Macro moves

The RBA equivalent of a dovish pivot well regarded domestically, as the odds of hiking into the abyss are now lower.

Readers will have noticed that international markets are also very strong. Whilst there is likely some “RBA-as-first-central-bank-to-turn-dovish-at-the-margin-bodes-well-for-the-stance-of-other-CBs”, the rally in risky assets has more to do with the JOLTS data, out overnight.

Consider that inflation has been a function of overly expansionary monetary and fiscal policy, at a time of constrained supply.

The other (it’s related, endogeneity is everywhere when trying to disentangle impacts) issue has been overly tight labour markets driving wages growth driving inflationary pressures as firms attempt to pass on these costs.

To cool labour markets, we’ve needed higher interest rates. But we don’t want to inadvertently overtighten, and send the unemployment rate skyrocketing in the process.

Bears would point out that it is very difficult to get job openings (the advertised demand for labour) down without materially impacting unemployment. That’d the dreaded “hard landing” scenario, in which almost certainly corporate profits and earnings fall alongside declining demand, in response to rise unemployment.

So, firstly note that overnight we did in fact see a big drop in job openings (bottom left graph). That’s the cooling that has to happen.

And that mapping job vacancies to the unemployment rate (called the Beveridge curve) looks like the below, that big pink dot is the most recent print. It declined a lot, from the cluster of dots immediately above it. That matters, because we don’t want to be on the 2020 “line of best fit”. That would imply a massive trade-off; a large requisite increase in unemployment to get vacancies down. We want to be on the 2000’s line of best fit, or the 2010 curve. We want that Beveridge curve to shift in!

That’s the key to squeaking by on a cooler labour market without spiking the unemployment rate.

If this keeps happening, the odds of the Fed achieving their objective, and the rest of getting to enjoy a “soft landing“, increase materially.

And that’s good for bond yields, for risky assets, for almost everyone.

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