RBA: All eyes on wages growth this week - TDS

Analysts at TD Securities point out that Wednesday 14 November reveals the much-anticipated Q3 wages report of Australia  and notes that the pace of annual wages growth has barely increased between the Dec qtr 2016 low of 1.87%/y and the Jun qtr report of 2.14%/y.

Key Quotes

“This lacklustre pickup in wage growth momentum has been undershooting the signals from business surveys (e.g. NAB, PMI) and the more traditional Phillips curve approach, where a 5% unemployment rate used to generate annual wage growth closer to 3½-4%/y (pre-2014).”

“Consensus is clustered around +0.6%/q (16/25) and TD is slightly on the hawkish side at +0.7%/q with a few others (7/25). Two outliers look for weaker prints of +0.4%/q and +0.5%/q (one of each).”

“For some time now the markets see 3%/y wages growth as a the main trigger for higher cash rates, so we need to see this report posting annual wages growth closer to 2½% to make the markets seriously price in a rate hike for H2 2019. However, we don't see a big risk of an outsized print as while Q3 includes the 1 July 3.5% minimum wage increase the second round of penalty rate cuts also began from 1 July, offsetting the impact somewhat.”

“The RBA needs higher wages for two key reasons (1) along with solid employment growth means higher household incomes can manage a tightening cycle, even if rate hikes are modest by historical standards; and (2) provides a valuable offset to declining asset prices, i.e. the housing and equity market correction underway in recent months.”