Developments in the labour market remain the Board's primary focus, with July's minutes highlighting the unemployment and underemployment rates and wages growth as the key indicators to watch. Thus, the latest update from the ABS on the labour market released on Thursday was timely. Employment was expected to slow in June, though the outcome of just 500 jobs on a net basis was well below the 10,000 addition anticipated by markets and was against the very strong outturns from April (42,000) and May (45,300). While employment growth was robust in Q2, the annual pace moderated from 2.9% to 2.4%, with risks of a further slowdown over the second half of the year, as highlighted in this week's NAB Business Survey for Q2. The July minutes confirmed the RBA Board acknowledges this risk.
Despite the soft employment result in June, the unemployment rate held at 5.2% for the third consecutive month, as workforce participation was little changed. While there was no improvement on that front, as our chart of the week (below) highlights, the positive from June's report was that the underemployment rate fell from 8.6% to 8.2% and the underutilisation rate declined from 13.7% to 13.3%. Those declines only retraced increases from the past couple of months but would clearly be welcomed by an RBA Board intent on reducing excess capacity. For our full review of June's Labour Force Survey see here.
Chart of the week
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Turning to developments offshore, GDP growth in China slowed in line with expectations from 6.4% to 6.2% over the year to Q2; the slowest pace since the early 1990s but still within the authorities' target for 2019 of 6.0-6.5%. The easing in momentum reflects the impact of a weaker contribution to activity from external trade in response to tariffs and ongoing tensions with the US. Weakness has also been evident in imports, indicating that the uncertainty is weighing on business confidence and investment. Regarding households, retail sales growth outpaced expectations at 9.8% over the year to June, with consumption supported by large-scale tax cuts implemented earlier this year, though a weaker business sector has been raising concerns over the employment outlook. Stimulus through investment in public sector infrastructure projects is expected to ramp up to help underpin economic activity.
In the US, Federal Reserve Chair Jerome Powell gave a speech in Paris, which reiterated the accommodative tone from last week's testimony to the Congress, notably that the FOMC saw a strengthened case for easier policy and was prepared to "act as appropriate to sustain the (economic) expansion". That comes in response to slowing business investment and weakness in the manufacturing sector due to uncertainty prompted by trade tensions and slowing global economic growth. In contrast, household consumption is strengthening supported by a robust labour market, with growth in the retail sales 'control group' lifting by a stronger-than-expected 0.7% month-on-month in June as the annual pace accelerated to 4.6%.
Nevertheless, the FOMC remains on track to cut its benchmark interest rate when it meets at the end of the month. The only question for markets is whether it will be by 25 or 50 basis points. Expectations towards the latter surged to as high as a 2 in 3 chance from around a 1 in 3 probability following a speech by New York Federal Reserve President and Vice-Chair of the FOMC, John Williams, titled "Living Life Near the ZLB" early on Friday morning (Australian time). The overall tone was one of proactivity, arguing for policymakers to "take swift action when faced with adverse economic conditions" on the basis that "it's better to take preventative measures than wait for disaster to unfold". In particular, even in the case of a low r-star (neutral interest rate setting), "when you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress". Such was the market reaction, the New York Fed later issued a clarification, noting that the speech was based on academic research and was not intended as policy guidance ahead of the FOMC's next meeting. Markets remain fully priced for a 25 basis point cut on July 31 and place the chance of a 50 basis point cut at around 1 in 2.
Over in Europe, anticipation is beginning to build ahead of next week's policy meeting of the European Central Bank's Governing Council. A survey released by Reuters (see here) showed that the most likely outcome according to a little under 60% of economists polled was a change in forward guidance. A rate cut is then expected to be announced at the following meeting in September, while around 40% of respondents see the ECB re-commencing quantitive easing this year, up from around 15% in the previous survey. In the UK, markets appear to be pricing in an increased risk of a no-deal Brexit, with the Sterling falling to a 2-year low against the US dollar. That came despite strong data showing the unemployment rate held at its 44-year low of 3.8% in May, while the pace wages growth lifted to its highest since mid-2008 at 3.6% year-on-year. The results from next week's Conservative leadership ballot are expected to be announced on Tuesday, in which Boris Johnson is favoured to become the UK's next Prime Minister after campaigning on a pledge to deliver Brexit by 31 October, with or without a deal.
In the US, Federal Reserve Chair Jerome Powell gave a speech in Paris, which reiterated the accommodative tone from last week's testimony to the Congress, notably that the FOMC saw a strengthened case for easier policy and was prepared to "act as appropriate to sustain the (economic) expansion". That comes in response to slowing business investment and weakness in the manufacturing sector due to uncertainty prompted by trade tensions and slowing global economic growth. In contrast, household consumption is strengthening supported by a robust labour market, with growth in the retail sales 'control group' lifting by a stronger-than-expected 0.7% month-on-month in June as the annual pace accelerated to 4.6%.
Nevertheless, the FOMC remains on track to cut its benchmark interest rate when it meets at the end of the month. The only question for markets is whether it will be by 25 or 50 basis points. Expectations towards the latter surged to as high as a 2 in 3 chance from around a 1 in 3 probability following a speech by New York Federal Reserve President and Vice-Chair of the FOMC, John Williams, titled "Living Life Near the ZLB" early on Friday morning (Australian time). The overall tone was one of proactivity, arguing for policymakers to "take swift action when faced with adverse economic conditions" on the basis that "it's better to take preventative measures than wait for disaster to unfold". In particular, even in the case of a low r-star (neutral interest rate setting), "when you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress". Such was the market reaction, the New York Fed later issued a clarification, noting that the speech was based on academic research and was not intended as policy guidance ahead of the FOMC's next meeting. Markets remain fully priced for a 25 basis point cut on July 31 and place the chance of a 50 basis point cut at around 1 in 2.
Over in Europe, anticipation is beginning to build ahead of next week's policy meeting of the European Central Bank's Governing Council. A survey released by Reuters (see here) showed that the most likely outcome according to a little under 60% of economists polled was a change in forward guidance. A rate cut is then expected to be announced at the following meeting in September, while around 40% of respondents see the ECB re-commencing quantitive easing this year, up from around 15% in the previous survey. In the UK, markets appear to be pricing in an increased risk of a no-deal Brexit, with the Sterling falling to a 2-year low against the US dollar. That came despite strong data showing the unemployment rate held at its 44-year low of 3.8% in May, while the pace wages growth lifted to its highest since mid-2008 at 3.6% year-on-year. The results from next week's Conservative leadership ballot are expected to be announced on Tuesday, in which Boris Johnson is favoured to become the UK's next Prime Minister after campaigning on a pledge to deliver Brexit by 31 October, with or without a deal.
