Looking at the job numbers yesterday made me think about an old joke about a bloke who had an operation on a bad leg. When he came out of the op and woke up, the doctor told him there was bad news and good news.
The patient asked for the bad news first and the doctor replied: “We had to take your leg.” To that, the patient asked what the good news was, and the doctor said: “The guy in the next bed wants to buy your slippers.”
Similarly, the jobs report brought both good news and bad news. The good news was that in September, 64,100 Aussies or new arrivals from overseas got a job and the unemployment rate didn’t go up, which is another plus for a pretty healthy economy.
However, as the AFR’s Cecile Lefort reports today, the bad news is that now the smarties in the money market aren’t pricing in a rate cut for this year.
Yesterday morning, when I saw the job creation number was 25,000 more than economists expected, it made me think: “That’s not going to be great for a rate cut this year!”
And sure enough, the money market players who try and make money out of guessing where interest rates are going now say there’s only a one in three chance of a cut in December. Before these job stats, they were tipping 50:50. This shows you that it doesn’t make sense to over-rely on these ‘tipsters.
To be clear, they guessed wrong and now they want us to heed their next guess!
However, if you’re interested in their other guesses, which Cecile has reported, they now see three cuts next year taking the cash rate to 3.7% by December 2025.
Su-Lin Ong, chief economist for Australia at RBC Capital Markets, explained it pretty well to the AFR with this: “The Australian labour market stands in notable contrast to a number of developed economies and especially its dollar bloc Canadian and Kiwi cousins, where the unemployment rates have lifted 1.5 percentage points to 1.75 percentage points from the lows with increasing labour market slack”.
Given the surprising strength of the labour market, it makes sense to argue the chances of a rate cut this year have been badly affected because the unemployment rate hasn’t spiked.
On the other hand, for those praying for a cut ASAP, there are two or three more economic readings that could give a cut a chance.
The first could happen on October 30 with the release of the September quarter CPI. If this is a ripper low number, the RBA could think about a cut.
Then on December 4, which is before the last RBA rates meeting on December 10, we see the September quarter economic growth numbers. If they’re negative, the RBA could cut. The June reading was a wimpy 0.2%, taking annual growth to 1.2%. But a negative number could tell the central bank that we could end up in a recession!
You might be thinking how could we be in a recession when we’re creating jobs?
It’s a good thought that economists one day will explain but we’re seeing screwy, wild and wacky economic results around the world. In the US, inflation is falling but the job market is stronger than expected. And despite 11 big rate rises, the chances of a recession look low.
Interestingly, the CBA’s economics team is toughing it out and sticking to its December rate cut call because they argue that solid disinflation (i.e. falling inflation rates) is happening. But they’ll need October 30 to bring a great drop in the CPI.
By the way, if the core inflation number is in the 2-3% band, the RBA should cut because that’s what Governor Michele Bullock has told us she wanted.
I’ve been in this game too long to be categorical about what economic statistics will do, so I’m just hoping October 30 ends up bringing great news on inflation. Right now, February is looking more likely as the month when we might get our first cut. I hope I’m wrong.