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Everyone thinks new twist means interest rate cuts are doomed. Here's why I don't

The next few labour force releases will determine just when and how many interest rate cuts will be delivered over the remainder of 2024.

Interest rates cuts are on most Aussies' minds and with the release of every data set, economists like myself start talking. If you believe the Australian Bureau of Statistics (ABS) data on the labour force, the number of people employed rose by 116,500 in February after rising 15,300 in January and dropping 61,800 in December.

The monthly numbers are notoriously volatile, and the ABS prefers the use of trend data to overcome some of the measurement problems of the monthly numbers.

Based on a simple average monthly move over the past three months, the gain is a more tepid and realistic 23,300. Steady, to be sure, but not all that strong.

Interest rates and job losses story illustrated by people crossing the rain on a Sydney street.
An interest rate cut is tied to the unemployment figure, and some fear the 116,500 jobs added to the economy in February mean we are not on track for one. (Source: Getty) (olaser via Getty Images)

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What was also a highlight in February was a stunning 0.4 percentage point drop in the unemployment rate from 4.1 per cent to 3.7 per cent - a monthly move rarely seen. Everyone should welcome lower unemployment so, on that score, the news was also encouraging.

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At face value, the numbers are a refreshingly positive indicator, given the weakness in economic growth including household spending, building approvals and consumer sentiment.

And there is more good news. The stock market is hovering close to record highs, and wages growth has been rising at a pace above the rate of inflation since the June quarter of 2023.

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Jobless dip only temporary - don't give up hope of rate cut

Despite the favourable labour market data, the economy is weak and the number of job vacancies is falling at a steady and unrelenting pace. It would be most unusual, if not impossible, in these circumstances for the unemployment rate to remain around these current levels.

Indeed, the unanimous consensus from market economists, the RBA and Treasury is for the unemployment rate to rise to around 4.5 per cent, or more, through 2024 and into 2025. This is still on track, even in the face of the February labour force data.

It is also noteworthy that the shockingly good news on jobs and unemployment did not have a significant impact on the market’s pricing for a series of interest rate cuts through the second half of 2024 and into 2025.

The smart investors are still anticipating a series of interest rate cuts in Australia, as well as in the US, UK, Canada, Europe and New Zealand.

As is often the case, more data is now needed before we can be sure just how strong, or weak, the labour market actually is.

Along with the updates on inflation each month, the next few labour force releases will determine just when and how many interest rate cuts will be delivered over the remainder of 2024.