The Australian dollar briefly fell half a US cent after the government reported 100 net jobs were lost in July, undershooting forecasts of a 10,000 increase. Full-time employment dropped 22,200, unwinding half of June's jump.
The soft report only encouraged wagers that turmoil in global markets will so endanger the economic outlook that the Reserve Bank of Australia (RBA) will be forced to reverse course and cut interest rates.
"The unemployment rate will be the focus for the RBA and the risks are that it will tick higher from here, maybe to 5.5 pct by year end" said Benjamin Dinte, an economist at Macquarie.
"That in turn means the risks for rates are moving toward an easing, though it's not our base case that they will cut this year," he added.
Concerned about inflation, the central bank actually considered tightening policy at its August policy meeting last week but was deterred by the acute uncertainty in markets.
Since then things have only got worse, with the US downgraded, world equities plunging and banks under pressure in Europe. Analysts worry that consumers and businesses will react by putting off spending, so leading to the very economic slowdown that markets fear.
As a result, interbank futures have soared higher to price in a cut of at least 25 basis points in the 4.75 percent cash rate at the next RBA meeting on September 6.
They imply rates falling to 3.42 percent by Christmas and a total easing of 156 basis points in the next 12 months.
While sky-high export earnings are still fuelling a massive boom in mining investment in Australia, other parts of the economy are struggling with the drag from a high currency and a restrained consumer.
As a result employment growth has slowed markedly in recent months to stand at an annual 1.7 percent in July, around the long-term average, down from a torrid peak of 3.6 percent last November.
Mining, finance and public employment remain healthy, but weakness has emerged in a range of once strong hirers, including manufacturing, administration, utilities and construction.
The slowdown in employment was noted by the RBA when it left rates unchanged last week, and it warned that jobs growth was now likely to be lower than expected just a few months ago.
Still, if there is a silver lining to a softer labour market it is that it should lessen inflationary pressures.
The Australian economy is to all extents and purposes, already fully employed and a further drop in the jobless rate would have taken it to lows that have fuelled wage and price pressures in the past.
With the jobless rate now more likely to stay around 5 percent for an extended period that should provide one less reason to tighten again. And were unemployment actually to start trending higher that would offer the RBA a compelling domestic reason to cut rates.
"The key really is the unemployment rate. The fact that it has ticked up, we need to watch now whether it is the start of an upward trend," said Su-Lin Ong, a senior economist at RBC Capital Markets.
"I think that's fairly significant, from a Reserve Bank point of view in particular. It keeps them firmly on the sidelines."
Copyright Reuters, 2011