Why did the ASX 200 leap higher on rising unemployment data?

Woman sitting at a desk shrugs.Woman sitting at a desk shrugs.

The S&P/ASX 200 Index (ASX: XJO) is up 0.76% late today, receiving a midday surge following news from the Bureau of Statistics that Australia’s unemployment rate increased from 3.5% to 3.7% in January.

It appears the rise in unemployment is being interpreted by some investors as a potential signal that interest rate rises are starting to slow the economy, which is necessary to tame inflation.

And inflation is the sole reason the Reserve Bank has been raising interest rates so rapidly.

RBA Governor Dr Philip Lowe has already indicated that another two 25-basis point rate rises are almost certain in 2023. He told a Senate committee yesterday that inflation remains “way too high”.

Why are ASX 200 shares going up?

Right now, any news indicating that interest rate rises are working is good for the share market. It means we’re getting closer to the point when the Reserve Bank will back off and pause rates.

The bank isn’t going to do that until there’s enough evidence that inflation is falling. In order for inflation to fall, certain things have to happen, like lower consumer spending and business investment.

The prices of everyday goods will come down when supply bottlenecks clear and consumers rein in spending.

The share market likes today’s news because inflation is bad for most businesses. Put simply, it raises their input costs. Then rising interest rates increase their debt costs.

The impact is especially seen in ASX consumer discretionary shares.

When inflation is rising, discretionary businesses face rising input costs as well as fewer customers. Most discretionary businesses can’t raise their prices to offset the effect, so it’s a real triple whammy.

So, it’s little wonder that today’s jobs data is pushing up ASX 200 consumer discretionary shares the most.

The S&P/ASX 200 Consumer Discretionary (ASX: XDJ) sector is the top riser of the 11 market sectors today, up 2.81% in late afternoon trading.

Among the biggest ASX 200 movers in the sector today are Corporate Travel Management Ltd (ASX: CTD) shares up 9.8%, Bapcor Ltd (ASX: BAP) shares up 5.3%, and ARB Corporation Limited (ASX: ARB) shares up 5.2%.

Following behind is the S&P/ASX 200 Information Technology (ASX: XIJ) sector, up 2.4%.

ASX tech shares have also been hit hard by rising interest rates, as Australia’s tech sector is pretty young and thus in growth mode, and ASX growth stocks typically have higher debt ratios than the blue chips.

Among the biggest ASX 200 tech movers are Block Inc CDI (ASX: SQ2) shares up 8.9% and Life360 Inc (ASX: 360) shares up 4.7%.

Economists cautious on jobs data

According to reporting in The Australian, economists are cautious about today’s jobs data for a number of reasons.

One of them is that the data relates to January, which is typically a month in which people switch jobs. Those in the switch period are technically counted as unemployed at the time of the survey.

RBC Australia chief economist Su-Lin Ong said the labour market “is likely past peak strength” but will not sustainably weaken until 2H FY23.

Ong said:

We doubt if today’s labour force will derail RBA hikes in the coming months.

Goldman Sachs Australia chief economist Andrew Boak says the labour market likely remains robust.

Boak said:

Overall, the weakness in the headline data bears watching, but we caution against placing too much weight in today’s report.

The post Why did the ASX 200 leap higher on rising unemployment data? appeared first on The Motley Fool Australia.

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Motley Fool contributor Bronwyn Allen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended ARB Corporation, Block, Goldman Sachs Group, and Life360. The Motley Fool Australia has positions in and has recommended Block. The Motley Fool Australia has recommended ARB Corporation, Bapcor, and Corporate Travel Management. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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