Tim Hext: Strong jobs growth masks deteriorating picture

The latest jobs data has lifted market expectations for an RBA hike, but rising underutilisation suggests the labour market is gradually softening. Pendal’s head of government bond strategies TIM HEXT explains

• Jobs growth beats forecasts, unemployment rises
• Underutilisation signals gradual labour market softening
• Find out about Pendal Government Bond Fund
• Browse Pendal’s fixed interest funds

WHILE recent times have seen a major improvement in the timeliness and accuracy of data from the Australian Bureau of Statistics (ABS), the Labour survey remains stuck in time gone by.

Collection of data from the 25,000 households involves either on-line forms, telephone interviews or even face to face.

The survey contains 70 questions revealing a fair bit of personal information. You stay in the survey for eight months before rotating out.

Now I would not want to be the one collecting this data, as if I get a call, email or even a knock on the door from someone claiming to be from the ABS, my most likely course of action would be to avoid the scam.

But apparently, they have over a 90% success rate, which may also be due to a potential fine if you don’t cooperate.

Collection issues aside the survey is quite volatile, so I prefer to look at trend measures when assessing the state of employment.

On this basis trend unemployment is at 4.4% and trend job growth is at 0.2%, or 32,300 a month. This suggests labour supply is also increasing, both with immigration and participation (back up to 67%).

The RBA expected unemployment to be at 4.2% by the end of June. They also expected employment growth to be at only 1.3%, but it has come through at 1.6%.

So, more jobs than predicted but also higher unemployment. The Reserve Bank would view that as a draw, meaning no impact on inflation from either excess demand or supply.

Underutilisation

However, perhaps of mild concern to the Reserve Bank would be the increase in labour underutilisation.

This measure looks at not only unemployment but adds in part-time workers seeking more hours, known as underemployment. It is trying to get a more accurate and earlier read on spare capacity.

The recent shift to part-time job creation over full time means rising spare capacity.

Underutilisation now stands at 10.9%, meaning around 1.7 million people either don’t have a job or want more hours.

This is historically still quite low but is hardly a sign of overall tight conditions. Importantly, it continues to deteriorate.

Market Impact

Bond markets have been selling off this month largely on Middle East tensions. The most recent headline employment growth saw yields shift slightly higher and the odds of an August hike shift from 25% to 30%.

The key distinction here is between nominal and real yields. The nominal 10-year yield is the visible market yield, currently around 5%, but the real yield is the return investors receive after inflation expectations.

That is what matters for purchasing power. If inflation expectations remain reasonably anchored, a 5% nominal yield represents a meaningful positive real yield.

This is why bonds are starting to look better value, even if the short-term mark to market remains uncomfortable.

I am slightly surprised by this as the labour market seems to be steady to slightly deteriorating.

However, when overnight headlines easily move markets, few participants are wanting to take on the volatility.

For more patient investors, 10-year yields around 5% do offer value. If inflation expectations remain contained, that implies a positive real yield, which is the more important measure of long-term bond value.

A slowly deteriorating labour market and rising underutilisation should also limit the need for further tightening. With term premium higher than normal, investors are now being paid more both for inflation adjusted return and for taking duration risk.

If you’d like to hear more about how Pendal’s Income & Fixed Interest team is positioning for this environment, please contact us through our accounts team

About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here

About Pendal

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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