So, what is the Reserve Bank (RBNZ) to make of the latest labour market figures that on the face of it tell it to do two completely different things?
The surprise rise in unemployment might, at first flush, suggest the RBNZ may be able to think about backing off somewhat with its current super-aggressive interest rate hiking cycle.
The perhaps even more surprising very sharp rise in wages is possibly suggesting something else. Maybe it needs to get MORE aggressive with those Official Cash Rate (OCR) rises because clearly a wage-price spiral is now under way that could put a bonfire under that already hot 7.3% inflation rate.
Undoubtedly the folk at the RBNZ will be looking to get under the hood over the next few days to work out in minutiae just what this labour market data is telling us.
The slight rise in unemployment from the previous record low of 3.2% (where it had been for each of the December 2021 and March 2022 quarters) to 3.3% could be telling us that the peak has been reached and the labour market will now start to cool.
But, with employment levels not budging at all, the suspicion has to be that there just are not the people to fill the jobs. So, in effect we've reached a bit of a stalemate. Employment can't grow. Unemployment can't shrink. If that's the case it doesn't suggest the labour market is getting any cooler. Far from it.
And what about those wages? Statistics New Zealand produces several different figures to measure the growth in wages.
In the interests of simplicity, I prefer to look at the private sector hourly increase. And that was 7%. So, not far short of the 7.3% inflation.
The RBNZ makes its next decision on the OCR on August 17. This decision will be accompanied by the full bells and whistles of a Monetary Policy Statement. That's good because it means the RBNZ will update its 'forward track' for the OCR where it forecasts the expected level of the cash rate over the next three years. And it's also good in that the RBNZ gets plenty of space to explain why it has made the decisions that it has.
The last 'forward track' for the OCR in the May Monetary Policy Statement suggested the OCR peaking at just under 4% by the middle of next year. Wholesale interest rate pricing is currently pointing toward a peak of a little less than that.
Remember, the OCR is presently on 2.5%, having been hiked by some 225 basis points already since the RBNZ starting this hiking cycle (when the OCR was at the pandemic emergency setting of 0.25%) in October 2021. The last three OCR reviews have all seen 50 basis point rises and another 50 pointer is universally expected for the August review.
After that the views of economists start to diverge a little - largely depending on where they see the OCR needing to finish up to achieve the RBNZ's goal of slaying the inflation monster.
And it is fair to say that the contradictory nature of the latest labour market figures has fuelled some further divergence in the views of the economists.
That comes back to the essential riddle that's provided by the data, namely: Is it telling us that the labour market is cooling, or is it in fact heating?
My view is that the RBNZ will be more swayed by the hot wage figures than it is by the slight rise in unemployment.
In that last MPS in May the RBNZ was forecasting private sector hourly wage increases of just 5.6% - versus an actual outcome of 7%. That's a hell of a miss when you are vitally concerned about the prospect of a wage-price spiral.
As I say, it's now up to the RBNZ to pore over the labour market detail and try to make the informed decision as to whether the data is telling it that labour pressures are cooling, or whether the risk is that inflation could get another kick from the hot wage figures. On the latter point it would hang on whether the RBNZ sees these wage rises as the peak and whether it believes they won't in themselves fuel another round of secondary price increases.
Hey, it's looking like a tough job from where I'm observing it, and I don't envy the RBNZ.
There's one more key piece of information for the RBNZ to digest before it makes the final call on August 17. That's the central bank's own Survey of Expectations in which a small group of experts offer their views of where they see inflation over the next one, two, five and 10 years. The RBNZ likes to see 'inflation expectations' sitting around 2%, which is the targeted midpoint of its 1% to 3% range. Well, the expectations have moved well away from 2% recently - and if the next survey shows continued divergence from that then this will be another push for the RBNZ to keep aggressive. If, however, there is an easing of expectations, that could tilt the RBNZ in a more 'dovish' direction.
What would I do if I were the RBNZ?
I think the picture painted by the labour market data is too cloudy to make a bold decision. I don't think it should be inferred that the latest data suggests unemployment is now necessarily on the rise. Nor does the data necessarily suggest that wages are going to keep heading north.
However, what the data would suggest to me is that caution is needed. My suspicion at this point would be that, yes, the RBNZ will hike the OCR again by another 50 points to 3% and it will retain a forecast OCR peak of about 4%, or maybe even just a bit more. And it might bring the timing of the peak forward a bit, so that the market would be left with the clear view that the following OCR review in October will also see a 50 point rise.
The RBNZ already got too far behind the inflation eight-ball. It won't want to risk lagging further behind by backing off now and finding out later it was the wrong thing to do.
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