SYDNEY, Aug 7 - Australian employment unexpectedly fell sharply in July and the unemployment rate ticked higher, prompting a rally in interest rate markets on the mere whiff that a rate cut may be back on the cards. July employment fell a seasonally adjusted 55,200, according to data released on Thursday, compared with a forecast 20,000 increase. It was the fifth fall in six months. "Clearly the labour market is telling us a different story from a lot of the other indicators on the economy at the moment," said Michael Blythe, chief economist at Commonwealth Bank of Australia. "It suggests we are still right to be very cautious about the outlook and I think those who have moved to pencil out any chance of the Reserve Bank of Australia cutting rates might have been a bit premature," Blythe said. December bank bill futures, which indicate the market's thinking on the rate outlook, firmed to imply a modest discount to the 4.75 percent cash rate. Bills, which only a few weeks ago were expecting a 25 basis point rate cut, this week had started to price in a tightening in response to stronger economic signals from the United States and generally firm domestic economic data.
AUSSIE SLIPS
The Australian dollar slipped a quarter U.S. cent on the sign of a weakening labour force market and the risk it may lose part of its supportive 375 basis point interest rate premium should the RBA ease policy. July unemployment rose to 6.2 percent when it was expected to stay at the June level of 6.1 percent, even though the participation rate of those in or actively seeking employment fell to 63.4 percent. Still, the Australian government pointed to forward indicators of employment which are suggesting the recent soft patch in the labour market will be shallow. "On this evidence, the recent slowdown in employment growth may be relatively short-lived," said Employment Minister Tony Abbott. Unemployment also remains close to 13-month lows, which has helped to boost consumer confidence to nine-year highs, and along with relatively low interest rates, has helped to keep the economy ticking along. This has partly offset a downturn in exports due to the impact of Australia's worst drought in over 100 years and a sluggish global economy. The RBA left the cash rate unchanged for the 14th consecutive month on Wednesday after this week's monthly board meeting. The central bank, which does not issue a statement when leaving rates stable, will give its latest view on the economy on Monday when it releases its quarterly Statement on Monetary Policy. RBA Governor Ian Macfarlane raised the prospect of a rate cut in June when he indicated the bank would ease if the global economic recovery continued to disappoint, although he had niggling concerns over the domestic housing boom. Since then, there have been tentative indications of an improving global economy, while the housing market has shown little sign of stalling.