Transcription of Finance News Network with Commonwealth Bank of Australia’s (ASX:CBA)broking arm Commsec Economist, Savanth Sebastian. Lelde Smits: Hello, I’m Lelde Smits for the Finance News Network and joining me today from Commsec is Economist, Savanth Sebastian. Savanth, welcome back to FNN.
Savanth Sebastian: Thanks very much.
Lelde Smits: Australia’s unemployment rate has just risen by more than many had been expecting, climbing to a 12-year high of 6.4 per cent. Where you surprised?
Savanth Sebastian: It was certainly a big surprise, not just for us but for I think the market. We were expecting unemployment to fall from 6 to 5.9 per cent, the prior month was revised up to 6.1 [per cent] and this unemployment rate hitting 6.4 per cent - the highest level in 12 years -so certainly concerning from the headline figure but I think if you delve in a little bit deeper it’s probably not as bad a result as what it has been made out to be.
Firstly, the lift in unemployment was largely driven by more people looking for work, discouraged workers coming back into the workforce. In the last couple of months we have heard of business hiring intentions lifting, job advertisements have picked up substantially, and I think it’s a sign that more people are coming and looking for work which is not a bad outcome provided the jobs turn up over the next few months.
The other side of the equation is that we are shifting from part time to full time jobs, so you’ve actually started to see that there has been a substantial shift in full time employment, and we’re at that transition point when it comes to the labour market. If you look at full time jobs we’ve created 110,000 full time jobs since the start of 2014. It’s the best start to a calendar year in six years, and I think it just highlights that there’s some underlying strength in the labour market.
Lelde Smits: Where would you expect the unemployment rate to trend over the coming year?
Savanth Sebastian: I think we will probably see it volatile in the next few months given the transition effects in the labour market, it’s probably likely to peak in the next couple of months but then start to ease off, particularly in the second half of 2015. I think there’s some serious jobs growth that is going to come we look at the finance sector, education, healthcare and construction. Those would be probably sectors that drive jobs growth and have been the key areas of jobs growth over the past year. Keep in mind that unemployment rate may be little bit more volatile in the next couple of months but if you look at key jobs, I think the story here is that The Reserve Bank wouldn’t be overly concerned.
Lelde Smits: What does the latest jobless rate mean for Australia’s key cash rate?
Savanth Sebastian: Well I think it’s pretty clear. It means The Reserve Bank is not going to be raising interest rates this year. If it comes down to another rate cut remains to be seen.
I don’t think The Reserve Bank will be wanting to cut rates, unless you saw a huge spike in unemployment from here. Keep in mind that somewhat perversely maybe The Reserve Bank would be quite encouraged by this latest result because it pushed down the Australian dollar and that’s something that they’ve wanted to do for a number of months and they weren’t able to push it down but these number certainly did and it’s holding a lot lower then where it was in the last month or so.
The Reserve Bank would be more about interest rate stability, they’ve seen that the Federal Budget effectively pulled back confidence, now confidence levels have responded quite dramatically, we’ve got the best confidence since January, retail sales is once again lifting. The Reserve Bank would be glass half full, and quietly optimistic.
Lelde Smits: So what are you expecting the next interest rate move will be and when will it happen?
Savanth Sebastian: We’re expecting it in the first quarter of 2015 and that’s largely to be driven by I guess improvements in the labour market. I think if you go back 12 months it was hours worked that started to lift, then part time employment and now it’s full time. Business profitability has improved and that means that they are adding that one extra worker. So as we move into early 2015 that labour market story is likely to get stronger, The Reserve Bank will feel comfortable lifting rates at that point.
Lelde Smits: Onto the markets - August has gotten off to a shaky start for the Australian share market, do you believe this could be the beginning of a correction?
Savanth Sebastian: Look I think it’s a modest correction, it comes back to the fact the global economy, downside risk to global growth have really been coming to the fore. The issue lies with those political risks that are now driving markets and at the same time you’ve got the Federal Reserve effectively finishing off and tapering off their stimulus program so there’s no cheap money out there anymore. So those are probably the big drivers. So, if you look at share markets across the globe at best they’re fair value, if not they’re a little bit expensive. So in that environment I think a modest correction is likely.
But given the amount of cash that is on the sidelines with super funds, institutions and retail it’s very unlikely that you’re going to see a huge pull back because growth is likely to lift from here. We hear of the Chinese growth story improving, the US growth story, the IMF [International Monetary Fund] is expecting 3 per cent growth over 2015, it’s the best growth, if achieved, in a decade so those sorts of numbers seem to suggest that the share market’s a modest correction but nothing too dramatic.
Lelde Smits: So finally Savanth, where do you see the ASX moving over the coming financial year?
Savanth Sebastian: Well we expect it to get up to 6,100 in the end of this financial year so midway through 2015. So if you look at this financial year we are expecting a gain of something like 13/14 per cent. You add in dividend yield and you’re getting a pretty healthy outcome. I think the key in this reporting season that we are just coming into now, is whether companies that have been cashed up in the last 12 month by cost cutting measures, start to pay out some of that money in terms of a dividend. And, at the moment we haven’t really seen that, the big question is if that takes place because that has to provide the next level of PE expansion for the market.
Lelde Smits: Savanth Sebastien, thanks very much for the update today.
Savanth Sebastian: Thanks very much.
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