September 3, 2012 / 2:17 AM / 7 years ago

UPDATE 1-Australia retail sales suffer setback in July

(Adds market, analyst reaction)

* Retail sales fall 0.8 pct in July, biggest drop in 21 mths

* Job ads down 2.3 pct in August, fifth month of falls

* Market narrows odds on rate cut, but not this week

By Wayne Cole

SYDNEY, Sept 3 (Reuters) - Australian retail sales suffered a surprising spill in July, as consumers shunned department stores after two months of strong spending, denting the local dollar and narrowing market odds for another cut in interest rates.

The Australian dollar dipped a fifth of a cent to $1.0240 after government figures showed retail sales fell 0.8 percent in July, from June when they jumped an upwardly revised 1.2 percent. The fall was the largest since October 2010 and well short of forecasts of a 0.2 percent increase.

Much of the weakness came in department stores where sales fell a steep 10.2 percent, the largest drop in seven years, after government handouts boosted spending in May and June.

“It is a bit strange that most of the fall is concentrated in department stores,,” said Michael Turner, a strategist at RBC Capital Markets. “All up, fairly consistent with the impact of the cash handouts fading into the second half of the year.”

“We’ve had (interest rate) cuts in our profile for quite some time now and this data is consistent with that, but they don’t make too much of a case for cuts to come sooner rather than later.”

The Reserve Bank of Australia (RBA) holds its September policy meeting on Tuesday and is widely expected to hold rates at 3.5 percent for a third straight month. Bank officials have sounded content to wait for cuts made in May and June to make themselves fully felt.

Investors are wagering the central bank will have to ease again by year-end, largely to offset the drag on global growth from Europe and, increasingly, China.

Interbank futures <0#YIB:> put a 50-50 chance on a move in October and are fully priced for a cut to 3.25 percent in November. Overnight indexed swaps, which show where the market thinks the cash rate will be over time, put rates at 2.89 percent in 12 months.

Household consumption had been particularly robust in the second quarter and is a major reason analysts look for another strong result from gross domestic product (GDP) on Wednesday.

Forecasts are for a rise of 0.8 percent in the second quarter, on top of the first quarter’s resounding 1.3 percent increase. That would leave GDP 3.7 percent higher than the second quarter of last year, easily outstripping much of the rest of the developed world.

SOFTER START

However, the current quarter looks to have got off to a more subdued start.

Australian job advertisements in newspapers and on the internet fell 2.3 percent in August, a fifth straight month of decline that points to some softening in labour demand, a survey showed on Monday.

“Recent trends in job advertising suggests the labour market continues to soften,” said ANZ’s head of Australian economics, Ivan Colhoun.

“The slight declining trend for job advertising in recent months, together with a pick-up in job losses due to restructuring and businesses’ productivity initiatives, is likely to be consistent with a slight further trend rise in the unemployment rate.”

The official jobs report for August is due on Thursday, and economists generally expect a modest rise of 5,000. The jobless rate is seen ticking up a tenth of a point to 5.3 percent, having been between 4.9 and 5.3 percent for over a year.

Separately, a private gauge of Australian inflation jumped in August as prices rose for petrol, fruit and vegetables, but the annual pace of inflation remained benign.

The TD Securities-Melbourne Institute’s measure of consumer prices rose 0.6 percent August, the largest monthly rise since March 2011. Still, if petrol, fruit and vegetables were excluded, the index only rose 0.2 percent.

The annual pace of inflation picked up to 2.2 percent, from 1.5 percent in July, but was still near the floor of the RBA’s long-term target band of 2 to 3 percent.

“We are of the view that underlying inflation will continue to hug the lower bound of the two to three percent target range for longer,” said Annette Beacher, head of Asia-Pacific research at TD. (Reporting by Wayne Cole; Editing by Eric Meijer)

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