Australia: Will the RBA follow its peers and look beyond job creation? – Deutsche Bank

Arguably, Australian labour market data has been all RBA-watchers really need – over the past quarter-century the change in cash rate has moved very closely with the change in the unemployment rate, according to Tim Baker, Strategist at Deutsche Bank.

Key Quotes

“The market doesn’t expect much move in unemployment any time soon, consistent with expectations of an on-hold RBA.”

“Headline labour market data are okay, but weakness elsewhere 

But is a laser-focus on the jobs data still appropriate? Jobs growth and the unemployment rate have been decent for a while, yet wages have hit a record low, and consumer spending is below trend. Part of the puzzle lies in the jobs data itself: hours worked growth has lagged jobs growth – we’ll be watching this component closely.”

“What if the RBA starts focusing more on inflation, like its peers? 

More generally, the labour market doesn’t seem to be as good a proxy for overall conditions as in the past. This is a familiar theme – major central banks have dialled back tightening expectations this year by noting that inflation developments have lagged growth. The RBA has scope to do the same, given very limited signs of inflation – that would get the market pricing cuts. But that kind of shift would take time, and there’s still housing consolidation to wait on.” 

“Too early for generalized AUD weakness – but sell AUD/CAD

In the meantime, we like selling AUD against the CAD, particularly given hawkish BoC comments in recent days. The two-year rate differential has hit a 15-year low, and could narrow further. And recent softening in the iron ore price relative to oil also points to AUD/CAD downside.”