Initial read into the Australian jobs numbers and impact on central bank action

Market expectations were for the unemployment rate to come in around 5.2-5.3% – so a rate of decline in jobs was always expected. The market has experienced jobs numbers to be surprising on the upside – as in the rate of unemployment not rising as much as some had feared earlier this year. Our focus here is on the actual composition of the numbers.

Today’s numbers show two important developments:

* The rate of unemployment has risen above the market estimates to 5.4% not due to  the poor rate of new job additions, but because the participation rate has risen faster than expected. Some 14,500 new jobs were added, which is a positive. The participation rate moves around a fair bit, but the fact that new job additions blew the market away (expectations were 3,750) will give the RBA some comfort that its recent rate cuts have been working.

* On a geographical basis, Queensland continues to disappoint, the rate of unemployment is back above 6% and now at 6.3%. This confirms recent anecdotal evidence from public sector job cuts. More importantly, Western Australia’s unemployment rate remains low at 4.0% in line with the prior month, which suggests job cuts in resource projects are either minimal or yet to take their full impact on the market. Our eyes remain closely fixed on Western Australia over the next few months. Unemployment fell from 5.6% in September 2009 to 3.5% in June for this state.

The Bottom Line

The headline unemployment rate is worse than expected but not due to poor jobs growth. The RBA can probably ‘buy’ a little more time to see the impact of its recent cuts and a recovery in commodity prices, like iron ore, before it is forced to move again. We maintain our view that February is more likely than November to see another 25 basis point cut and that seems to be resonating with currency traders with the A$ up around 40 pips following the jobs release, last at US$1.0254. A hold above this level could see US$1.0347 tested over the next few sessions.