RBA Set for Longest Rates Pause Since 2007 as Jobs Slump: Australia Credit

Reserve Bank of Australia Governor Glenn Stevens is poised to keep borrowing costs unchanged for the longest stretch since 2007 after the nation’s record job growth slowed, money markets indicate.

The yield on June interbank cash futures dropped 2.5 basis points to 4.78 percent on the Sydney Futures exchange yesterday, matching the biggest fall in almost two months. It rose 0.5 basis point today, implying an 86 percent chance Stevens will keep the overnight cash rate target at 4.75 percent for a sixth meeting, the longest he has stood pat since a seven-meeting pause in 2007. Yesterday’s report showed the weakest January-to- April employment growth since 1999.

Stevens has scope to pause as retail sales weaken after household savings reached what the RBA calls a two-decade high and the currency’s surge to a record curbs tourism and manufacturing, giving mining greater capacity to expand. The RBA’s 175 basis points of rate increases from October 2009 to November 2010 has helped shield the economy from global inflation pressures that are spurring Asian and European policy makers to tighten.

“The jobs report throws an extra element of uncertainty into the equation and, combined with the soft retail sales number, suggests that the RBA is likely to just sit and watch a little bit longer,” said Adam Donaldson, Melbourne-based head of debt research at Commonwealth Bank of Australia (CBA), the nation’s largest lender. “The chance of a move in June has receded.”

The RBA will add a percentage point to borrowing costs in four steps, Commonwealth Bank predicts, starting in August and ending in the second quarter of next year.

Contrary Predictions

Commonwealth Bank is among 15 of 24 institutions surveyed by Bloomberg News forecasting the RBA will extend its pause next month. It is the only one of Australia’s four major banks to predict no change.

Economists at Westpac Banking Corp. (WBC), National Australia Bank Ltd. (NAB) and Australia & New Zealand Banking Group Ltd. (ANZ) say that the central bank will increase rates by a quarter percentage point to 5 percent on June 7.

Data yesterday showed Australian employers shed 22,100 workers in April, the most since 2009, including 49,100 full- time jobs, the most in two years. The jobless rate held at 4.9 percent, and the labor force as a percentage of the working-age population -- the participation rate -- fell to 65.6 percent from 65.8 percent.

Household Spending

Household spending accounts for 54 percent of Australia’s economy and a government report last week showed retail sales unexpectedly fell 0.5 percent in March, the first decline in five months, and sales adjusted to remove inflation stagnated in the three months through March from the previous quarter.

Employment rose 22,900 in Queensland and Western Australia, states that are the biggest participants in the largest mining- investment boom in the country’s history, yesterday’s report showed. In contrast, the number of jobs in New South Wales, Australia’s most populous state, fell 44,000, its biggest decline since 1992.

Last month’s drop in total jobs brings to 26,300 the number of net new positions created in the first four months of the year, the weakest start to a year since 1999. Australia created 362,300 jobs in 2010, exceeding the previous record of 339,100 set in 2006.

Government bonds have returned 2.7 percent this year, including reinvested interest, offering gains for four straight months, beating the 1.5 percent profit on U.S. Treasuries, Bank of America Merrill Lynch indexes show.

Australian Debt

The benchmark 10-year Australian government bond yield fell to 5.37 percent as of 5 p.m. in Sydney from 5.43 percent on April 29, extending four months of declines, the longest stretch since December 2008. The premium offered over similar-maturity Treasuries shrank to 215 basis points, down from this year’s high of 230 on Jan. 7.

The yield differential will likely fall to less than 200 basis points by year-end as Australian bonds outperform their U.S. counterparts, said Donaldson at the Commonwealth Bank.

Bill Gross, who runs the world’s biggest mutual fund at Newport Beach, California-based Pacific Investment Management Co. Gross said May 3 investors should prefer Australian and Canadian debt and shun Treasuries amid inflation risks.

Demand for Australian assets has spurred a 19 percent advance in the country’s dollar over the past year to $1.0672. It reached $1.1012 on May 2, the strongest since the currency was freely floated in 1983.

Department Stores

The record-high Aussie dollar is driving consumers to purchase cheaper goods over the Internet, hurting domestic retailers, Patrick Elliott, chairman of JB Hi-Fi Ltd. (JBH) said April 3. The advance in the household savings rate, which reached 9.7 percent at the end of last year from 1.5 percent three years earlier, is further crimping profits.

Myer Holdings Ltd. (MYR) and David Jones Ltd. (DJS), Australia’s biggest department store chains, on May 11 reported declines in quarterly sales.

Melbourne-based Myer’s sales fell 2 percent to A$657 million ($696 million) in the three months ended April 30, and Sydney-based David Jones, the second-largest chain, posted a 1.4 percent drop in revenue to A$411.7 million in the same period.

Budget Surplus

Further weighing on consumers, the government said this week it will end 23 years of spending growth to ease inflation from the mining boom and support the return to a budget surplus.

Prime Minister Julia Gillard’s administration is trying to reduce the need for higher borrowing costs for consumers and businesses after the central bank said last week that an advance in rates will likely be needed “at some point” to contain inflation.

The RBA’s rate increases over the past two years contrast with the U.S. Federal Reserve, which has held its benchmark rate near zero since December 2008.

Australia’s central bank said in its May 6 quarterly policy statement that “most leading indicators point to further growth in employment over the months ahead, although at a slower pace than in 2010.” It also predicted the jobless rate would fall to 4.25 percent by December 2013.

Tony Morriss, head of interest-rates research in Sydney at ANZ, said it’s too soon to rule out a rate rise next month because government reports due this month on first-quarter wages and private capital expenditures will give RBA officials a better reading on the economy’s health.

To contact the reporters on this story: Michael Heath in Sydney at mheath1@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

To contact the editors responsible for this story: Rocky Swift at rswift5@bloomberg.net; Stephanie Phang at sphang@bloomberg.net

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