Last Week

There were a couple of interesting developments last week:

EMPLOYMENT
The labour market continues to show great resilience. Although there were 16,000 less in full time employment in July there were 48,200 more people in part time employment meaning the headline rate hung in at 5.8%. In the year to July the economy shed 189,000 full-time jobs which were replaced by 190,700 part-time positions. Aggregate hours worked (new measure) dropped 0.4% in July and 2.9% from a year earlier. Compared to 1990's there had been as quicker and deeper reduction in hrs worked this time as employers have reduced hours rather than axing staff.

The impact will be a reduced level of household income placing a drag on the speed of any recovery.

RBA STATEMENT ON MONETARY POLICY
Much has been reported in the paper about the RBA's significant adjustment to their outlook for the future. Wholesale rates have continued to sell off this morning as the market tries to second guess when the next tightening will be and how quickly subsequent tightenings will follow. The concluding paragraph is always an important one to scrutinise:

"Given the rapidly evolving financial and economic landscape globally, the outlook for the Australian economy continues to be subject to considerable uncertainty, although the risks are more balanced than they have been for some time. With confidence globally still fragile, it remains possible that the outlook could again weaken. On the other hand, with the cash rate at an unusually low level and the global economy stabilising, movement towards a more normal setting of monetary policy could be expected at some point if further signs of a durable recovery emerge. For the time being though, the Board’s judgment is that the present accommodative setting of monetary policy is appropriate given the economy’s circumstances. Over the period ahead, the Board will continue to monitor economic and financial conditions and how they affect prospects for a sustained recovery in the domestic economy, consistent with achieving the inflation target."

The RBA therefore will want to move to a more neutral stance (around 4%- 4.5%) quickly once it is sure the economy can sustain such a move. It acknowledges this could still be some time away. 90-day futures are pricing a 90 -day bank bill from December this year at 3.87%. Time will tell is the market is correct but personally I think it's a little ahead of itself.

Having said that the sell off could continue for the time-being. 1 - 3 year rates are about 15 points higher than Friday morning.