Published: Wednesday, 5 Aug 2009 | 11:23 PM ET

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Australian employment blew away expectations by rising 32,200 in July to keep the jobless rate steady at 5.8 percent, a startling sign of strength that added greatly to the risk of an early hike in interest rates.

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[AUD=  Loading...      ()   ] firmed while bill futures slid as investors added to bets the Reserve Bank of Australia (RBA) might soon begin to lift its cash rate from a record low of 3.0 percent.

"Magnificent," declared Adam Carr, chief economist at broker ICAP. "I don't think there can be any debate about which direction the cash rate is going. I still think the first hike will come in December, but there are risks of a move earlier."

Interbank futures implied one-month rates of 3.37 percent by December, with a real chance of an increase of 25 basis points in November.

Such a move would easily make the RBA the first central bank of any developed nation to tighten policy since tentative signs of a global recovery began, reflecting the effectiveness of
stimulus here and Australia's good fortune in being a major resource supplier to China's growing economy.

Just this week the RBA felt upbeat enough to drop its easing bias and shift to neutral on policy, though it also said the current loose stance of policy was appropriate.

"The jobs data underlines that shift towards neutral and it certainly won't dampen speculation about imminent rate rises," said Michael Blythe, chief economist at Commonwealth Bank.

"It's very strong result and one that increasingly suggests that we're beyond the worst for us and certainly doing much better than pretty much everybody else," he added.
     
Jobs Regained

The rise of 32,200 in employment was the largest in nine months and confounded market forecasts for a 20,000 drop. It also wiped out all this year's job losses, so that employment was now unchanged on July 2008.

The strength was tempered somewhat in that all the growth in jobs in July were part-time, with full-time positions falling by 16,000. That reflects a reluctance by firms to fire skilled labor, choosing instead to keep them on part-time.

As a result hours worked in July fell 0.4 percent, to be down 2.9 percent on the same month last year.

"That shows the labor market is getting more flexible, which is good for growth and for inflation in the long run," said Brian Redican, a senior economist at Macquarie.

It was also helping keep the unemployment rate from rising anywhere as quickly as feared just a few months ago.

The jobless rate held at 5.8 percent in July, when analysts had expected a rise to 6.0 percent, and made the government's forecast of 8.5 percent look increasingly pessimistic.

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"That's crucial, as it will make consumers more confident and thus reinforce the RBA's confidence in the recovery," said Redican. "It will obviously encourage those in the market looking for an early hike in rates."

The Westpac measure of consumer confidence surged in both June and July, and media coverage of this upbeat jobs report could well deliver another robust reading for August.

It also contrasted markedly with the position of neighbor New Zealand which on Thursday reported a 1 percentage point increase in its jobless rate to 6.0 percent.

Investors will now focus on the RBA's quarterly statement on monetary policy, due on Friday, which is almost certain to contain upward revisions in its forecasts for economic growth.

"Should greater labor market flexibility underpin a more resilient labor market, then the RBA may well begin normalizing rates sooner rather than later," said Su-Lin Ong, a senior economist at RBC Capital Markets.

She sees the tightening cycle starting early in 2010 with a rise to 4.5 percent likely over the course of the year.

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