Unemployment rate falls more than expected to 6.0%; June 10 OCR hike now near certain

Unemployment rate falls more than expected to 6.0%; June 10 OCR hike now near certain (Update 5)

The unemployment rate fell by more than expected in the March quarter to 6.0% from a revised 7.1% in the December quarter, Statistics NZ reported.

Economists had expected the rate would stay above 7% and said the result was unambiguously strong.

They said an Official Cash Rate hike on June 10 was now almost certain, particularly in the wake of a hawkish speech from Alan Bollard.

(Adds chart, comment from Westpac economist Brendan O'Donovan on need for June rate hike, ANZ economist Mark Smith on small rate hikes likely from June 10, ASB economist Christina Leung seeing the OCR being lifted to neutral over the next 12 months, BNZ's Doug Steel seeing rate hikes from June)

The New Zealand dollar jumped after a hawkish speech from Alan Bollard earlier in the morning where he argued for interest rate increases, but continued to rise after the jobless figures.

Westpac economist Brendan O'Donovan said the result was stunning and indicated a hike in the Official Cash Rate on June 10 was a near certainty.

The detail of the survey was even stronger than the headlines. The 1.0% increase in employment was entirely full-time. Part-time employment actually fell slightly. Hours worked rose 1.7%, confirming the picture given by Tuesday's Quarterly Employment Survey. Underemployment fell. The number declaring themselves "discouraged workers" fell. We have long been the cheerleaders of the economic recovery, but today's data had even us dropping our pom-poms in astonishment. We had not expected jobs growth of this magnitude until mid-year. The evidence confirming a normal recovery had, until this week, mainly been of the soft variety - ballistic business confidence, surveys reporting sharply rising sales, high consumer confidence et al. We now have hard evidence that the economy has embarked upon the long road to recovery. We are now thinking that our forecast of 0.8% March quarter GDP growth may be a tad too low. The "double dip recession" hypothesis will now surely be cast aside by its last few adherents. Rather than questioning the existence of a recovery, markets and economists will now focus their attention on the nature of recovery and the RBNZ's response. On that score, both the current level of unemployment and the revision to the peak show that there is much less slack in the labour market than previously thought, meaning wage pressure will rear its head earlier. Therefore, the RBNZ will have its eye on normalising the OCR earlier rather than later. Not to mention that hikes will be an easier sell now that unemployment is falling. Markets dispelled any lingering doubt that the RBNZ will hike the OCR in June, and are now pricing a 98% chance. The 2-year swap rate rose 16 basis points and the exchange rate rose about 70 pips on the release.

ANZ economist Mark Smith also saw the OCR being increased from June 10 in 25 basis point increments.

The strong increase in hours worked, which is consistent with the strong rise in the hours paid data from the QES on Tuesday, suggests a more robust Q1 GDP growth than we had initially envisaged. However, this is consistent with RBNZ expectations. Today’s data points firmly towards a June start to the tightening cycle. We are sticking to the script of a June hike in 25bp increments, rather than anything more substantive

ASB economist Christina Leung saw the OCR being lifted to neutral over the next 12 months.

Today’s (Household Labour Force Survey) HLFS confirms the labour market has turned. The number of people employed increased by 22,000 over Q1. This is the first quarter of job growth since Q4 2008. Actual hours worked rose by 1.7% during the quarter, following declines in six out of the previous eight quarters. The fact that employment growth was underpinned by an increase in full-time employment highlights the definitive nature of the recovery in labour market. Bar an unexpectedly restrictive Budget on May 20, we see little standing in the way of the RBNZ increasing the OCR in June. Today’s data supports the RBNZ’s confidence that a self-sustaining recovery is taking place. Accordingly, RBNZ can begin the normalisation process in June. We expect the RBNZ to lift the OCR by 0.25% on June 10, and gradually lift the OCR towards neutral settings over the next 12 months.

BNZ economist Doug Steel said the labour market data was exceptionally strong and RBNZ Governor Alan Bollard's comments in a speech showed a June 10 start in the rate hike cycle was likely. Bollard said the OCR was currently very stimulative.

There were surprises galore in this morning’s employment report. It was exceptionally strong, no buts. The strength surprised all and sundry – the most bullish of forecasters, the market, and the RBNZ. We were surprised that the current setting of the OCR was described as clearly in ‘a very stimulative position’. This seems a little overdone to us given elevated funding costs and what interest rates borrowers are actually paying. Still, given that is where the RBNZ sees current settings it makes it more likely they will pull the trigger. However, it is worth noting that Dr Bollard suggested businesses were ‘behaving very cautiously, still not looking to invest in plant and equipment or re-employ staff’. Today’s strong employment will thus have been a surprise to the RBNZ, as much as it was to pretty much everyone else. Not to mention the unemployment rate massively undershooting its 7.2% forecast from the March MPS. In our view, these surprises will be enough to get the tightening cycle underway in June.

See the full Statistics NZ statement below:

In seasonally adjusted terms, New Zealand’s unemployment rate dropped from 7.1 percent to 6.0 percent during the March 2010 quarter, Statistics New Zealand said today. This is the first decrease in the unemployment rate since the December 2007 quarter in the Household Labour Force Survey, which is based on a representative sample of 15,000 New Zealand households. The number of people unemployed dropped by 25,000 during the quarter, while the number of people employed grew by 22,000. This compositional change in the labour force resulted in a sharp fall in the unemployment rate. Labour force participation remained unchanged over the quarter. “Typically in the March quarter, temporary employment associated with the Christmas and New Year period and seasonal agricultural activity declines, and unemployment increases,” said manager of labour market statistics, Peter Gardiner. “But this March quarter we have seen an unexpected fall in unemployment, particularly among young men, which is accentuated when seasonal influences are removed.” The rise in employment during the March 2010 quarter followed a revised increase of 0.1 percent in the December 2009 quarter. Employment rose for both men and women, primarily driven by a rise in full-time employment for men (up by 19,000). Part-time employment fell by 3,000 during the quarter. In line with the rise in employment, actual hours worked increased by 1.7 percent. The HLFS produces quarterly estimates of the number of people employed, unemployed, and not in the labour force, which are then adjusted to remove the impact of regular seasonal events.