From Philip Brown, Head of Research at FIIG Securities
“US inflation results confirm a problem, but there’s more than one problem out there. The US inflation results were remarkably reminiscent of what’s happening in Australia – which is no surprise since oil prices are global and human behaviour is the same in both places.
“The headline inflation rose 0.6% in the month to be up 3.7% on the year, which was slightly above expectations of 0.6% and 3.6%. The core result was 0.3% and 2.6%, which was also above expectations of 0.2% and 2.5%.
“Obviously, gas prices were a large part of the headline move. But the core result, year on year, rose from 2.4% to 2.6% suggesting that this rise in inflation is much broader than just petrol prices.
“As Australia is also experiencing, the war was originally understood to be a short-term temporary phenomenon, but that understanding is changing. As the new, higher, oil prices get locked in to forward planning, businesses which had initially absorbed the higher costs respond by passing them on. This results in a much broader, much stickier and generally much more dangerous type of inflation.
“The bond market reacted viciously, with the two-year yield rising 20 basis points on the data and the 10-year selling off 15bps. At this point the feeling changed dramatically, there were large falls in equity prices of chipmakers and some mediocre earnings results from banks, triggering a solid fall in overall equity prices and a rush back to the safety of bonds. By the end of the session, the bond yields were little changed, but that obscures a 20bps sell-off followed by an 18bps rally. But although bond yields ended back near where they started, it was a very unusual night nonetheless.
Australian labour force data
“The labour force data today will be the local focus. The labour market is weakening, very slowly, from a position of exceptional strength.
“The RBA continues to consider the labour market to be in excess demand – i.e. still strong. That’s probably still true but the quantity is worth watching as well as it’s far less strong than it use to be.
“The various labour market indicators have been mixed of late. The most recent job vacancies number was slightly poor, while the most recent job ads number was better. However, the job ads number has been much weaker since COVID and is not actually suggesting a particularly strong labour market. Vacancies, in contrast, are still very high compared to more normal behaviour. But that does rather raise the question about whether the numbers are real. At face value, there are hundreds of thousands of jobs which are vacant, but no-one is bothering to advertise.
“The unemployment rate was 4.64% last print, though this is reported as 4.6%. As such, it seems there is more risk of a rise than a fall in the reported unemployment rate. The market consensus according to Bloomberg is +20,000 jobs and an unchanged 4.6%. That looks very hard to achieve, actually, as 20K new jobs isn’t normally enough to keep the unemployment rate from rising slightly.
“The consensus is for a fall in participation to make up the difference. The participation rate rose 0.2% to 67.1% last month which is only just below the record high of 67.2%. With the cost of living biting the way it is the fall in participation looks like it might not be achieved. If so, you likely get a slightly better employment number, but a rise in the unemployment rate. The RBA will continue to focus on inflation so the print today won’t change the shorter bond yields. But if the labour market signals weakness, the longer bonds will start to rally a little and flatten the curve.”
