Phew. Buyers breathe a sigh of relief.
I told readers last week that they shouldn’t believe the RBA jawboning on rates.
Governor Michelle Bullock wanted us to believe that the RBA might be one and done – that more rate cuts might not necessarily be coming.
The key reason for this was wages – or the fear that a tight labour market might cause a wages breakout.
I thought this was rubbish. Yes, the labour market was tight, but it wasn’t translating into wages growth.
Remember, the only reason why a tight labour market is a problem is because, in theory, it leads to higher wages, which translates into cost-pressures, which creates higher inflation.
That’s the theory. But it hasn’t been happening.
It didn’t happen back when the unemployment rate was 3.5%. It’s not going to happen now that it’s 4.1%.
And just to underscore the point, we got wages data a few days ago, which showed that wages growth was surprisingly soft.
The Wage Price Index (WPI) increased by 0.65%qoq in the December quarter, well below market expectations for a lift of 0.8%.
Year-ended growth eased 30bps to 3.2%. The trend is very clearly downwards now:
So it’s all pretty soft. Remember, the RBA reckons that wages growth of 3-4% is consistent with an inflation target of 2-3%, so on that logic, this is bottom of the band stuff.
Cut away, Michelle. Cut away.
The RBA itself actually told the story in their statement on monetary policy (SMP).
Unpacking recent strength in the labour market, the RBA noted that over half of the employment growth in the year to September 2024 came from a single sector: Health. Think NDIS and so on.
And the surging growth in Health Care employment was pulling people from the ranks of the unemployed, and from other industries:
And this is why, when we zoom out a little, we can see that almost all the jobs in the past two year has come from the public sector (up 624,000), while the market economy is barely posting any jobs growth at all (up 91,000).
So yes, the labour market is tight.
But it’s all about health care.
Which is why wages are going nowhere. Healthcare wages are set by the government, so even though the sector is tight, it’s not creating strong wages growth.
There’s no wages growth in the market sector because the market sector is weak.
Which then is all why wages growth is going nowhere right now.
Which in turn is why the RBA can be relaxed about it. There is nothing in the jobs or wages data holding back further rate cuts.
And again, this is all why I’m saying that we shouldn’t believe the RBA right now.
The idea that we shouldn’t cut rates because the labour market is too tight is just silly.
Last week’s wages data proves it.
JG.