People worried about rising interest rates don’t get how much the game has changed.
I don’t know if people really understand this, but jobs are the only game in town right now.
Over the past couple of weeks, everyone has been freaking out about inflation. (Looking at you, bond markets.)
The idea here is that inflation lifts off, then the Reserve Bank might jack up rates, which could hammer valuations which have been based on the idea that it’s free money for everyone, as far as the eye can see.
So once markets got a whiff of inflation, they got the jitters.
But I don’t think people have clocked how much the game has changed. Especially how much things have changed in central banking land.
Until recently, central banks (like our very own RBA), were only concerned with inflation. That was the main game in town. On paper they also had permission to think about a target of ‘full employment’, but in practice, they were really only interested in inflation.
However, the game has changed. Recently, the RBA has been trying to make it clear (as best they can, in their politically-constrained boffin speak), that they’re giving more space to the ‘full employment’ side of their mandate. (They also have a mandate for ‘stability of the currency’ but lets park that for the moment.)
And really what they’re saying is that until the unemployment rate gets down to “4 point something”, then they’re not going to be in any rush to lift interest rates.
And what they’re saying there is that while we might get a short-term reflationary lift in inflation, until the jobs market lights a fire under wages, we’re not going to see sustained inflationary pressure, and we can all just relax.
So, it’s not inflation that we should have our eye on, but the jobs market. This is a new reality and it’s a reality that I don’t think a lot of people have caught up with.
And what’s happening in the jobs market.
Well, it’s coming back in a pretty decent way, but there’s still a fair degree of slack in the system.
Indeed give us a nice window into this with their job ads data.
On the whole, the Covid crash was way sharper than it was in the GFC, but the rebound has also been much stronger.
During the GFC, job ads dropped to below 60% of volumes after seven months and stayed there for four to five months before starting to return. COVID hit rock bottom in April and starting to return from May.
In other words, in the first three weeks of March 2020 job ads fell as much as they did in the first three months of the GFC.
But, we’re well and truly in the rebound, with applications and vacancies more balanced for now. Indeed actually say it’s become a bit of a “job seeker’s” market.
There’s an industry story here too. Consumer services jobs were hit pretty hard as the services sector went into lockdown, although even that sector has laregely recovered now. Only professional services job ads remain below their pre-Covid levels now.
However, beneath this story of broad based recovery has been a pivot to casual and part-time work. Full-time job ads still make up the majority of job ads, but there are definitely more casual and part time jobs on offer these days.
This is not surprising. Many employers will want to see clearer signs that the economic recovery is established before commiting to expanding their full-time work force.
However, it still says that the slack in the labour market that Covid created is still there.
And that means our “4 point something” unemployment rate target is still a long way off.
And that means that the RBA is definitely in no rush to hike up rates.
So relax, everybody.
JG