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Thursday, 13 June 2019

Unemployment needs to fall...perhaps by a lot

Desperately seeking NAIRU

A seemingly innocuous, but nevertheless very important chart, from the Reserve Bank's Luci Ellis.

Only a year ago the RBA thought that NAIRU was around 5 per cent.

The latest estimates imply that it could well be below 4½ per cent. 

This might not mean a lot to you if you're a business owner or executive.

More likely you'd simply tend to notice that there are lots of good candidates in the employment market, or very few, depending on where we're at in the business cycle.

But it's potentially very important for the Reserve Bank's line of thinking, and in turn for the trajectory of interest rates. 

Summarily, the unemployment rate is presently some way above 5 per cent, but it possibly needs to fall substantially lower to get to where we want and need to be. 

Accordingly financial markets are pricing further declines in the cash rate to just 0.75 per cent or lower. 

Anything goes

The May 2019 labour force figures are due for release later this morning.

The 3-month average gain for employment has been solid at +22,400, with lots of female employment, but has been easing since January. 

The figures for the month of May might have been disrupted by the election, so market forecasts range anywhere from stone dead flat to a massive +50,000 jobs.

In other words, today's release is a total crapshoot.

Similarly the unemployment rate forecasts range all the way from 4.9 per cent up to 5.3 per cent.

A must-watch release today, then!