Even 24 hours after its release, the minutes of the Reserve Bank of Australia’s (RBA) July monetary policy meeting continue to reverberate across Australian financial markets.
The Australian dollar is above 79 cents, adding to yesterday’s 1.5% gain, while bonds remain under pressure, undermined by a growing expectation that the RBA will deliver a rate hike in the middle of next year.
While those moves were largely driven by a discussion as to what Australia’s new neutral cash rate level is, perceived by some as a signal that households, businesses and markets should prepare for higher interest rates given the RBA’s view that “monetary policy had been clearly expansionary for the preceding five years or so”, not everyone thinks that was the most important development to come from the July minutes.
Annette Beacher, chief Asia-Pacific macro strategist at TD Securities, points out that there was another line in the minutes that was, in her opinion, far more important: the board’s discussion on the outlook for Australian wages growth.
Here’s what the board said:
Members noted that the strength of recent labour market data had removed some of the downside risk in the Bank’s forecast of wage growth.
As Beacher rightfully points out, it was certainly a more optimistic assessment than the line the RBA used in its July monetary policy statement that “wage growth remains low, however, and this is likely to continue for a while yet”.
In central bank speak, often interwoven with subtle clues as to what the outlook holds, it was a fairly significant tweak, seemingly pointing to a board who is becoming increasingly confident that wage growth is nearing, or is even past, the lows.
Given recent strength in labour market data, Beacher thinks the lows in wage growth have already been seen, predicting that they’re likely to rebound in the second half of this year.
“We see the next two wage price index (WPI) reports not only putting an end to ‘record low wage growth’ headlines, but expect wage inflation to pick up towards 2.5% per annum by Q3,” she says.
In two charts, she explains why she’s confident that a rebound in wage growth is just around the corner.
The first shows that annual wage growth, breaking down the WPI by services and cyclical sectors over the past decade.
While both look fairly depressing, it shows that while still far below wage growth for service sector workers, those in cyclical sectors such as manufacturing, construction and private professionals saw annual wage growth edge higher earlier this year.
Now, while a promising development for those working in cyclical industries, we can hear you asking the question “but what about services which continue to decelerate”?
There’s some good news coming for you too, Beacher says, and you can thank the recent increase in minimum award wages that kicked in at the start of July.
This next chart explains why.
“We found a compelling correlation between TD’s services sector WPI and minimum wage growth,” she says.
“The recent 3.3% annual rise in minimum wage growth — the strongest since September 2011 — implies that by Q3 2017, services sector WPI could rebound at least 2.5% if not 3% per annum.
Yes, a punchy 3%.
Your next wage review may finally contain a pleasant surprise, something few have experienced, let alone can remember, given the trend over the past five years.
While some will undoubtedly point to a lack of wage growth in other advanced economies where labour market conditions are far tighter than those in Australia, casting doubt as to whether an increase of such magnitude is even plausible, Beacher is confident that the lows have already been seen.
And, as a consequence, she thinks that we’ve also seen the lows for official interest rates, suggesting this will be reinforced by Australia’s June jobs report — released tomorrow — where she sees another stonking increase in employment of 30,000.
“If we are right about the employment report tomorrow, we see yesterday’s market moves as the beginning of rising market anticipation for higher RBA cash rates,” Beacher says.
“While February 2018 is possible, our base case will remain for a May 2018 hike unless wages and CPI materially surprise to the upside in the interim.”
The median economist forecast is centred around an increase in employment of 15,000 in June, with individual forecasts ranging from TD’s 30,000 increase all the way down to a fall of 12,000.
One suspects that there’ll be plenty of market movement come 11.30am AEST tomorrow, even more than usual for a jobs report.