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Australia Jobs Fall for First Time in 19 Months

Australian employment fell in May for the first time in 19 months, an unexpected sign of softness in one of the strongest parts of the economy which should lessen the risk of another increase in interest rates.

The Australian dollar dropped over half a U.S. cent while bond futures jumped after Thursday's report showed employment fell 19,700 in May, wrong-footing markets which had looked for a 13,500 rise. The jobless rate was also a tick higher than expected at 4.3 percent.

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"It's not a disastrous number, annual growth in employment is still running at 2.2 percent which historically is quite strong," said Rob Henderson, chief economist markets at nabCapital.

Indeed, job gains in April were revised up by 12,100 to an even stronger 37,500 increase, taking some of the sting out of the May fall.

"But there is evidence that the slowdown that we've seen, particularly in the service sectors, is now showing up in reduced hiring," added Henderson. "It's a little bit more accumulating evidence that the economy is responding to rate hikes."

The Reserve Bank of Australia (RBA) has raised its cash rate twice this year, taking it to a 12-year high of 7.25 percent, as it sought to cool the economy and restrain inflation.

Earlier this month the central bank warned it might yet have to tighten again should domestic demand not slow as desired. Thus there was a silver lining in the jobs report in that an easing in the drum-tight labor market should lessen the need for a hike.

"The Reserve Bank will be very happy with these numbers," said Brian Redican, a senior economist at Macquarie. "We've seen retail sales decline like they wanted. Confidence has been curtailed. And now the final peg off the wall is this slackening in the labor market."

"It should give the RBA confidence that we've seen the peak in wages and that inflation will begin to recede," said Redican.

Hike Still Seen

Investors seemed to agree to some extent as bill futures surged on the data. Yet, the market is still pricing in around one more hike of 25 basis points in coming months, in part due to global alarm at rising inflationary pressures.

Analysts said a further increase in the jobless rate toward 5.0 percent would likely be needed to truly ease the central bank's concerns on wages. It has long been worried that intense competition for suitable labor coupled with high inflation would lead to rising pay claims.

There are pockets of pay pressure, notably in the booming mining and construction sectors, but annual wage growth across the economy has been restrained so far at just over 4.0 percent.

And there are signs that further softness in the labor market might lie ahead. Employment tends to lag economic growth and recent surveys suggest some firms are now cutting back on hiring plans as sales disappoint and production costs rise.

Job advertisements in major newspapers dropped a steep 13.5 percent in May.

Yet analysts also suspect employers will be in no hurry to fire workers given how hard it was to find them in the first place.

"labor is just too scarce for employers to let people go," said Matthew Johnson, a senior economist at ICAP.

He noted a monthly business survey by National Australia Bank had showed a record 72 percent of firms citing labor scarcity as the primary constraint on their business. "That suggests employment should hold up pretty well in the early stages of an economic slowdown," he argued.

Johnson also pointed to record levels of skilled immigration as a reason to be optimistic on employment since such migrants tended to have jobs waiting when they arrived, thereby pushing up employment and participation.