It will be all about looking beyond the 'headline news' when the latest labour market figures are released in the coming week.
And I say that because the headline news may not be what particularly the Reserve Bank wants to see. We might even see a new record low for unemployment of under 3.2%, when Stats NZ unveils the figures on Wednesday, February 1.
What people will be searching for will be signs that the amazingly hot jobs market is in any way starting to cool. Such signs may be fairly subtle - if they are there at all.
The labour market and what happens to it this year will be key in the Reserve Bank's battle to get inflation down.
The RBNZ, which has candidly conceded it is trying to create a recession in order to extinguish inflation, needs to see some slack appearing in the labour market in order for a slow down in spending to occur and for the economy, in turn to slow, thus reducing inflationary pressures.
I've said it before and will say it again - the labour market is THE most important thing at the moment in the battle to control inflation. Unless heat comes out of the jobs market then it's going to be extremely difficult to curb both the inflation rate and its ugly partner in crime - inflation expectations.
The sheer strength of our jobs market has been astonishing. Our unemployment has been hovering around historic lows of 3.2%-3.3% since the second half of 2021. The figure for the September quarter was 3.3%.
Increasingly, this tightness in the market, coupled with the inflationary impacts that have come through - initially due to supply chain issues - has seen strong upward pressure on wages. Average private sector hourly wage growth hit an annual rate of 8.6% as of the September quarter.
So, the big question is, will there be any relief on either the employment or wages front when the latest labour market figures are released on Wednesday, February 1?
Well, the RBNZ is certainly not expecting relief yet. It has forecast unemployment to drop again, to 3.2% for the December 2022 quarter, while it is forecasting an annual rate of average private sector hourly wage growth of 9.1%.
After this the RBNZ reckons unemployment IS going to start lifting. It sees unemployment rising to 3.6% in the March quarter, which will, incredibly, be the highest rate of unemployment since mid-2021 if it happens. And the RBNZ is forecasting unemployment to keep rising during the year, to reach 4.8% by the end of December 2023.
Likewise wage growth is being forecast by our central bank to moderate during the course of the year after a last big spike in terms of percentage growth in the December quarter. But even then, it's only forecast to reduce to a still-high 8% by the end of 2023.
If we assume the figures in the coming week do show still extremely low unemployment and high wages, the key thing then will be if there is any sign at all of a future developing weakness.
After the latest inflation figures came in well below the RBNZ's forecast (annual rate of 7.2% versus RBNZ forecast of 7.5%) there's been a growing expectation that the central bank may now back away from its earlier signposted 75 basis-point hike to the Official Cash Rate in the next review on February 22. A 50-point rise, which would take the OCR to 4.75% is now being seen as the most likely.
However, if the labour market figures are just super, super strong, then this could definitely tip the balance back in favour of a 75-point rise. So, these figures in the coming week are going to be crucial.
The problem of course is that the labour market figures are essentially backward looking and reflect what's happened - not what might be about to happen.
In terms of what might be about to happen, however, there does appear to be mounting evidence that the jobs market WILL start to soften soon.
The BNZ/SEEK employment report for December, for example, demonstrated the kind of downswing RBNZ is looking for. BNZ senior economist Craig Ebert said that "far from being an aberration", the 8.3% drop in November’s job ads proved to be a pretty good pointer to further weakness in December.
"Job ads fell 6.3% in the final month of 2022. This took the cumulative fall over the last four months to around 20%, based on the seasonally adjusted series. It’s been a similar sized drop in trend terms. This measure also marked jobs ads, in December 2022, at about 20% above their 2019 average, whereas in mid-2022 they were running around 40% higher than that pre-Covid point of reference. It’s been quite the cooling. Indeed, tracking the trend forward, jobs ads could be back down to pre-Covid levels by the middle of 2023."
And in their preview of the forthcoming job figures, ANZ's economist Finn Robinson and senior economist Miles Workman highlight that timely indicators of labour demand "turned decidedly negative in the final months of 2022".
"However, given the extreme mismatch between labour demand and supply that persisted over 2022, and the additional pressure generated by the revival of international tourism, we don’t expect to see a significant easing in labour market tightness until later this year."
Robinson and Workman say this week's labour market release "will probably still portray a labour market facing historically low levels of unemployment, and very high wage growth at the end of 2022".
"But this is not a reflection of the state of play in 2023, which is pointing towards labour demand dropping sharply as the impacts of the fastest OCR hiking cycle on record work their way through into the real economy."
I'm expecting that the labour market figures will be strong and wouldn't even be surprised to see the unemployment rate maybe dip down to 3.1% from 3.3% previously.
However, what if everybody is wrong, and the figures come up with a surprise and maybe even show a rise in unemployment? That would certainly put the cat among the pigeons in terms of what the expectation might be then of what the RBNZ will come up with in its February OCR review. Downward pressure would come from the wholesale interest rate markets.
I raise that seemingly slim possibility (of an unemployment rise), because we should always be prepared for a shock - and it's fair to say the labour market data does throw up some shocks from time to time.
But if we do assume that it will be 'business as expected' with a fall in unemployment and high wage growth, then it will be a question of trying to work out how happy the RBNZ will be to treat this data as 'last year's news' and focus on the idea that the jobs market is about to soften.
Just how the RBNZ treats the data will then be the key factor in whether the central bank keep the foot firmly down on the interest rate accelerator (75-point hike) or starts to show signs of easing off (50-points and perhaps a less 'hawkish' statement).
I dare say that the markets and the public won't be watching the announcement of these figures as closely as last week's inflation figures were observed. But really, the labour market is the key to everything at the moment. And if the imagined looming slowdown doesn't start to materialise soon, this will increase the size of the RBNZ's headache.
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