Unemployment Rises In December

The latest labour market readings from Australia showed that the Unemployment rate rose by 0.1% in December to 5.8%, which means the indicator remained roughly unchanged over the course of 2016 and above its full employment level of 5% – 5.25%.

Jobs growth remained firm over the month at 13.5k, beating the market’s expectation of 10k whilst the participation rate also rose by 0.1%.

The unemployment rate has broadly tracked between 5.6% and 5.8% since February 2016. Spare capacity in the labour market has put downside pressure on wage growth and domestic inflation. Over 2017, it seems that a modest tightening of the labour market should provide some support for wage growth.

The recent rise in commodity prices is also expected to feed through, given the historical, strong-positive correlation between commodity prices and unit labour costs. Some stabilization in wage growth should be enough to see the RBA refrain from further cutting and remain on hold over coming quarters.

Data Flash

• Employment rose 13k over December against 10k expected. Jobs growth has averaged 9k p/m over the past 9 months. Annual employment growth sits at 0.8%, up from 0.7% the prior month
• Full-time employment rose 9k over December, down 0.4% from a year ago. Part-time employment rose 4k against the prior month and 3.4% year-over-year.
• The participation rate rose from 64.6% to 64.7% over December. The rate is currently 0.4% below the end-2015 level but did increase 0.3% between October and December 2016.
• The unemployment rate rose to 5.8% from 5.7% the previous month
• The employment-to-population ratio was 60.9%, down from 0.1% from the prior month.

Summary

With Australia’s unemployment rate having tracked roughly sideways over the year, the labour market was left with continued spare capacity. Employment growth slowed after a period of strong growth over 2015 but combined with a lower participation rate; the end result was that the unemployment rate stagnated over 2016.

The gradual rise in employment along with a steady unemployment rate has been consistent with other labour market indicators such as job vacancies and timely measures of business activity. The forward-looking components of these indicators reflect point to continued jobs growth over the coming months, albeit at a modest level.

The data clearly reflects the fact that the labour market retains some spare capacity, which has weighed on wage growth and domestic inflation. However, the recent rise in commodity prices is likely to impact change in this dynamic.

Australia’s terms of trade are getting a sizeable boost from the recent commodity rally which is expected to fuel a much faster pace of nominal GDP growth and national incomes.A rising terms of trade has typically seen faster growth in labour costs, which suggests that should this materialize again, the RBA are likely to view further rate cuts as unnecessary.

The benefits of higher commodity prices and improving full-time employment growth should also provide a boost for corporate profitability, which in turn should eventually lead to an increase in wage growth at the margin.  Overall, the RBA seems comfortable with the current level of monetary policy, having cut twice last year, especially in light of its neutral tone over recent policy statements.

The overall improvement in employment alongside rising labour force participation should add to the RBA’s confidence in growth. As such, unless there is a significant appreciation in AUD over the coming month, the RBA is likely to keep rates on hold.

Technical Perspective

AUD has rallied sharply against USD over the last few weeks, breaking back above the 7440 level resistance. The next key technical resistance for the pair will be a retest of the underside of the broken rising bullish trend line from last year’s lows where also sits the bearish trend line from last year’s highs as well as the November 2016 high.