The Post-COVID Job Market Narrative Of 2021 Was... Completely Wrong

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by Tyler Durden
Monday, Jul 10, 2023 - 02:50 PM

By Stefan Koopman, Senior Macro Strategist At Rabobank

The Global Daily is a publication of a Dutch bank, but it rarely discusses Dutch politics. Historically, the Netherlands is known for its financial stability and ‘poldermodel’ decision-making, so financial markets often have better things to focus on. However, the opportunistic manner in which Prime Minister Rutte pulled the plug on his fourth (and final) cabinet did grab international attention, as it caught his coalition partners completely off guard. They are expected to respond in kind: a vote of no confidence in the Prime Minister – initiated by opposition parties – is expected to be submitted today. The goal is to appoint a technocrat as caretaker until a snap election can be held in November. The collapse means that no ‘controversial’ decisions can be taken until there is a new government and that the status quo will be maintained.

This all adds to the degree of disillusionment among the Dutch electorate. The collective sentiment is that Rutte's manoeuvres regarding asylum policy are entirely driven by power politics. While it is true that society struggles with large migrant inflows, which the housing market and the education system can’t handle, it is also true that the VVD government, under the influence of Dutch business, strives for more labour migrants in order to solve for structural worker shortages. As such, Rutte’s VVD decided to set sights on the much smaller group of asylum seekers – and their families in particular – knowing in advance that this would corner their junior partner ChristenUnie and precipitate the fall of the coalition. That may be electorally opportunistic, but if the VVD was truly serious about reducing immigration, they would have done something about labour migration flows. However, this would negatively affect various key sectors of the Dutch economy, such as high-tech, professional services, education, distribution, food and agri, and horticulture, and that’s not something the VVD probably would ever consider.

The question is what this will achieve. After all, Rutte's fourth cabinet faced numerous crises, struggled to reach compromises, and relied on self-imposed deadlines and vague promises to mask its lack of power. Taking advantage of the low interest rates of late-2021, a significant amount of money was made available to achieve progress on key issues such as the energy transition, nitrogen emissions, the housing market and migration. It would have allowed some of the necessary financial interventions to be implemented relatively painlessly. Yet the lack of clear plans, delayed decision-making, an overall inability to address pressing issues, and the increasingly difficult funding environment as time progressed, made this coalition increasingly fragile.

The VVD seems to believe that new elections will result in a workable right-wing coalition, seeing it as the right timing given the ongoing increase in the BoerBurgerBeweging’s popularity at the expense of the CDA, D66's poor polling and the still-incomplete merger between the PvdA/GroenLinks. Whether this strategy pays off rests with the voters, but also depends on the willingness of other parties to try their luck with Rutte’s VVD. Current sentiment is that he may have pushed his luck too far this time.

That being said, a US non-farm payroll report has a bigger impact on markets than the collapse of the Dutch government, so let’s get back to it. Amidst the Great Confusion of 2021, one of the prevailing narratives was that "no one wanted to work" anymore. The story was that workers were quitting in large numbers, resisting returns to the workplace, and embracing self-employment. These stories were supported by evidence of declining labor force participation and increased job vacancies. It particularly impacted consumer-facing businesses like restaurants and hotels, which struggled with persistent shortages and needed to pay up.

This narrative was also completely wrong. The June Employment Report revealed that 80.9% of Americans aged 25-54 (considered "prime age") were employed, the highest rate in over twenty years and only one percentage point below the record high of April 2000. While overall labor participation still lags pre-pandemic levels, every age group has now returned to pre-pandemic participation levels except for those aged 65+. While there have been some earlier than expected retirements, describing these as "early" would be inaccurate unless there is a demand for grandparents to re-join the workforce.

Source: Federal Reserve

The ADP’s nowcast of the official US nonfarm payrolls suggested half a million jobs could have been added in June, prompting a big sell-off in both equities and bonds on Thursday. Instead, actual payrolls printed below-consensus for the first time in more than a year. As hopes were so high, the 209k rise was a bit disappointing, even more so in light of the -110k of net revisions. So it does look like employment growth is cooling, but it also seems that we’re still at a healthy pace of growth that absorbs new inflows and keeps the labour market relatively tight. Average hourly earnings growth had its third successive 0.4% m/m print, remaining sticky at 4.4% y/y. All in all, the report had something for the doves and for the hawks and is not likely to change the July rate hike that is widely anticipated.

It also stands in sharp contrast to China, which continues its slide into the world of deflation. This morning, China CPI came in at 0.0% y/y while factory prices declined sharply by -5.4% y/y. The CPI has now fallen for a fifth consecutive month, indicating weak consumer demand and a clouded growth outlook. As a result, there is an increasing need for more economic stimulus. However, due to the current levels of debt and the ongoing real estate crisis, we do not anticipate any significant economic stimulus measures. We could see more strategic sectors receiving tax breaks, and some stimulus may come in the form of additional investments in digital infrastructure such as data centres, cloud computing, and the semiconductor sector. However, demand-side stimulus would likely be more effective given the disappointing revival of domestic consumption so far.

Treasury Secretary Janet Yellen has concluded her visit in China. While no agreements on US-China disputes were announced, she did confirm that Washington will open up a channel of communication with China's economic team and that it is open to respond to unintended consequences of its own actions. She again tried to reassure her Chinese counterparts that the US doesn’t want to decouple or separate its economy from China, but that it mainly tries to "de-risk" trade in ‘narrowly’ targeted areas that are relevant to national security. That is easier said than done.

She also suggested that the possibility of a US recession cannot be entirely dismissed. In combination with confirmation of weak demand and excess supply from China, this leads to a subdued start of the week. European equities are down -0.3% in the first hour of trading, following last week’s big sell-off. Government bond yields are little changed, with the two-year German note down 2bp to 3.22% and the 10-year unchanged at 2.63%. The dollar is up 0.1% vis-à-vis the euro and trades at 1.095.