Employment in Australia recorded another solid rise in December while the jobless rate fell by more than expected, underlining a domestic case for a rise in interest rates, even as a troubled global outlook argued against one.
Net new employment increased by 20,100 in December, in line with forecasts of a 20,000 gain and a robust result after November's hefty 47,500 rise.
The jobless rate dropped back to 4.3 percent, more than reversing November's surprise increase to 4.5 percent which was caused by a big jump in the number of people looking for work.
"The message here is pretty straightforward. The domestic economy is in good shape and the labor market is tight," said Michael Blythe, chief economist at Commonwealth Bank. "On the figures we've seen up until today the domestic case for a rate rise seems to be pretty much in place."
The Australian dollar firmed above 88 U.S. cents while bond futures nursed losses as the market priced in slightly more chance of a hike in rates at the Reserve Bank of Australia's (RBA) next policy meeting in February.
Yet, futures are still showing less than an evens chance of a rise in the 6.75 percent cash rate, as many investors suspect turmoil in credit and equity markets and the growing risk of a U.S. recession will stay the central bank's hand.
"The jobs data suggest the domestic economy on its own could easily withstand a further tightening," said Brian Redican, a senior economist at Macquarie. "But policy makers' focus will be on the problems overseas, so these figures don't sway the rate argument one way or the other," he added.
An Uncertain World
So pervasive has the credit crunch become that the RBA cited it as the only reason for not lifting interest rates at its December policy meeting.
The central bank hiked twice last year, taking rates to an 11-year high of 6.75 percent, as it battled to contain inflation.
The lending squeeze has also driven up some market interest rates in Australia, including variable mortgage rates at the major banks, doing some of the RBA's work for it.
This has left the market divided on whether the RBA will hike at its next policy meeting in February, with futures showing around a 42 percent chance of a move.
Crucial will be the consumer price report for the fourth quarter due on Jan. 23. Another high reading for underlying inflation, say a rise of 0.9 percent in the quarter, could well force the central bank to act next month.
Median forecasts were for a 0.8 percent rise in underlying inflation, which would lift the annual rate to 3.4 percent, well above the RBA's 2 to 3 percent target band.
In this regard, there was troubling news out of New Zealand on Thursday as consumer prices there showed a higher-than-expected rise of 1.2 percent. This series has shown a close correlation with Australian inflation in the last couple of years.
"The historical relationship between Kiwi and Aussie CPI suggests that Q4 Aussie CPI may be another shocker," said Matthew Johnson, a senior economist at broker ICAP. "It now seems more likely Q4 core CPI could be clocked at 0.9 percent, which will probably be enough to get the RBA to lift rates in February," he warned.
Inflation Expectations Rise In January
Meanwhile, consumer inflation expectations picked up in January, ending two months of decline and adding to worries about an upward price spiral, a survey showed.
The Melbourne Institute consumer inflationary expectations survey found the median expectation of price increases in the coming year climbed to 4.4 percent, from 4.1 percent in December.
The proportion of respondents expecting annual inflation to be within the Reserve Bank of Australia's (RBA) target band of 2 to 3 percent dipped to 13.7 percent in January, from 14.2 percent the month before.
The pick up in expectations follows a string of strong domestic economic data and a sharp rise in petrol prices in the past month. Official data on inflation are due next week and are expected to show another hefty rise in both headline and underlying inflation, driven in part by
fuel, rents and food costs.
Rising expectations of inflation can prove self-fulfilling if workers demand higher wage increases and firms strive to maintain profit margins by raising prices.