Credit Suisse says the RBA will need to cut multiple times

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The Reserve Bank of Australia will need to cut interest rates multiple times as the labour data understates the slack in the economy, according to Credit Suisse.

While jobs growth in April surpassed expectations and the unemployment rate fell to a four month low, full-time jobs fell and the weakness in the detail would have been bigger if not for another month of bias from the sample rotation, Credit Suisse analysts, led by Damien Boey, said in a note to investors.

The Credit Suisse call for cuts is in contrast to the collective market wisdom, which expects the RBA to stay pat at a record low cash rate of 1.5% for the rest of the year.

“The output gap is at levels historically consistent with another cash rate cut,” Credit Suisse said. “We believe there is a case for multiple cuts, because our measure of the output gap is based on upwardly-biased labour market data, and probably understates the degree of slack in the economy.”

That said, Credit Suisse felt the positive headline data means the RBA is yet to get a trigger to change its policy stance.

This chart from Credit Suisse shows the sample bias

Data on Thursday shows Australia added 37,400 jobs, smashing expectations for an increase of 5,000.

However, full-time employment fell by 11,600 over the month, while part-time employment surged by 49,000.

Credit Suisse explains the quality of the data thus:

Employment quality was even more questionable considering statistical distortions. For yet another month, the ABS rotated its sample in favour of cohorts with higher full-time employment to population ratios. There is a notable net upward bias to the full-time employment data since late 2016. In our view, this means that if we were to remove upward statistical biases, the decline in full-time employment in April would have been even greater than officially reported.

Employment leading indicators, based on business and consumer confidence, as well as trend growth in loan approvals point to a near-term bottoming out in the labour market, Credit Suisse said.

However, the official data, thanks to the statistical problem, has stolen the march and shows the jobs market has already bottomed out and when the sample bias reverses, it could start throwing out some ugly numbers.

Credit Suisse is not alone in blaming the data. Commonwealth Bank of Australia economists said the jobs report left them scratching their heads and pointed to the fact the job additions over the last two months were the equivalent of 1.2 million increase in US non-farm payrolls over the same period.


This chart shows Credit Suisse’s cash rate model

“our cash rate model currently points to one further cut,” Credit Suisse analysts said.

“However, because of our belief that full-time employment gains have been significantly overstated, we think that our output gap proxy understates the amount of slack in the economy. We remain of the view that the RBA needs to cut rates multiple times this year.”

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