Australia's labour market continued its strong recovery as a 29.1k rise in employment in June outperformed expectations, pushing the national unemployment rate down from 5.1% to 4.9% to be at its lowest in 10½ years (reviewed here). At the nadir of the 2020 national lockdown, the unemployment rate lifted to a 22-year high peaking at 7.4% (see chart below), with the stunning turnaround over the past 11 months reflecting the highly elevated pace at which jobs were returned to the economy once the reopening effort commenced, far exceeding the limited growth in the working-age population due to the border restrictions. Also helping drive the decline in unemployment in the month was the participation rate remaining steady at 66.2%, sitting just a fraction below its record high. June's increase in jobs was an encouraging outcome considering that it followed a 115.2k surge high in May, taking total employment to 1.2% above its pre-pandemic level. However, the outlook over the near term has become very uncertain with the nation's two largest capital cities in lockdown. Sydney's lockdown has been extended until at least the end of the month, while stay-at-home restrictions have returned in Melbourne for the next 5 days only a few weeks after a two-week lockdown was lifted.
Chart of the week
Highlighting the effect of the lockdown in Victoria was weakness in hours worked, which collapsed by 8.4% in the state in June, driving a 1.8% fall in the national outcome. A very sharp decline in hours worked in New South Wales will flow through in July, and as this week's report highlighted, there are implications for the level of spare capacity in the labour market. With the Victorian economy shut down, there were 33.4 million fewer hours worked in Australia in June compared to the month prior, which drove up rates of underemployment (7.4% to 7.9%) and underutilsation (12.5% to 12.8%). Given the hit to incomes for households and businesses flowing off the back of this, the announcements by the fiscal authorities to increase and expand access to support payments will go some way to attenuating the risks of a more material impact on the economic recovery. Another factor key to sustaining the momentum in the recovery is consumer sentiment, which for the time being was holding up at optimistic levels, rising by 1.5% in July to a reading of 108.8 on the Westpac-Melbourne Institute's index. But beneath that outcome was a wide divergence across the states, with New South Wales -10.2% offset by reopening rebounds in sentiment in Victoria (15%) and Western Australia (11.5%). The lengthening lockdown in Sydney could lead to further weakness in New South Wales, while Victoria is now at risk of reversing this gain due to the spreading of the delta strain. There could also be spillover effects on sentiment in the other states, based on the signals coming from high-frequency data for card spending and mobility.
Pressures on businesses were also starting to show as a result of the rise in COVID-related concerns. In the June NAB Business survey, measures of both confidence (+11 from +20) and conditions (+24 from +36) stepped down from what must be said were very elevated levels, the latter coming off a record high in the month prior. Given this, and the timing of the survey, it is difficult to be clear just yet on the extent to which the pullback can be attributed to the deterioration in the pandemic situation, but clearly, it is an adverse development and businesses may be sensing that the impact to trade from lockdowns could last for a while longer with vaccination rates still at low levels. On vaccinations, the ABS Household Impacts of COVID-19 Survey reported that overall willingness to receive the dose had risen to 73% in June, up from 68% in May. Among other findings in the final release of the survey that has been a timely source of insights throughout the pandemic period, expectations for wages growth on a 12-month-out view were soft, with only around 30% of households expecting an increase despite the strength of the recovery in employment.
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Inflation has been front and centre of developments offshore this week, with Federal Reserve Chair Jerome Powell staying resolute in the line that price pressures will prove transitory amid more hawkish tones being taken by other central banks. All the while the bond market has remained unphased by hot inflation data — the US 2/10 Treasury yield spread narrowed further this week to its lowest since February. US CPI inflation printed well above consensus forecasts rising from an annual pace of 5.0% to 5.4% in June (vs 4.9% expected) — its highest since 2008 — as the core rate accelerated to its fastest pace since 1991 at 4.5%Y/Y from 3.8% (vs 4.0% expected). Once again, reopening pressures were the main contributors, with energy prices (24.5%Y/Y) now much higher compared to during the lockdowns a year ago; used cars and trucks resetting record highs (45.2%); and very sharp increases for airfares (24.6%), hotels (16.9%) and for a range of household durable goods. Reflecting the shifts in spending patterns driven by the onset of the pandemic, and now the supply-side bottlenecks with the economy attempting to rebuild its previous capacity, there remains a very significant spread between durables CPI (14.6%Y/Y) and services CPI (3.2%Y/Y), though the latter is seeing the price impulse lift with rents picking up and as demand for domestic travel rebounds. Those expecting high inflation to prove more sustained will point to the acceleration in producer prices, up from 6.6% to 7.6%Y/Y in June, as a sign that more price pressures are coming down the pipeline and will be passed through to consumers with spending robust. Speaking to this was June's stronger-than-expected rise for retail sales, which advanced 0.6% in the month while control group sales posted a 1.1% lift. But during this week's testimony, Chair Powell told lawmakers that price pressures were expected to abate as the reopening broadens out and as supply constraints are resolved. With the labour market still deep in recovery mode, it is on that basis that the core of the Fed's FOMC is maintaining the view that it is appropriate to continue running asset purchases at the current pace of $120bn/mth.
However, there are much more hawkish views on high inflation being taken by other G10 central banks, two of which — the Bank of Canada and Reserve Bank of New Zealand — held policy meetings this week. The BoC cited increased confidence in the domestic economic outlook for the second half of the year, with widening vaccination coverage set to see an easing of restrictions, as justification for a further tapering of its asset purchases, from $3bn to $2bn per week. But its forward guidance for rates to remain at the lower bound through to the second half of 2022 was retained. Going a step further was the RBNZ, with the surprise announcement coming from the Committee that its asset purchase program will be wound up by the end of next week as it assessed stimulus could be withdrawn with downside risks to the economic outlook having receded. On the back of this and following a stronger-than-expected rise in CPI inflation in Q2 to 3.3%Y/Y from 1.5% (vs 2.7% expected), rates markets have moved to price in around 50bps of hikes (2 rate hikes) by the end of the year. Another economy where inflation is running above the central bank's target is the UK. Annual CPI lifted from 2.1% to a near 3-year high of 2.5% (vs 2.2% expected) in June, driven by the reversal of sharp price falls from the depths of last year's initial lockdown, with prices for motor fuel, used cars, clothing and footwear and eating out on the rise. While the central view of the Bank of England is that the prevailing inflation dynamics have a transitory nature, speeches from two MPC members Ramsden and Saunders put forward cases for considering a near-term tapering of asset purchases. Further tension here came from a House of Lords report this week that was critical of the BoE's £895bn quantitive easing program. In the euro area, while June's finalised CPI readings at 1.9%Y/Y for the headline rate and 0.9%Y/Y on core are well up from the lows of the pandemic, the impulse is softer than in many other advanced economies. Given the recent adjustment to the European Central Bank's inflation mandate to a 2% symmetrical goal, this sets up an interesting meeting by the Governing Council next week, with President Christine Lagarde hinting that its forward guidance is in line for some tweaking.
