ASX 200 hits intraday high following latest unemployment data. Here’s why

After the carnage on the share markets that we saw yesterday, no doubt most ASX investors would be relieved to see that the S&P/ASX 200 Index (ASX: XJO) has recovered some ground today.

It was initially a bumpy start for ASX shares this morning. But the ASX 200 seemed to get a boost around midday, hitting an intraday high of 6,878.1 points. That happened to coincide with the release of some rather important economic data.

Today, the Australian Bureau of Statistics (ABS) released the latest employment data for the Australian economy. And it makes for some interesting reading.

According to the ABS, the national unemployment rate actually rose in August 2022, ticking up 0.1% to an unemployment rate of 3.5%.

Of course, last month’s 3.4% figure was a very special one. It showed Australian unemployment at the lowest levels in 50 years.

You might think that ‘lower unemployment is good’ and ‘higher unemployment is bad’. Certainly that is true from a social policy standpoint. So why are ASX shares seemingly responding positively to news that unemployment has risen today?

Well, it comes back to inflation interest rates. Employment figures are one of the most important economic metrics we have. It is also a potent barometer of how the overall economy is tracking. When economic growth slows, unemployment tends to pick up, and vice versa.

What does unemployment have to do with the share market?

As we all know, the Reserve Bank of Australia (RBA) has been undertaking an aggressive shift in monetary policy in 2022. The RBA has now hiked interest rates five months in a row, most of which were ‘double’ rate hikes of 50 basis points. That included the last hike, which was implemented earlier this month.

The RBA has been raising interest rates to deal with the high levels of inflation that have emerged over 2022. Inflation tends to be caused by economies running hot (although supply chain bottlenecks are also contributing to 2022’s inflation). Perhaps, unfortunately, the best way to curb inflation is by slowing the economy down.

The RBA is doing this right now by hiking rates. Higher mortgage rates pull money out of the economy.  Homeowners have less cash to spend on goods and services. And savers are incentivised to store cash in the bank instead of spending it.

This is the key to understanding why the ASX seems to have risen on this employment data.

Rising unemployment might be showing that the RBA’s rate hikes are working as intended. Thus, investors might be betting that the RBA perhaps won’t need to hike rates as much, or for as long, as the markets might have been expecting. And higher interest rates are generally bad news for shares. Along with other assets like property.

So this could explain why the ASX seemed to get a boost from this unemployment data that was released today.

The post ASX 200 hits intraday high following latest unemployment data. Here’s why appeared first on The Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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