Hedge Clippings | 16 February 2024

Hedge Clippings copped some flak from some quarters recently when we suggested moving Australia Day from the end of January to somewhere nearer the beginning of the month. Our comments were nothing to do with the celebration - or commiserations - that are normally associated with the arrival of the First Fleet, but all about getting workers off the beach, out of the bar, or away from the back-yard barbie and back to work. To put it bluntly, Australia is largely a "no-work" or "no-deal" zone from at least mid-December (and post Cup Day in Melbourne) through to the beginning of February.

This was reiterated (but not quite so bluntly) by the ABS this week when releasing January's unemployment data, which came in at 4.1% - the first time for two years that it has been above 4 per cent. For the past 3 years, the January unemployment rate has coincided with a higher-than-usual number of unemployed people who said they were expecting to start work in the next four weeks.

One can argue that this was not their choice - there may have been fewer jobs on offer - or that they had chosen the beach/bar/barbie option or a combination of the two. Either way, if the holiday season ended three weeks after Christmas instead of five, Australia would be a whole lot more productive. Of course, the likelihood of that happening is about the same as politicians voting themselves a pay cut, or come to that, a longer working year. 

For the record, Federal politicians leave Canberra at the end of November, not to return until early February. Of course, that generally keeps them out of the news, or in some cases off the streets - Barnaby, please note!

Back to the unemployment numbers, the economy, and inevitably the outlook for interest rates:

While employment has been steadily rising (excluding a slight hiccup in the 3rd quarter of 2021) since March 2020 (when all we could think or talk about was COVID), the number of hours worked has been much more volatile, and has been steadily falling since April last year.

There are a whole range of statistics around employment - unemployment, underemployment, the participation rate, and employment to population ratio, and even the NAIRU (or 'non accelerating inflation rate of unemployment') - which collectively leave Hedge Clippings with a headache, but the bottom line, according to the ABS, is they "all point to a slowing labour market during 2023-24, although this follows a particularly tight market in 2022-23."

This shouldn't upset RBA Governor Michele Bullock, given she was on the record in a speech she gave in June last year while Deputy Governor, saying the RBA was forecasting unemployment to hit 4.5% by late 2024, with employment growth still intact, and (and at that time) inflation returning to target by mid 2025. Under these circumstances, she said, "the economy would be closer to a sustainable balance point."

Not wanting to fall into the same ditch as her then boss Philip Lowe had done, she was careful not to make any predictions on interest rates, but did cover herself by adding "Of course these forecasts are subject to a considerable amount of uncertainty."

However, at this stage it looks as if she's on track with the employment forecast, and provided she doesn't ease rates too quickly, she may even get inflation back to the 2.5% target by mid (or late) 2025. At her most recent press conference, she sensibly covered all bases on the next move in official rates - possibly up, possibly down (but don't get excited), or (more likely) on hold for a while longer while waiting for more data, all aiming for the happy space of a "soft landing".

Across the Pacific in the US it's much the same, as Fed Chair Jerome Powell also disappointed the market by dampening expectations for an early easing, in spite of falling inflation, 3.7% unemployment, and solid economic growth. Having faced, and to date turned, the direction of inflation with 11 rate rises, he'd rather keep them where they are, and things going as they are, until the gains are locked in.

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