The market isn’t quite sure how to view Australia’s labour market report for July, as a surprisingly large jump in the unemployment rate competes with encouraging jobs growth and a growing labour force set against lower than expected population growth. The unemployment rate jumped to 6.3% from a revised 6.1%, which is a far cry from the 6.1% the market was expecting, and the economy added an impressive 38.5K jobs over the month.
Are these numbers good or bad?
At first glance it may seem somewhat counter-intuitive that the unemployment rate rose significantly on the back of stronger than expected jobs growth, but this doesn’t account for a significant increase in the labour force participation rate. The labour force participation rate increased to 65.1% from 64.8% (expected 64.8%), its highest level in over two years, which could theoretically explain the jump in the unemployment rate. Looking behind the numbers the implications are that people are returning to the workforce faster than previously expected as workers become more confident about job prospects.
However, the market is taking these numbers with a grain of salt, largely because the ABS has reviewed the way it calculates the data and there are questions about the accuracy of the new figures. When in doubt, it’s hard to go past the headline number, which is a worryingly large jump in the unemployment rate. This is dragging down the Australian dollar, with AUDUSD testing some support around 0.7320 at the time of writing.
A soft labour market could push the RBA back into dovish territory
Earlier in the week the RBA removed a soft ceiling from above the aussie by removing its easing bias and it’s harsh words for the commodity currency. Stevens also noted that the bank expects the economy to operate with a large degree of spare capacity and the unexpected resilience of the labour market was a welcome sign, and if faith in the latter further erodes it may force the RBA back into a more dovish stance. The Australian dollar cannot escape this lingering fear about the health of the labour market, as evidenced by today’s sell-off. Also, if the aussie regains much more strength that isn’t associated with rebounding commodity prices, the RBA will likely turn very sour towards the currency once more.