The week that was
The NAB measure of business conditions topped out after a series of solid increases in the first few months of 2018. Most analysts suggested the monthly fall was more statistical noise than a change in trend – the level of business conditions remains solidly positive.
That said, in recent years, there has been a breakdown in the correlation between the results of business surveys and actual activity in the economy. The chart below shows how annual growth in both household demand and overall domestic demand remains relatively subdued, whilst the quarterly reaching for business conditions has been strong. This could be because firms are doing well via low interest rates, weak growth in their wages bills and generally lower costs, while the overall economy is under pressure from subdued household demand which is being held back by high consumer debt and weakness in the housing market.
The week ahead
The ever-important labour force release will dominate local market news, especially when it come to the outlook for official interest rate settings.
More so than for most data, the recent labour force news has been difficult to interpret. On the strong side, has been the surge in employment over the past year and a half which has seen annual jobs growth expanding by a very strong 3 per cent. This is good news. On the down side has been evidence that the unemployment rate stopped falling in the middle of 2017 and has since been stuck around 5.5 per cent. At the same time, underemployment has been elevated at over 8 per cent of the workforce.
Which begs the obvious question – is the labour market strong or not?
The interest market futures market is erring on the soft side. Pricing for interest rate hikes has been pushed back since the start of the year. Just a few months ago, a 25 bp rate hike was priced in for December 2018 with a further hike expected by the middle of 2019. Now the market has just one 25 bp hike priced in by the September quarter 2019. A soft labour force release next week could see these expectations further scaled back.