RBA: Labour market tightening, but hikes are coming - HSBC

Australia’s rising capacity utilisation and a tightening labour market are expected to lift wages growth, supporting a gradual rise in underlying inflation and as a result analysts at HSBC expect an RBA hike in early 2018.

Key Quotes

“At last, the official labour force survey is starting to line up with other labour market measures, such as job advertisements and business surveys. For quite some time we have argued that the divergence had largely reflected measurement issues in the official survey. Stronger official prints in recent months means that the indicators are now all showing a tightening labour market. The positive momentum is also consistent with the view emanating from the business surveys. The NAB survey showed business conditions and capacity utilisation around decade highs in May.”  

“This is happening despite weak real GDP numbers for 1Q. The GDP print, which was published in early June, showed growth of 0.3% q-o-q and 1.7% y-o-y. However, we think most of the weakness reflects the impact of Cyclone Debbie and unusually wet weather on the east Coast. Despite weak real GDP, nominal GDP rose by a strong 7.7% y-o-y, which is its fastest rate in over five years. Nominal growth has been boosted by the rise in commodity prices, although there are also some signs that the nominal lift has moved beyond just a mining story. Corporate profits have also picked up in a broad range of non-mining sectors.”

“However, as yet, we have not seen a pick-up in wages growth. Although there are signs that wages growth has stabilised, it is still running at multi-decade lows. Nonetheless, we expect wages growth to pick-up in 2H17 supported by a number of factors. First, corporate profits growth is strong and historically this leads to a rise in wages growth. Second, the labour market is tightening, and even though the link between wages and jobs market conditions may be weaker than in the past we still expect some traction. Third, the minimum wage was lifted by more this year than last year, which we expect could add 0.2-0.3ppts to wages growth. The lift in wages growth should support a gradual rise in underlying inflation. Once the RBA sees clear evidence of a lift in wages growth, we expect that a hike will not be too far away.” 

“On fixed income strategy, expect front-end risk premium to rise as the RBA would like to remove accommodative policy if/when the data allows, similar to other central banks.”