Australia Employment Soars, Market Gives Up on Rate Cut

Ian Waldie | Bloomberg | Getty Images

Australian employment soared by 71,500 in February, far above any forecast and the biggest increase in over a decade, the most compelling sign yet that low rates and rising asset prices are fueling an economic pick-up.

The Australian dollar and bond yields jumped on the startlingly strong figures, which were seen as almost ruling out any cut in interest rates before the middle of the year.

Thursday's figures from the Australian Bureau of Statistics showed full-time jobs rose 17,800 in February while part-time employment climbed 53,700. The jump helped keep the jobless rate steady at 5.4 percent even though the participation rate rose sharply to 65.3 percent.

(Read More: What Aussie Earnings Season Says About the Economy)

A rise in participation is often a sign of an improving economy as people feel encouraged enough to look for work.

"It's spectacular employment growth," said Brian Redican, a senior economist at Macquarie.

"With that kind of employment growth, obviously policy makers would be feeling pretty comfortable with the current policy settings."

Yields on three-year government debt shot 13 basis points higher Thursday to reach 3.12 percent, the highest since April last year. That was the first time they had been above the 3 percent overnight cash rate since July 2011.

(Read More: Australia Business Investment Slips, Spending Peak in Sight)

After cutting rates in October and December, the Reserve Bank of Australia (RBA) has since held them steady at 3 percent in the hope that lower borrowing costs and rising asset prices would gradually percolate through the economy.

It seems to be working. Retail sales jumped past all expectations for January and consumer confidence hit a 27-month high for March. House prices have picked up and home building is showing signs of life after a long lull.

(Read More: Australia Extends Growth Run to 21 Years as Exports Pick Up)

Demand for credit still remains somnolent and a high currency is squeezing sectors such as manufacturing. But investors have sensed enough of an improvement in the underlying economy to sharply scale back expectations of how far or fast rates might fall from here.

In just the past two weeks, swap rates have slashed the amount of easing implied for the year ahead to just 6 basis points, from 45 basis points.

Interbank futures have the likelihood of an easing at no more than 50-50 and then not until late in the year.