The S&P/ASX 200 Index (ASX: XJO) dived 0.18% immediately after the latest unemployment data was released by the Australian Bureau of Statistics (ABS) on Thursday.
The data revealed a less than 0.1% rise in the unemployment rate to 4.1% in June in seasonally adjusted terms. This compares to an unemployment rate of 4% in May, 4.1% in April, and 3.8% in March.
The ASX 200 was already down 0.12% for the day when the jobs data was released at 11.30am AEST.
The index initially fell a further 0.18% in the first 10 minutes after the data was released. ASX 200 shares then rebounded and recovered almost all of that loss by midday.
Then they spiralled down again, losing 0.22% by 12.30pm. Then up they went again.
Overall, the ASX 200 is down 0.23% at the time of writing.
So, why was the market's reaction to the new jobs numbers so erratic?
ASX 200 topsy turvy after jobs news released
Well, it's a case of good news/bad news here.
For many months, the market has been waiting with bated breath for any indication that an interest rate cut may be on the cards.
Then, last month's higher-than-expected inflation numbers prompted speculation that a rate rise may come first. Inflation for the 12 months to May was 4%, up from 3.6% in the 12 months to April. Eek.
So, the market is nervous about interest rates right now.
That brings us to the good news/bad news element of today's unemployment figures.
The 'good' news is that unemployment went up. The reason that is 'good' news is because historically, inflation won't go down without a rise in unemployment.
And everyone wants inflation to go down, because that's our ticket to interest rate cuts.
So, last month's small uptick in unemployment represents progress toward lower inflation.
But it's the pace of progress that is the bad news here.
The unemployment rate lifted by less than 0.1% last month. It's now back to where it was in April. So, over the past two months, it's fair to say the jobs market has been incredibly resilient and stable.
Resilient jobs tend to mean businesses are going well. They're making enough money to retain staff and even hire more. But it also means the progress on bringing inflation down appears to be stalling.
And that is something the Reserve Bank of Australia is concerned about. Governor Michele Bullock has explained on many occasions that if the board feels inflation is not moving sustainably toward the target 2% to 3% band, the board will not hesitate to do what is necessary (i.e., raise rates) to achieve this goal.
The jobs data in detail
Employment rose by 50,200 people — which was twice consensus estimates — and the number of unemployed persons rose by 9,700.
The participation rate rose to 66.9%, which is only 0.1% lower than the historical high of 67% recorded in November 2023.
Bjorn Jarvis, ABS head of labour statistics, said:
The employment-to-population ratio and participation rate both continue to be near their 2023 highs. This, along with the continued high level of job vacancies, suggests the labour market remains relatively tight, despite the unemployment rate being above 4.0 per cent since April.
Jarvis said more people than usual worked reduced hours in June due to illness, and fewer people took annual leave.
He commented:
In June, we continued to see more people than usual working reduced hours because they were sick, similar to what we saw in May.
Around 4.5 per cent of employed people in June could not work their usual hours because they were sick, compared to the pre-pandemic average for June of 3.6 per cent.
However, we also saw less people taking annual leave in June 2024. There were around 12.5 per cent of people working fewer hours because they were on leave, compared with the pre-pandemic average for June of 14.5 per cent.
The underemployment rate fell 0.3% to 6.5%.
What does all this mean?
The labour market is "too strong for inflation to fall", according to VanEck's head of investments and capital markets, Russel Chesler (courtesy Australian Financial Review (AFR)).
Chesler said:
It's a tough pill to swallow, but the reality is that an unemployment figure of at least 4.5 per cent would be needed to cool inflation.
With inflation coming in at 4% in May, Chesler thinks the RBA will have to raise rates to knock inflation back onto a sustainable downward trajectory.
This is the only way to push inflation back into the RBA's target range. The RBA did not go as hard as other developed economies with rate rises, and we are now seeing this play out with escalating inflation. It's time for the RBA to rip the band-aid off.
But State Street's Asia Pacific economist, Krishna Bhimavarapu, maintains his view that the RBA will cut rates in November.
Bhimavarapu said:
The key takeaway is that the unemployment rate increased by a tenth to 4.1 per cent …
We continue to view an August rate hike to be a bad idea, and still think the cash rate will be cut in November.
The big test for the economy will come on 31 July when the second quarter inflation data is released.
The RBA pays much more attention to quarterly inflation data given monthly readings do not cover all goods and services and, thus, are notoriously volatile.
The Reserve Bank's next board meeting to discuss interest rates is scheduled for 5-6 August.
Energy shares lead the ASX 200 on Thursday
Energy shares are leading the ASX 200 today, with the S&P/ASX 200 Energy Index (ASX: XEJ) up 0.49%.
Woodside Energy Group Ltd (ASX: WDS) shares are up 1.05%, and Santos Ltd (ASX: STO) is up 1% on rising oil prices. Brent crude is up 0.45% at US$85.45 per barrel at the time of writing.
Oil prices are rising due to a larger-than-expected drawdown in US crude inventories, according to Trading Economics.
