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With one or maybe two monetary bullets left in the chamber, yesterday’s employment read must be a massive relief for Glenn Stevens’ and Co., as it takes the pressure off the Board and some would suggest the February decision is now working.
RBA Board member John Edwards seized on the figures, describing them as ‘unambiguously good’ and ‘very far’ from recession. So clearly the Board is feeling the heat to act and any economic good news just releases this pressure; AUD positive, yield trade negative.
There a couple of things from the employment change that I need to caveat; the employment change of 37,700 jobs added in March, coupled with the revision up of the February numbers to 41,900 is a staggering read considering the other data that has been released over the past few months; employment had downside risk not upside.
Plus, a back of the envelope calculation suggests that if the US was to replicate that same growth rate as Australian in the non-farm payrolls over the same two months, it would have needed to add 1.1 million jobs in February and March, which raises the question of ‘seasonality’? The employment change figures are extraordinarily strong.
The fall in the unemployment rate is also a rare positive – Australian consumers are as pessimistic as they were just after the May budget (employment fears a major driver here). We continue to see the very public end to the mining boom (the fall out on employment is yet to be truly felt) and forward guidance on business spending is plummeting (so hiring pressure are likely to emerge).
Yet February’s unemployment read was downgraded to 6.2% from 6.3%, and yesterday’s read was well ahead of expectations at 6.1% - no employment issues here.
This data now puts real upside risk in the AUD and possible downside risk in equities.
First the AUD – pre the release of the employment figures, the interbank market was pricing in a 70% chance of a 25 basis point rate cut at the May meeting (it has been easing over the past two weeks, you may remember it was pricing in a certainty just before the April RBA meeting). Post the release the market plummeted to 49.8% before settling in a range of 51% to 53% - a flip of a coin.
The trading in the interbank market clearly shows the market is starting to wonder if it’s got things wrong; a rate cut look less and less likely. Next Wednesday is Australia CPI data for the first quarter of 2015. If the year-on-year trimmed mean read is 2% or more, I see this as further reasoning for the RBA to hold off moving rates as inflation is holding inside the RBA’s comfort band of 2% to 3%.
What’s more - the week after the May RBA rates meeting is the Federal budget - a political football match the Board is unwilling to be pulled into unless absolutely needed.
The employment read, China GDP (which is in-line with consensus despite exports declining) and a possible CPI print inside the comfort band suggest the need for another cut can wait another month to avoid political fall outs.
Upside risk in the AUD is very real - the USD is caught in a lull against all major pairs after a four-month run that has seen it monstering the currency market; data upside suggests in the next two weeks the AUD is likely to be in the 79 cent handle rather than in the 75 cent handle that the Board would prefer.
The chart tend to agree with this assessment: