".

Another gentle nudge (or two) from the RBA, along with the Morrison government's increased fiscal spending - intended to provide relief and help in the recovery of the communities and businesses devastated by the bushfires - and the relative improvement in global macro dynamics, should underpin stronger gains in the labour market, and by extension, the Australian economy.

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