Wages and jobs data to test Reserve Bank’s mantra
"As the labour market tightens, wages growth and inflation should increase gradually." It's the Reserve Bank mantra that underpins Australia's economic policy settings.
This week in finance:
- Wage price index (Wednesday), employment/unemployment (Thursday)
- Reporting season: Wesfamers, CSL (Wednesday), Telstra (Thursday)
- Reserve Bank governor Philip Lowe's biannual parliamentary testimony (Friday)
It's embedded into most RBA economic communiques — post rate decision statements, speeches, quarterly monetary policy updates; it's a given it will be in governor Philip Lowe's testimony to Parliament this week as well.
It's the conviction behind the RBA's determination that the next time rates move, it will be up — an optimistic, forward looking belief.
It needs to be, because looking backwards it hasn't stacked up so well.
For all the jobs created in the past couple of years, the labour market hasn't tightened and wage growth is stagnant.
Wage growth near historic lows
Wage growth remains near historic lows and inflation is stuck below where the RBA wants it — its economics team even nudged down its short-term forecast last week.
The mantra is likely to be further tested this week with the release of key wages and jobs data.
The betting is it will be more of the same. More jobs created, plenty of slack in the labour market and wages creeping incrementally higher.
Citi's chief economist Paul Brennan, for one, thinks the RBA is overly optimistic.
"The international experience is that there is more spare capacity in the labour market than generally thought to be the case … [and] wage pressures are less sensitive to falling unemployment than might have been expected," Mr Brennan said.
"The bank's own forecasts are for only a half of one percentage point reduction in the unemployment rate by the end of 2020.
"Is this really enough and fast enough to make a noticeable difference to the pace of wage rises."
Last week's Statement on Monetary Policy doesn't see inflation reaching the RBA's mid-point of the targeted 2 to 3 per cent inflation band before the farthest reaches of its current forecast at the end of 2020.
That puts the pace of change somewhere between gradual and glacial.
The consensus forecast is the Wage Price Index (Wednesday) will increase by 0.6 per cent over the second quarter, marginally higher than the first but leaving the annual rate stuck at 2.1 per cent.
Even then, wage growth has been patchy.
Healthcare workers and those in the public sector have done better. The private sector — where the bulk of the workers (and consumers) are — has lagged painfully behind.
Bonuses strong, EBAs weak
The more positive news out of the last quarter's figures was the WPI — when bonuses were tossed in the equation — was stronger at 2.6 per cent.
And while it won't be evident in the second quarter's numbers, the Fair Work Commission awarded a solid minimum wage increase of 3.5 per cent, from 1 July, which directly impacts about a quarter of the workforce.
That should give the WPI a sugar-hit for the subsequent few readings.
NAB is expecting the WPI to come in at 0.4 per cent for the quarter, which would deliver a result just a notch above the record low annual growth of 1.8 per cent recorded in the third quarter of 2017.
"In part, this reflects still elevated underemployment, modest inflationary expectations and low average wages growth in Enterprise Bargaining Agreements (EBAs)," NAB's Kaixin Owyong said.
"EBAs will remain a headwind given they are still running below aggregate wages growth, despite recently approved EBA wages rising a little."
So for the foreseeable future wages growth will continue bumping along in the basement.
So what about unemployment?
To make much of a headway in lifting wages unemployment needs to get closer to 5 per cent. Below would obviously be better.
Once again it will fall a long way short when the July number is released on Thursday.
The consensus view is 10,000 jobs will have been created in July, leaving the unemployment rate plonked at 5.4 per cent, assuming the number of people looking for work stays roughly the same.
The last time unemployment was below that level was more than five years ago. It was also the last time wages growth was above 3 per cent.
Worryingly, the strong jobs growth of last year appears to have, if not rolled over then softened despite a big jump last month.
The six month annualised pace of jobs growth has slowed from its peak above 4 per cent 12 months ago, to less than 2 per cent currently.
The NAB business survey points to slowing employment growth as well, while the Australian Bureau of Statistics noted the outgoing labour force survey group had above average employment and participation rates.
That may revert to the mean this month.
Westpac's Bill Evans says all this points to the possibility of the number of jobs falling in July.
"Our minus 5,000 forecast will see the three month average fall to 19,000," he said.
At that rate, the spare capacity in the market — or underutilisation rate, the sum of unemployment and underemployment — will stay at elevated levels, keeping wage growth subdued and the RBA maintaining its mantra that things will get better, eventually.
While equity markets have sailed blithely on for weeks, not worrying too much about the disintegrating relationship between the US and its major trading partners and softening global industrial production, it took one of those unforeseen Black Swan events to bring things to an abrupt halt on Friday.
Actually, not so much a Black Swan event — it was more to do with Turkey, and the problems have been brewing there for a while.
On Friday the Turkish lira collapsed, falling by as much as 18 per cent in the day, for a variety of compelling reasons including the Trump administration's decision to double tariffs on metal imports from Turkey.
That, and the conviction the Turkish economy is teetering on the edge of a very deep and worrying precipice.
President Tayyip Erdogan's urging for Turks to swap gold and dollars backfired. They, and the investment world, dumped the currency and bolted to the safety of US and German bonds.
The US dollar was also something of a sanctuary as well.
Its rise against most currencies pushed the Australian dollar down to 73 cents against the greenback, its lowest level since January last year.
