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Where are the workers?

Good morning! We trust those of you in the West had a pleasant long weekend. Unfortunately it's not looking particularly bright for those in Melbourne, with 11 new coronavirus cases declared yesterday.

What's especially troubling is that there are two strains spreading through the community – Delta and Kappa (both more infectious 'Indian' variants) – with one of the clusters currently having no known origin. However, all 11 of yesterday's cases have links and unless there's "a massive shock", Melbourne's two-week 'circuit breaker' lockdown should end on Friday.

On a brighter note, the outbreak has served as a metaphorical kick up the butt: over 1 million people received a vaccine dose over the past 9 days. Let's hope it's sustained!

Markets

Daily % change

AUD/USD

77.6

0.3%

10Y Bond

1.59

-3.0%

ASX200

7,282

-0.2%

Brent (bbl)

71.5

-0.6%

Gold (oz)

1,903

0.6%

Iron ore (t)

192.0

-3.5%

Bitcoin

34,338

-7.3%

Note: Brent oil, gold bullion and iron ore prices are the second futures contract.

The US S&P500 was flat overnight, falling 0.08%, with the big data release – May's consumer price index (inflation) – due out near the end of the week (Thursday night Australian time).

The jobs are there... But the workers haven't returned. US nonfarm payrolls increased by 559,000 in May, well below expectations of 671,000. Markets loved the disappointing news (the Nasdaq was up a full 1.5% on Friday) because these days bad news equates to more Fed stimulus, helping to prop up lofty stock valuations.

People wanted: The monthly ANZ job advertisement report showed a 7.9% rise in Australian job openings in May, its 12th straight month of gains. Job adverts are now up 38.8% on pre-pandemic levels, suggesting there's plenty of work to be done (although probably not in Melbourne this month).

Minimum taxes: The Group of Seven agreed to a 15% minimum global corporate tax rate (for context, Australia's is 30% and Ireland's is 12.5%). However, a lot of tough questions remain unanswered. Implementation and effective enforcement will be a lot more difficult a task (impossible?) than agreeing to a rate.


Analysis

Where are the workers?

Workers haven't returned to the labour force.
Workers haven't returned to the labour force. FRED

Writing in National Review, Michael Strain notes that in the US, "workers aren't coming back":

"Employers are boosting wage offers in order to attract and retain workers, who are increasingly difficult to attract and retain. This is a situation you’d expect with employers’ demand for workers growing much faster than workers are returning to the labor market. Labor demand is booming, and labor supply is not keeping up."

Stepping back: The US and much of the world are in the midst of a serious supply shock – and not just for commodities. Demand for just about everything has soared in recent months, including for labour. But for a multitude of reasons labour supply has struggled to keep up, with participation rates still well below pre-pandemic levels (see chart above).

Strain highlights a few possible causes, from "the $300 federal weekly supplement to standard, state-provided unemployment benefits", to a lack of childcare due to many schools being closed or educating remotely. There's also still COVID-19 risk aversion – not everyone has been fully vaccinated, along with the usual labour market matching issues (it takes time for people to apply for jobs and for employers to hire them).

Why this matters: The longer the labour supply shock lasts, the more it will slow the US recovery and the higher the risk that it could potentially spook the Fed into triggering a recession.

According to Strain, "significant wage pressures growing over the summer is concerning because it could boost consumer prices". Average wages in May increased at an annual rate of 6.1% and in April at 8.7%. If that flows through to higher consumer prices (above 4%), then "many will be alarmed", including those at the Fed, which could lead to a tightening of monetary policy.


The Wrap Up

  • El Salvador will make bitcoin legal tender, a move designed to "generate jobs and help provide financial inclusion to thousands outside the formal economy". 70% of El Salvador's population does not have a bank account.
  • Former Attorney-General Christian Porter's discontinued defamation case against the ABC cost the public broadcaster $780,000.
  • Queensland Premier Annastacia Palaszczuk received the Pfizer vaccine yesterday despite being aged over 50 (i.e. in the government's AstraZeneca cohort), "in the event I need to travel to Tokyo for the Olympics". 🙄
  • China's government continues to crack down on its domestic Big Tech companies, "for alleged offences ranging from inconsistent pricing to imperilling user privacy to difficult working conditions". Translation: the government is cutting down the tall poppies, reminding them who's in charge.
  • Jeff Bezos and his brother will fly to space next month on his rocket company Blue Origin's first crewed space flight.

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