Key insights from the week that was.

For Australia, the June labour force survey was key this week. Offshore, China data and remarks from FOMC officials were most noteworthy.

Beginning with Australia’s labour force, employment growth disappointed in June, rising just 0.5k against the market’s expectation of 10k. As the participation rate held up at its historic high of 66%, the unemployment rate also remained unchanged at 5.2%. Interestingly, underemployment (those that are willing and able to work more than they currently do) instead fell in the month from 8.6% in May to 8.2% in June. This looks to be a one-off fall that reverses a similarly-sized rise in April.

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For the economy overall, it is important to highlight that, at 5.2%, the unemployment rate is well above the RBA’s 4.5% full employment target. And, despite June’s reversal, underemployment is still materially above its post-GFC high. Further, the trend looks to be going the wrong way, employment growth having slowed from 2.9%yr at May to 2.4%yr in June on its way to 2.1%yr in the December quarter, according to the forward indicators. Our expectation is that employment growth will be weaker still in the period ahead, resulting in a drift higher in the unemployment rate. Note that it also seems consumers are increasingly aware of the labour market’s deterioration.

This weakening trend remains the focus of the RBA as they instead seek sustained strong employment growth which begets wage inflation so as to lay a foundation for a return to trend growth and inflation at target. While the July meeting minutes point to a pause for policy following June/July’s rate cuts, as highlighted by Chief Economist Bill Evans, by November enough pressure will have built on the RBA’s growth and inflation forecasts for the year ahead to justify another cut to 0.75%. Indeed, given the significance of the labour market in the RBA’s thinking and its weakening trend, we believe prospects for the next move being as early as September or October cannot be dismissed.

On July 31 the Q2 CPI for Australia is released. Our preview is now available. In short, we look for another soft outcome for trimmed mean core inflation of 0.3%, leaving the annual rate well below the 2-3%yr RBA target range at 1.5%yr. Released this week, New Zealand’s CPI provided no surprises, annual inflation soft at 1.7%yr. Our New Zealand team and the market continue to expect the RBNZ to cut in August.

Turning to China, GDP and the June monthly data round were received this week. GDP was as expected in Q2, annual growth decelerating to 6.2%. Support from net exports abated, putting the onus for growth more on domestic demand. While consumption has received support from tax cuts, it is evident in the PMI detail that employment growth is under pressure. As a result, for both the short and long-term, investment is critical. Momentum in real estate investment is strong, but public infrastructure and private business investment remain weak. The credit data points to local governments accumulating funding, and so a lift in infrastructure work can be expected shortly. However, private sector investment looks set to remain weak absent greater liquidity and reduced cost for banks, as well as strong encouragement by authorities to lend to these firms.

Then to the US. June retail sales confirmed that the US consumer remains in strong shape, with control group sales up 7.5% annualised for Q2 overall – the strongest outcome in 14 years. As long as the labour market and sentiment hold up, this should remain the case. In a speech which assessed ‘Monetary Policy in the Post-Crisis Era’, it was notable that Chair Powell again reiterated that, while the FOMC “expect growth in the United States to remain solid”, “Uncertainties about this outlook have increased”. This clearly reaffirms an intent to cut in July and again by year end, and to remain cognisant of the impact of risks on the US economy thereafter.

More broadly on the responsiveness of policy near the lower bound, New York Federal Reserve President Williams was very clear on the need for policy makers to be proactive. Simply, research points to a need to first “take swift action when faced with adverse economic conditions”, then to “keep interest rates lower for longer”, and finally to “adapt monetary policy strategies to succeed in the context of low r-star and the ZLB”. Practically speaking, with “only so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress”, and it is “better to take preventative measures than to wait for disaster to unfold”. Such comments were later reinforced by Fed Vice Chair Clarida who emphasised “You don’t want to wait until the data turns decisively if you can afford to”.

Having already been more than fully priced for a 25bp cut at the July meeting, the market moved to pricing 42bps after the Fedspeak. However, the NY Fed later released a special statement announcing that Williams’ speech was “academic” and not about “specific policy action”. Pricing for the July meeting is now back to 37bps, reflecting roughly even odds between a 25bp or 50bp reduction.

Lastly on the UK, MPs passed an amendment 315-274 in order to prevent the next Prime Minister suspending Parliament in October to push through a no-deal Brexit. Such tactics had been touted by Boris Johnson’s campaign as one possibility to deliver on his “do or die” commitment to leave the EU on the October 31 deadline.

Johnson is the firm favourite to win the Conservative leadership ballot and become PM with results likely to be released this coming Tuesday. While he is popular among the Conservative’s voting base, last night’s parliament vote highlights the division between MPs.

Divisiveness between Johnson and European leaders is of course even more intense. That said, Irish Taoiseach Varadkar indicated this week that he is “willing to compromise” to avoid a hard border on the island of Ireland but conceded an agreement on “alternative arrangements” to the tabled backstop is unlikely before the current Brexit deadline. Indeed, The UK House of Commons rises for summer recess on July 25 and returns on September 3. From there, it is only six weeks until the EU Summit on October 17.

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