AMP Capital's Shane Oliver noted over the weekend a slide to 70 cents is on its way.
Risk was also abandoned. Wall Street fell, European stocks fell more, dragged down by the regional banking sector's exposure to Turkey.
Despite the conniption, futures traders on the ASX weren't buying it with market poised to tick higher on Monday's opening.
That position will be tested next week, particularly if the promising forecasts for reporting season sour.
Markets on Friday's close:
- ASX SPI 200 futures +0.2pc at 6,229 ASX 200 (Friday's close) -0.3pc at 6,278
- AUD: 73.0 US cents, 64.0 euro cents, 57.2 British pence, 80.9 Japanese yen, $NZ1.11
- US: Dow Jones -0.8pc at 25,313 S&P500 -0.7pc at 2,833 NASDAQ -0.7pc at 7,839
- Europe: FTSE -1pc at 7,667 DAX -2pc at 12,424 EuroStoxx50 -1.9pc at 3,426
- Commodities: Brent oil +1pc at $US72.81/barrel, Gold +0.1pc at $US1210/ounce, Iron ore $US69.00/tonne
The ASX reporting season cranks up another gear this week. More than 40 of the top 200 companies release results.
The key announcements include index heavyweights Telstra (Thursday), Wesfarmers (Wednesday) and CSL (Wednesday).
Last week was fairly solid with earnings on track for an almost 10 per cent growth, albeit propped up by the continued rebound in the resources sector.
Elsewhere on the corporate calendar the bank royal commission's hearings on the superannuation industry enters its second week.
Can it get worse for the banks and wealth managers? It remains the most compelling show in business.
Overseas, China's big data dump (Tuesday) is likely to point to weakness in the domestic economy, while US housing figures (Thursday) will be closely watched for brewing softness in the sector.
|Bendigo & Adelaide Bank||FY profit & dividends likely edge up. Margins under pressure|
|BlueScope Steel||FY profit up 20pc to around $800 on stronger prices|
|JB HiFi||FY earnings should be in line with $230m guidance. Good Guys improving|
|GPT||FY profit a flattish $570m. Early insight into other REITs|
|Challenger||Likely to be slightly subdued, FY profit around $390m|
|Cochlear||Another solid year, guidance for $240-$250m profit. Forward sales & market share guidance important|
|Dominos Pizza||Earnings up around 20pc to $140m|
|Whitehaven Coal||Higher prices in the second half likely to see FY profit up 30pc to $580m|
|Computershare||Cost cutting & a busy corporate year likely to see FY profit up around 50pc to $340m|
|CSL||Has given guidance for a FY profit of $US1.7bn, up around 30pc|
|Fairfax||Likely to say goodbye with its final result with FY profit falling around 10pc to $130m|
|IAG||FY profit likely to edge above $1bn. Cost cutting an improving prices may boost outlook|
|Seek||Already issue a profit warning & written down value of offshore businesses|
|Wesfarmers||Profit likely to be softer, around $2.5bn. Update on Coles spin off|
|Iluka||First half profit likely to jump to $120m from $30m last year|
|Woodside||First half profit supported by higher oil prices, +50pc to $750m|
|ASX||FY profit up around 7pc to $460m|
|Origin||LNG exports and higher electricity margins likely to see FY profit double to $1bn|
|Seven West Media||Tough advertising market likely to see FY profit slide around 15pc to $140m|
|Sonic Healthcare||FY profit around 10pc to $490m|
|Telstra||Tough year for the telco. Profit down 10pc to $3.5bn. Forward guidance & news on dividends important|
|Treasury Wine Estates||Another solid year, profit +20pc to $370m. Guidance focus on US & China|
|QBE||First half profit of around $360m rebounding strongly from the big loss in H2 2017|
|Primary Healthcare||Flat FY profit around $90m|
|Bank royal commission||Hearings on the superannuation sector enter their second week|
|Business survey||Jul: NAB series. Conditions near record high. Focus on employment & new orders|
|Wage price index||Q2: Focus on wage inflation. Has been weak, not likely to pick up much, wages growing around 2.1pc YOY|
|Consumer sentiment||Aug: Optimism prevails marginally, falling house prices could become an issue|
|Employment/unemployment||Jul: 15K new jobs added, unemployment steady at 5.4pc|
|Average weekly earnings||May: Biannual measure, broader than WPI, good measure of purchasing power. Weak too, but a bit higher than WPI|
|Reserve Bank talks||Governor Philip Lowe semi-annual parliamentary testimony & Assistant governor Luci Ellis gives a speech in Sydney|
|US: Business optimism||Aug: Likely to tick down, but remain optimistic|
|CH: Monthly activity surveys||Jul: Industrial production, infrastructure investment & retail sales. Has pointed to cooling domestic economy|
|EU: GDP||Q2: Growing around 2.1 YOY|
|CH: House prices||Jul: Rebounded in June after showing signs of cooling|
|US: Retail sales||Jul: +0.3pc MOM forecast|
|US: Industrial production||Jul: Also expected to lift a bit over the month|
|US: Productivity||Q2: Growing only moderately, around 2.5pc YOY|
|US: Housing starts/permits||Jul: Evidence housing is starting cool. Fell 12pc in June. Building permits expected to be flat-to-falling|
|US: Consumer confidence||Aug: Pretty solid, supported by booming jobs growth|
|EU: Inflation||Jul: Benign, growing around 1.1pc YOY|