Unemployment expectations leap

From Westpac:

• The Westpac-Melbourne Institute Unemployment Expectations Index surged 4½% in Dec following on from a 2.7% rise in Nov and a –3.9% fall in Oct. Recall that a lower (higher) reading from the index indicates reduced (increased) concern around the labour market.
• In trend terms, the index rose 1.6% in Dec following a 1.1% rise in Nov (revised from a decline of –0.9%) and a modest 0.3% gain in Oct. The worm has turned and we are now observing a trend deterioration in expectations.
• In the year to Dec, unemployment expectations are 5.3% higher than a year earlier. We had been cautiously observing the trend improvement, the through the year pace hit a low of –0.9%yr in Aug, and it appears that caution was warranted. The most recent trend deterioration in expectations suggests household are become more nervous again about the employment outlook.
• Critically, unemployment expectations are consistent with the recent deterioration in labour demand revealed in the various business surveys. Westpac’s Jobs Index peaked just above its long-run average in Sep and has since decline 5% to Nov. Those early signs of an improvement in the labour market have faded and in fact, we now have early signs of a step down in labour demand.
• The level of unemployment expectations are high and rising which presents a disinflationary force on the economy. But what we have found is that it is the change in expectations, rather than the level, that is the more important guide to any possible change to the stance of monetary policy. The recent trend deterioration in expectations suggests that the chances of a rate cut are not as long as some may think. Westpac is forecasting a 25bps cut in Feb 2015.

Expect new highs in the New Year after an austere Christmas. Full report.