US Job Data Leaves RBA in Catch-22 With The Aussie Dollar

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After their last meeting, the US Federal Reserve was of two minds. They wanted to raise interest rates. In fact, they even supported the case for a rate hike. But the economic data was not as solid as they would have liked.

So they decided to defer the decision to the next meeting, and wait for the August unemployment report.

Now the report is out, and the results are disappointing. The Fed was expecting there would be 180,000 new jobs created. Yet there were only 151,000 jobs added, which left unemployment the same, at 4.9%. Plus annual wage growth had slowed to 2.4%, while weekly hours worked fell to 2014 levels.

The weak employment data and the upcoming election make a rate hike less likely.

And the fact that the Fed is not likely to increase the interest rates added pressure on the RBA meeting tomorrow.

Should the RBA cut the cash rate to counter the upward pressure on the Aussie dollar, or leave it as is? The dollar has already appreciated 3%, even with two interest cuts by the RBA this year.

AUD/US RBA Cash Rate

Source: Australian Financial Review

The fact is that Australia seems to be following the same patterns as other world economies. That is: low interest rates, growth, unemployment and inflation. The IMF is already considering downgrading the world’s growth forecast for 2016. Mostly due to weak demand, low investment and uncertainty.

According to the Australian Bureau of Statistics, Australian business investment plans for 2016–17 are quite positive, around $105 billion. Yet these plans are 10% lower than last year.

Unemployment has lowered to 5.7% this month. Yet, wage growth remains sluggish. And even though there has been a fall in unemployment, 87% of the jobs created were part time.

Plus underemployment is at an all-time high. That is, workers with a part time job need to work more hours or are overqualified for their jobs.

Tomorrow’s RBA meeting will be the last one for governor Glenn Stevens. He will be retiring after 10 years in the job. So the possibility of a rate movement seems unlikely.

Philip Lowe will be taking over as the new governor. The new governor has done a lot of research in the past on the role of monetary policy responding to asset price bubbles.

The fact is that cutting interest rates is not having the same impact as in the past. And it’s only encouraging private borrowers to get into more debt. ‘The problem now is that there is a limit to how much we can expect to achieve by relying on already indebted entities taking on more debt,’ Glenn Stevens has said to the Sydney Morning Herald.

As people take on more cheap debt to invest in property, demand for property keeps rising. And the intergenerational divide is becoming wider.

Most parents are now having to help their kids buy their first home. Or they are getting into more debt to buy an investment property for their retirement.

All this is diminishing the wealth of older generations and increasing their debt levels. Which will create financial strain on their retirement.

Regards,

Selva Freigedo,
For The Daily Reckoning

The Daily Reckoning’s Vern Gowdie believes we’re already at the beginning of the next major crisis.

Vern is the Founder of The Gowdie Letter and Gowdie Family Wealth advisory services. As one of Australia’s top financial planners, Vern says the coming crisis is already in motion.

Australia has gone through two credit bubbles in its history. The third, and latest, has built up over the past 65 years. When it pops, the impact will leave a lasting mark. One that makes the 2008 financial crisis look like child’s play.

The fallout of this crash could damage your wealth. But you can safeguard your wealth from the worst effects of the coming crisis, provided you act now.

Vern will show you how to do this, and more, in his latest report, ‘Global Financial Crisis 2016: 3 Crisis Scenarios, and How They’ll Impact Australia’. To get your free copy today, click here.

Selva Freigedo

Selva Freigedo

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