Published: Wednesday, 11 Nov 2009 | 8:44 PM ET

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Australian employment rose 24,500 in October, a second month of surprisingly strong growth which led investors to believe a further increase in interest rates was almost certain to come next month.

The Australian dollar jumped to 15-month highs and interbank futures slid as the market priced in almost a 90 percent chance of hike in December.

Such a rise would take the cash rate to 3.75 percent and would be the first time the Reserve Bank of Australia (RBA) had tightened for three straight months.

"One month of this data you can take with a grain of salt, but two months in a row of positive numbers is starting to look like a trend," said Rob Henderson, head of market economics at National Australia Bank.

"For the RBA, it's another bit of evidence to suggest the downturn is not as severe as they first thought," he added. "It's another reason to push interest rates higher, so we're comfortable with our forecast of 25 basis points in December."

The RBA became the first central bank in the G20 to tighten in October and followed up with another move to 3.5 percent last week, saying the economy was beating all expectations.

Analysts had been in two minds whether it would move in December as well, but the jobs figures changed that.

"It certainly counts toward another rise of 25 basis points in December. The Reserve Bank will surely be keen to remove more of this emergency stimulus," said Felicity Emmett, an economist at RBS.

The market was certainly leaning that way, pushing December bank bill futures down 0.05 points and the local dollar up over half a U.S. cent to $0.9370.

"Amazing" Jobs Market
     
"Employment is up 60,000 in just two months and the jobless rate might peak below 6 percent," said Emmett. "That's amazing -- it's much lower than expected earlier in the year."

The jobless rate ticked up to 5.8 percent in October, from 5.7 percent in September, but has essentially been steady around this level since March. That was a marked contrast with the United States where unemployment was up at 10.2 percent.

The labour market has surprised everyone by its resilience this year with firms reluctant to fire skilled labour and instead shifting people to part-time work.

The jobless rate has still risen as more people enter the workforce, keeping the participation rate near historical highs, and could climb further in coming months.

But indicators of demand for labour are beginning to turn higher, albeit from low levels.

The central bank now expects unemployment to peak far below the levels it feared just a few months ago. The government this month sharply cut its forecast for the jobless rate, expecting it to peak at 6.75 percent rather than 8.5 percent.

If right, that has huge implications for consumer confidence, household incomes and consumption. It is also good news for the budget bottom line, raising tax receipts while limiting spending on unemployment benefits.

"On the back of these numbers it looks like the RBA was right in its recent commentary where it signalled it was getting increasingly concerned about capacity constraints and wage pressures," said Helen Kevans an economist at JPMorgan.

"I think that is going to be a key thing going into 2010."

Investors have been pricing in a whole string of rate moves in coming months. One measure from Credit Suisse implies 180 basis points of tightening over the next 12 months, taking the cash rate to 5.25 percent.

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