Australian employment surged past all expectations in September and the jobless rate dropped in what might be a turning point months earlier than anyone thought, adding to the case for more rises in interest rates this year.
The Australian dollar jumped half a U.S. cent to a 14-month high and bill futures slid as the market priced in a real risk the Reserve Bank of Australia (RBA) would raise its 3.25 percent cash rate in both November and December.
"This justifies the RBA's decision to begin its tightening cycle and supports further moves in the months ahead," said Su-Lin Ong, a senior economist at RBC Capital Markets.
"We continue to look for another hike in November, a further 25 basis points in December and further increases in the first half of next year, taking the cash rate to 4.5 percent."
This week, the central bank became the first in the Group of 20 to raise interest rates, highlighting the outperformance of the local economy and even generating optimism about recovery world-wide. Global markets had jumped on Tuesday's rate hike.
The RBA had also heralded more hikes ahead, leading the market to price in a chance of another for November and rates of around 4 percent by the middle of next year.
Now, investors were bringing that timing forward. One measure from Credit Suisse showed a move to 3.5 percent was fully priced for November, while interbank futures shed 0.105 points to imply a 1-month rate of 3.7 percent in December.
"Today's data raise the risk the unemployment rate has already peaked at below 6 percent, and reinforces our view that the RBA will reach a 4 percent cash rate by March next year," said Scott Haslem, chief economist at UBS. "Anyway you look at it, this is a very strong labour market report."
Thursday's report from the government showed 40,600 jobs were created in September, confounding forecasts of a 10,000 fall. There were 35,400 new full-time positions, which typically pay more and offer greater security than part-time work.
The unemployment rate dipped to 5.7 percent, from 5.8 percent in August, again stunning analysts who had expected a rise to a six-year high of 6.0 percent. So unexpected was this development that some wondered if it actually marked a turning point for unemployment, way below the government's forecast of 8.5 percent.
"The jobless rate could have peaked two full percentage points below what most expected just a few months ago," said Rory Robertson, interest rate strategist at Macquarie. "A peak under 6 percent would be simply sensational."
Analysts have for some time been revising down estimates for where the jobless rate would top out, but most had still thought it would be around 7.0 percent.
More on CNBC.com
Indicators of demand for labour have begun to turn higher, albeit from low levels. Job advertisements and vacancies have started to recover in the last couple of months, and even the hard-hit building sector has benefited from massive government stimulus spending on schools and infrastructure.
When lifting rates on Tuesday, the RBA noted that unemployment had not risen as far as expected and predicted economic growth would be close to trend in 2010, much stronger
than previously forecasted.
If so, it would bode well for household income and spending, as well as for tax receipts and the budget deficit.
Michael Blythe, chief economist at Commonwealth Bank, said the sheer strength of population growth in Australia meant the jobless rate was still likely to rise somewhat further.
"But clearly that Australian outperformance continues and, even with that idea now firmly in people's minds, the economy still has the ability to surprise," he said. "It validates what the Reserve Bank did earlier this week and what they are going to do again in November."