Bond market reflects jobs data caution

BOND AND equity markets showed very different reactions to Thursday’s Australian labour force data.

Equities, already getting a lift from a solid start to the reporting season, rose on the steady 5.4 per cent unemployment number.

The bond market, however, appeared to take a ‘‘glass halfempty’’ view of the labour market and to focus on the weaker trends in the numbers, such as the six- year low in the participation rate at 65 per cent as part-time jobs with fewer hours worked bolstered the overall numbers.

Three-year bond yields rose slightly after the release, which Commonwealth Bank interest rate strategist Alex Stanley interpreted as a reaction to a better than expected headline result. ‘‘But the fact that the rise in yields was not significant tells us there’s an element of caution in the market,’’ he said.

Overall, the employment result was still enough to make next month’s rate decision a line-ball call. Traders had been pricing in a 55 per cent chance the Reserve Bank would cut rates by 0.25 percentage points in March, but this fell to 48 per cent after the release of the jobs data.

Deutsche Bank economist Phil O’Donaghoe said he backed the 47 per cent pricing.

‘‘The RBA probably won’t move, but only just,’’ he said.

O’Donaghoe thinks rates could fall to 2.25 per cent this year but said a fall in the iron ore price would be needed to underpin this.

‘‘But today’s jobs numbers won’t stand in the way of [lower interest rates] at all,’’ he said.

The Deutsche economist predicts the participation rate could fall to 64.75 per cent by the end of 2013 as more people give up the search for work.

Westpac chief economist Bill Evans agreed the unemployment report was weak and expects further labour market deterioration this year.

‘‘We are yet to see what happens when the resources investment boom starts to peak in the second half of this year [and] something big will have to arise to fill that gap,’’ he told clients.

Other economists are more optimistic and have called an end to the rate-cutting cycle.

‘‘This is not a strong [jobs] result, but not weak enough to motivate further RBA rate cuts,’’ HSBC chief economist Paul Bloxham told clients.