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Economics
Australian employment data signals rate hike
October 15, 2007
Clifford Bennett, Chief Economist, Sonray Capital Markets
Australian employment rose 13,000 in September, and unemployment fell to just 4.2%, the lowest in 33 years. The RBA must hike by 25 points at the very next meeting. Clifford Bennett reports
As expected employment remains a very firm feature indeed of the Australian economic landscape, and much of it has to do with the vast geographic landscape and on-going mining potential.
It must be said that much of Australia’s economic growth story is now highly connected to the demands of the rapid coming on line of China and its population into first world consumerism. In fact all of Asia is demanding ever increasing quantities of Australia’s produce, but of course the story doesn’t stop with exports. The domestic economy seems to have a fresh bout of optimism about it as well, with several retailers talking about new store openings.
The overall view remains that the rest of the world is going to do quite well, and continue the boom, despite a severe economic slow-down in the US. Data over the last couple of days confirms that for the moment at least the rest of the world has barely noticed the US crisis. Singapore, historically dependent on exports to the US, but now less so, has just reported extraordinary economic growth above everyone’s expectations, and Australian employment appears unstoppable. Some financial market contagion continues to spread globally, and risks do remain, but for the most part the rest of the world, non-financial markets and non-US, is continuing to do very nicely.
Robust global growth is the primary reason the Australian consumer seems to have bounced back so quickly from a momentary pause, and the demand for Australia’s exports continues unabated. The bullish outlook for the Australian dollar is only reinforced by this data, and it is only a matter of time before the large fund profit taking at the 90 cent level is overwhelmed, then 91-93 cents.
With inflation data relatively stable just now, but continuing to lean toward breaking the upper level of the Reserve Bank of Australia’s band at 3%, another interest rate hike of 25 points at the next RBA meeting remains our forecast. Not to hike rates at the next meeting would now clearly, with the confirmation of this employment data, risk inflation getting out of the bag. Once out, inflation is an extraordinarily difficult animal to recapture.
It remains debatable whether central banks actually influence inflation to the degree they once did, but from a markets perspective, what matters is that the RBA for one certainly believes it does, and so another hike is inevitable.
On this basis the RBA has no choice but to hike rates again. The economy, consumers and investors, barely noticed the last hike. The election factor, increased government spending, means the RBA must act immediately.
Key Forecasts:
- Fed will cut by 25 to 50 points at the very next meeting.
- US economy will flirt with negative growth for 2 or 3 quarters.
- US equity markets remain at risk having broken back below 14,010.
- China to remain a powerhouse.
- Global economy to remain firm.
- Commodities volatile but bullish, and will remain in high demand.
- Gold still targeting US$800 to US$1,100, as per the pre 500 forecast.
- US dollar will have an accelerated collapse within 6 months.
- Carry trade is old news and over, the USD/YEN decline to be savage.
- Australian dollar will continue to climb, 93 cents, then parity $1.00.
- Global equity markets may make fresh lows beyond the recent collapse points before a sustained recovery, though this medium term risk is now greatly diminished.
- Australian equities are increasingly aligned to strong global growth.
Clifford Bennett, Chief Economist, Sonray Capital Markets.
More articles from this week's newsletter:
Companies: Exclusive interview with the Pratt dynasty
Stocks: Stock picks for the long haul: Reece Australia and ARB Corporation
Politics: Who are the better economic managers?
Commodities: Wheat prices soar
Technical analysis: Elliott Wave theory spells doom and gloom for the US market
Stock of the week: Imdex Limited
Resident trader: How to profit from volatility
Smart investing: Counting the cost when confidence is lost
Economics: Australian employment data signals rate hike
Stocks: Construction: a two-speed industry
Disclaimer: This recommendation has been issued on the basis that it is only for the information and exclusive use of the particular person to whom it is provided by Sonray Capital Markets Pty Ltd ABN 18 104 482 993, AFSL 231151. These recommendations are current as at the date of issue. Past performance is no guarantee or reliable indication of future results. Trading in derivatives may involve a high degree of risk and significant loss, and is appropriate only for persons who can assume risk of loss in excess of funds deposited. This recommendation is of the nature of general information only and must not in any way be construed or relied upon as legal, financial or professional advice. No consideration has been given or will be given to the individual investment objectives, financial situation or needs of any particular person. The decision to invest or trade and the method selected is a personal decision and involves an inherent level of risk, and you must undertake your own investigations and obtain your own advice regarding the suitability of any investment for your circumstances. Although the information in this recommendation has been obtained from sources considered and believed to be both reliable and accurate no responsibility is accepted for any opinion expressed or for any error or omission that may have occurred herein.
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