Australia’s Unemployment Tumble Fuels View RBA Won’t Extend YCC

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Australian unemployment tumbled in May in response to a burst of hiring, further fueling expectations that Reserve Bank Governor Philip Lowe will not extend the timeline of the bank’s yield control measures next month.

The unexpected drop in the jobless rate to 5.1% in May, despite a paring back of government employment support points to a recovery that is charging ahead of the curve.

It will also likely strengthen speculation that the Reserve Bank of Australia will raise interest rates earlier than previously thought amid heightened global expectations of a pulling back of crisis stimulus following the Federal Reserve’s latest policy meeting.

Australia’s Unemployment Tumble Fuels View RBA Won’t Extend YCC

The strong labor market data showing the creation of 115,200 new jobs, almost four-times the expected amount, came less than two hours after Lowe said the bank saw scenarios in which interest rates could go up in 2024.

Lowe said a July 6 decision on whether to roll over the yield target to the November 2024 bond from the current April 2024 depended on the probability of an interest-rate rise in the next three years.

“The board will review these scenarios again at its next meeting,” he told an Australian Farm Institute Conference in Queensland.

The yield on sovereign bonds maturing in November 2024 surged as much as 12 basis points as investors bet that a more hawkish Fed and the stronger jobs data add to the case for the RBA to decide against rolling forward its yield control. The spread between April and November 2024 notes surged to over 30 basis points.

The Australian dollar advanced and was trading at 76.31 U.S. cents at 12:58 p.m. in Sydney.

Still, Lowe warned that there was little sign of the stronger wage growth needed for a lasting increase in inflation needed to raise rates. It was also too early to pull back the RBA’s support for the economy through its bond buying, he said. The bank would continue its purchases beyond the second round of quantitative easing currently due to expire in September, he added.

“The RBA’s bond purchase program is one of the factors underpinning the accommodative conditions necessary for our economic recovery,” the governor said. “The key consideration in our decision here is how the RBA can best support the ongoing recovery of the economy.”

What Bloomberg Economics Says

“A surprise surge in Australia’s employment in May has probably swung the balance for the central bank’s upcoming July policy meeting.”

“As a consequence the RBA is now unlikely to shift their yield curve target to the November 2024 bond.”

-- James McIntyre, economist. See full report here

Australia has transitioned from recovery to expansion after recouping jobs and output lost during the pandemic and most economists also expect the RBA will opt against extending the yield target. Lowe also needs to factor in Fed officials speeding up their expected pace of policy tightening.

Thursday’s jobs data suggests the economy has managed to absorb losses from the end of the government’s signature JobKeeper wage subsidy in late March.

Withdrawal Weathered

“The May labor force data were stellar across the boards,”said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada. “The data will add to the RBA’s confidence in the ‘transition into strong and durable economic growth’ with Governor Lowe borrowing these adjectives from the Bank of Canada in a speech earlier this morning.”

Both the RBA and Treasury expect employment will keep strengthening, based on job advertisements and other forward indicators. Yet there may also be some weaker readings ahead after Melbourne was forced back into a two-week lockdown to contain a Covid-19 outbreak.

Among other details in today’s report:

  • Monthly hours worked increased 1.4% in May
  • Under-employment decreased by 0.3 percentage point to 7.4%
  • Under-utilization fell 0.7 point to 12.5%
  • Full-time jobs advanced by 97,500 in May and part-time positions by 17,700

The jobless rate is now back to the level in February 2020, said Bjorn Jarvis, head of labor statistics at the ABS. “The declining unemployment rate continues to align with the strong increases in job vacancies,” he added.

©2021 Bloomberg L.P.

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