Everyone's changing their rate cut calls


Australia’s unbelievably strong October jobs report has got the markets talking, not only because of its strength but also its questionable reliability. It has also got many economists rejigging their RBA rate forecasts in the months ahead.

Having now come and gone, it’s time to see what Australia’s economic community have made of it all. Many notes received post the data release have expressed a degree of scepticism. Despite that, many who were previously calling for near term rate cuts have changed their tune.

Here’s just some of economist views that have hit our inbox this afternoon.

Tim Toohey, Goldman Sachs

The October labour market report was very strong across the board – a mix of robust employment growth, surging hours worked, and a material fall in unemployment (despite a lift in participation). Even accounting for the usual volatility of these data and concerns that recent survey changes have diminished their quality, recent communications from the RBA highlight that the central bank still leans heavily on this report when formulating policy. In turn, notwithstanding that a traditional Taylor rule, our assessment of financial conditions and growth continue to make a strong case for further policy accommodation, such a large fall in the unemployment rate and the +170k jobs reportedly created over the past six months gives the RBA the opportunity to wait to see if recent better news for the economy is sustained, in our view.

We now believe that the most likely scenario is that the RBA keeps rates unchanged at 2.00% through 2015 and into 2017.

Michael Workman, CBA

Today’s super sized 58.6k rise in jobs was well above market expectations which were centred on a rise of 15k (CBA f/c +20k). To keep it in perspective, there is a pattern that the last few episodes of monthly falls in jobs have been followed by very large rises. It is likely that the next few monthly outcomes are lowish and will bring the three month average back to 17k.

We doubt it will change the RBA’s easing bias for now. Low inflation is the major issue for 2016.

Justin Fabo, ANZ

Startling strength. While undoubtedly there is some noise in today’s data, underlying jobs growth has been strong for a run of months. Non-ABS labour market indicators have been solid/strong for some time, so today’s numbers might indicate some catch-up to those. In isolation this report makes a rate cut in February more difficult to achieve.

When we called for 50bps of cash rate cuts in H1 2016 we flagged that near-term labour market conditions would likely remain pretty good. Perhaps the labour market is even better currently than we thought. If so, achieving a cash rate cut by February looks less likely at this stage.

Ivan Colhoun, NAB

A much stronger than expected employment outcome and lower than expected unemployment rate in October. There is volatility in these numbers month by month (indeed we would not be surprised by some retracement in both of these moves next month), but even so, employment is clearly continuing to strengthen a little and the unemployment rate is beginning to trend down slightly. Trend employment growth is 18.8k per month, while only 14-15k jobs are required to keep the unemployment rate stable.

The RBA and the Government will welcome these figures. The data provides further support for NAB’s contention that strengthening in the non-mining sectors of the economy is more than offsetting the drag from weakness in mining and the end of the mining construction boom. The RBA appears to be coming to that same conclusion as evidenced in its recent November Statement of Monetary Policy. NAB remains of the view that Australian cash rates will remain on hold at 2% for an extended period.

Scott Haslem, George Tharenou and Jim Xu, UBS

Overall the jobs data is undeniably very strong, and follows a recent run of better domestic data including a rebound of consumer sentiment to an average level, and business conditions holding above average; as well as better US payrolls last week making a Fed December rate hike quite likely (which should put downward pressure on the AUD). Hence, the odds of the RBA cutting have sufficiently shifted that we today change our view and now expect the RBA to remain on hold ahead (rather than cutting by 25bp in February). That said, there is still some risk that a combination of a stalled Fed, further out-of-cycle rate hikes by lenders weakening housing, and another low CPI print, could still lead to RBA easing, albeit the odds have now fallen below 50% in our view.

Shane Oliver, AMP Capital

There is a danger in reading too much into monthly jobs data as it can be quite volatile. For example in May unemployment similarly fell to 5.9% from 6.2% in response to a 50,000 jobs gain only to bounce back in subsequent months. Employment growth at 2.7% year on year has now also run well ahead of the growth suggested by leading jobs indicators such as the NAB Employment intentions survey. As a result a pullback in employment could be expected next month and just as we have seen on several occasions over the last year or so, it’s still premature to say we have seen the peak in unemployment.

That said, the ongoing strength in trend employment growth (now running at +19,000 jobs a month) is consistent with the economy continuing to hold up reasonably well helped along by the rebalancing of the economy evident in strong jobs growth in NSW and Victoria. As a result a December rate cut is now very unlikely and while I still lean to another rate cut early next year, it’s now a very close call, and we would need to see some softer economic data in the interim.

Paul Bloxham, HSBC Australia

Recent measurement issues with the official jobs numbers mean there is likely to be some skepticism about the strength of the numbers. But a general improvement in the labour market is consistent with other surveys, including job advertisements, hiring intentions and consumer sentiment. Today’s numbers support the RBA’s decision to hold steady last week. However, the RBA still faces the challenge of lifting inflation back to target. Next week’s wages numbers will help to clarify if the improving labour market is yet to feed through to any wages pressures.

We have a cut in the cash rate pencilled in for Q1 2016, but if today’s labour market numbers prove to be the new trend, further RBA cuts would be unlikely.

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