Key data that could save fading February rate-cut hopes

Most economists have written off a February interest rate cut but there remain two crucial data releases that could convince the Reserve Bank of Australia otherwise.

A drastically stronger than predicted Australian Bureau of Statistics labour market report on Thursday caused economists and bonds traders to scale back their expectations.

Softer economic growth figures and a dovish tilt in the RBA's commentary following its December rate meeting on Tuesday had raised hopes of a February rate cut.

That was offset by the unexpected drop in unemployment to 3.9 per cent, said ANZ senior economist Adelaide Timbrell.

ANZ, along with Westpac and NAB, predicts the RBA to start its monetary easing cycle in May, given the central bank's concerns inflation remains too high and unemployment too low.

But big four outlier Commonwealth Bank still holds out hope for a February cut.

Despite conceding the labour market data weakened the case for a cut, CBA economist Gareth Aird believes the remaining inflation and labour market prints before the RBA's next meeting will coax the doves back out of the cage.

It will almost certainly require trimmed mean inflation - released on January 29 - to come in below 0.6 per cent for the December quarter, Mr Aird said, a significant reduction from the 0.8 per cent figure in the September quarter.

The labour market would need to show signs of softening too, he added.

Softer wages data of late suggested the central bank should not be so worried about the low unemployment rate contributing to inflation, Mr Aird said.

The RBA estimates the non‑accelerating inflation rate of unemployment (NAIRU) - which represents so-called full employment or the unemployment rate consistent with maintaining stable inflation - to be 4.5 per cent.

"Australia should be able to run an unemployment rate of about 4.0 per cent and see inflation within the target band sustainably," Mr Aird said.

"But we don't know if the RBA shares our view (or is coming around to our view)."

Data from online jobs marketplace Seek's November employment report painted a softer picture of labour demand, Mr Aird said.

Job ads fell 1.1 per cent over the month, while applications per job ad rose 3.4 per cent - the largest increase since April.

JP Morgan analyst Ben Jarman also predicted a February cut, despite the unemployment result being particularly surprising since it diverged from softening in other economic data and survey proxies for labour demand.

But there were enough "unusual dynamics in the details" to suggest nothing had fundamentally changed in the labour market.

Bond traders were optimistic too, with the money market implying a 55 per cent probability of a February rate cut, albeit down from more than a two-thirds chance.