Rate Cut Projections Drop Considerably Amid an Unexpected Fall in Unemployment Rate

Be it dwelling approvals, job vacancies, trade surplus, retail sales or unemployment rate data declared in 2020, every indicator has exhibited a considerable improvement towards the end of 2019, reducing the probability of an interest rate cut by the RBA in the upcoming February meeting.

The interest rate cut projections have diminished substantially after the December 2019 unemployment data declared by the ABS. The probability of February rate cut has reduced substantially from 60 per cent to about 25 per cent after the employment report.

Unemployment Rate Falls Above-Expectations in December 2019

Marking a solid end to 2019, the seasonally adjusted unemployment rate fell by 0.1 per cent to 5.1 per cent in December 2019, falling to its 9-month low level.

The figure surpassed analysts’ expectations, who were anticipating the jobless rate to stay at 5.2 per cent.

The ABS update notified that the employment improved to 12,981,600 people during the month, observing a rise of 28,900 people. The rise in employment was backed by a significant rise of 29,200 people to 4,146,900 people in part-time employment, partly offset by a fall of 300 people to 8,834,700 people in full-time employment.

Though the unemployment rate saw a downturn, the participation rate and the underemployment rate stayed constant at 66 per cent and 8.3 per cent in December 2019.

State-wise figures demonstrated that seasonally adjusted unemployment rate fell in all the Australian states except Victoria, wherein the rate rose by 0.3 percentage points to 4.9 per cent. In contrast, Queensland and Tasmania saw maximum falls of 0.6 percentage points and 0.5 percentage points to 5.5 per cent and 5.7 per cent, respectively.

The below figure showcases the trend of seasonally adjusted unemployment rate in 2019:

It is imperative to note from the above figure that the unemployment rate fluctuated in the range of 4.9 per cent to 5.3 per cent during 2019, bottoming out in February 2019. Also, though the unemployment rate saw numerous ebbs and flows over the year, its value at the end of year was quite closer to the rate in January 2019.

An economist of the Commonwealth Bank of Australia (ASX:CBA) mentioned that though the headline unemployment rate dipped, other measures of labour market spare capacity (underutilization and underemployment) stayed elevated and thus, persist to weigh on wages growth.

Property Market Perform Strongly in 2020

In addition to the unemployment rate, the recent property prices data released by the property consultant, CoreLogic is giving signals of a revival in the nation’s economy.

The first three weeks of 2020 turned out to be favorable for the country’s property market, with its two largest cities – Melbourne and Sydney – observing a jump of 0.8 per cent and 0.7 per cent, respectively in property prices. The growth in property prices in these two cities was more than double the rise witnessed in Perth (0.1 per cent), Adelaide (0.2 per cent) and Brisbane-Gold Coast (0.3 per cent) over the same time.

Market experts are of the opinion that the relaxing of mortgage serviceability measures and three interest rate cuts have enabled buyers’ access to greater debt.

Recollecting the facts, the ABS reported a rise in loan commitments and dwelling approvals for November 2019.

Moreover, the improvement was in line with the recent CBA’s expectations of continuing rise in property prices in the first half of 2020. To recall, the CBA reported a lift in home buying intentions series in December 2019, providing an encouraging sign that falling residential construction might be reaching its end.

Banks Push Out Rate Cut Call

Amidst optimistic unemployment rate data, analysts at many Australian banks have pushed out the expectations of the RBA’s interest rate cut call from February 2020 to the months ahead.

An economist at Citibank Australia now expects the RBA to undertake interest rate cut in May 2020. However, he believes that the RBA can cut rates on the basis of weaker trimmed mean CPI expected for the 2019 fourth quarter, which is likely to be declared next week. He is projecting a trimmed mean CPI of 0.4 per cent for the 2019 fourth quarter.

Moreover, he does not expect a fall in the unemployment rate to continue and retail sales to remain as "buoyant" as they were in recent results.

In addition to Citi, the CBA has also pushed out the rate cut expectations to April from February amid soft downtrend in unemployment. However, the big four bank is of the opinion that its so early to say interest rate cuts are done as underemployment rate is still at a higher level.

Following CBA and Citi, the UBS became the third bank to abandon the rate cut call, now expecting a slash in March.

Besides these banks, the National Australia Bank (ASX:NAB) also believes that there is greater uncertainty over the likelihood of a February rate cut with unemployment rate strengthening for two months in a row.

The sink in the near-term rate cut expectations accelerated losses in the S&P/ASX 200 index, which closed 0.6 per cent down at 7088, and rebounded the Australian dollar on 23^rd January 2020.

Notably, market analysts and economists continue to anticipate two interest rate cuts in 2020 by the RBA and subsequently the central bank opting for quantitative easing measure to stimulate economic growth. Furthermore, experts believe that recent unemployment data has just reduced the urgency of the rate cut while not completely eliminating the possibility of monetary policy easing.

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