Australian Employment Report Shuts the Door on the RBA

Highlights

• Australian employment shut the door on further RBA rate hikes.
• The Australian unemployment rate increased from 3.5% to 3.7% in July.
• Monetary policy divergence is tilting heavily in favor of the Fed and the greenback after the latest Australian labor market numbers.

Australian Unemployment Rate Hits 3.7%

It was a busy morning after the FOMC meeting minutes. Australian employment figures for July were in focus this morning. After the softer-than-expected wage growth figures, the employment figures were significant, with weak numbers likely to shut the door on further RBA interest rate hikes.

Employment declined by 14.6k in July versus a 32.6k jump in June. Economists forecast a 15.0k increase. Full employment fell by 24.2K versus a rise of 39.3k in June. The unemployment rate inched up from 3.5% to 3.7% in July. Economists forecast the unemployment rate to increase to 3.6%.

According to the ABS,

• The decline in employment followed an average monthly increase of circa 42,000 over the first half of 2023.
• July includes the school holidays, which likely impacted the month-to-month changes.
• Unemployment was 172,000 lower than before the pandemic despite unemployment rising by 36,000 in July.
• Monthly hours worked increased by 0.2%, while employment declined by 0.1%. The ABS attributed the higher hours worked to fewer people working over the school holidays.
• Underemployment remained unchanged, with the underemployment rate 2.4 percentage points lower than before the pandemic.

Australian employment remains a consideration for the RBA. Deteriorating labor market conditions ease pressure on wage growth and demand-driven inflation. Higher interest rates lead to a pullback in hiring and a decline in purchasing power, with the net effect of easing consumption and, ultimately, consumer price pressures.

The latest wage growth and employment numbers suggest the RBA policy moves are beginning to take effect. However, investors and the RBA need to consider the post-school holiday numbers to assess the lay of the land.

Aussie Dollar Reaction to the Australian Employment Numbers

Before the employment report, the AUD/USD rose to an early high of $0.64285 before falling to a post-stat low of $0.63946.

However, in response to the employment report, the Aussie dollar fell from $0.63971 to a post-stat low of $0.63649.

This morning, the Australian dollar was down 0.70% to $0.63797.

Post FOMC Jobless Claims Need Consideration

This afternoon, Philly Fed Manufacturing Index numbers and US jobless claims will also provide direction. A fall in jobless claims would question the theory of a softer US labor market and support hawkish Fed bets.

We expect the jobless claims to trump the Philly Fed Manufacturing data.

It is worth noting that the manufacturing numbers are unlikely to influence the Fed. The manufacturing sector accounts for less than 30% of the US economy and is unlikely to dictate sentiment toward Fed monetary policy. In contrast, tight labor market conditions support further Fed rate hikes to curb demand-driven inflation.