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Aussie jobs report says no cuts for RBA

September 15, 2016

The overwhelming consensus is that the Reserve Bank of Australia (RBA) will and should cut interest rates further, and the argument behind this is understandable, particularly with a still relatively strong Aussie dollar, a slow transition from the mining boom, and persistently low inflation. But aside from a bubbling housing market, the latest jobs report for August while disappointing on the day (-3.9k payrolls vs expected 15k) provides pause for thought for a dovish RBA.

The graph shows a fairly consistent pattern over the past 35 years between changes in the unemployment rate and changes in the official interest rate.  Historically whenever the unemployment rate is falling the cash rate rises.  Normally the RBA only eases monetary policy when the unemployment rate is rising. Thus if you were to ignore all other indicators and focus on this one you'd say the RBA should be thinking about starting a hiking cycle.

More of an observation than a prediction but one that would have meaningful implications for Australia's financial markets, particularly as the AUDUSD has been through a bear market over the past 5 years and Australian government bond yields having done a similar thing. Certainly something to think about, also in the context of China's economic stimulus efforts.

 

Bottom line: Over the past 35 years whenever the unemployment rate has fallen (as it is now) the RBA usually hikes interest rates, not cut.

 

 

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