The Week Ahead | 17 July 2023

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Sean Aylmer: Welcome to Fear and Greed: The Week Ahead. I’m Sean

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Sean Aylmer: Aylmer, and as usual, I’m joined at this time on

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Sean Aylmer: a Monday morning by economist Stephen Koukoulas. You can find

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Sean Aylmer: him thekouk. com, T-H-E-K-O-U-K.com, or on Twitter using the handle TheKouk.

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Sean Aylmer: Stephen, good morning

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Stephen Koukoulas: And a great morning to you, Sean.

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Sean Aylmer: Yeah, now look, just scrap the data for a moment.

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Sean Aylmer: How about what happened at the Reserve Bank on Friday,

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Sean Aylmer: the new governor, Michele Bullock?

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Stephen Koukoulas: What a good move. I think that while there was

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Stephen Koukoulas: clearly a bit of a competition and the list of

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Stephen Koukoulas: potential candidates was a good one, the others that were

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Stephen Koukoulas: there, appointing Michele Bullock was a solid, steady appointment. She’s

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Stephen Koukoulas: clearly got the knowledge, expertise, and experience to do a

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Stephen Koukoulas: good job. Obviously, she’s going to be at the helm

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Stephen Koukoulas: to implement the recommendations of the review of the Reserve

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Stephen Koukoulas: Bank, which came out a few months ago. So that’s

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Stephen Koukoulas: changing the number of board meetings, changing the transparency I

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Stephen Koukoulas: suppose, and the media conversations that she’s going to be

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Stephen Koukoulas: having after every board meeting now, and a few other

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Stephen Koukoulas: procedural issues with the new Monetary Policy Board, which is

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Stephen Koukoulas: obviously yet to be appointed, but it’s a good appointment.

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Stephen Koukoulas: It’s a solid appointment, and it’s one that I was

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Stephen Koukoulas: looking at the financial markets in the hour or two

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Stephen Koukoulas: after she was appointed, and I know there’s more moving

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Stephen Koukoulas: parts than just the appointment of an RBA governor, but

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Stephen Koukoulas: the ASX was up, the dollar was up and bond

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Stephen Koukoulas: yields were down.
So if they appointed the wrong person,

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Stephen Koukoulas: I dare say we’d get financial markets reacting negatively, but

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Stephen Koukoulas: we saw markets going in the right direction, and to

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Stephen Koukoulas: me, that’s a vote of confidence as well.

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Sean Aylmer: She said the consensus seems to be that she’ll be

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Sean Aylmer: a more consensus driven governor, shall we say?

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Stephen Koukoulas: Look, I think that’s right, and I think that one

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Stephen Koukoulas: of the criticisms of Dr. Lowe, rightly or wrongly, but

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Stephen Koukoulas: clearly he missed his inflation target quite a lot and

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Stephen Koukoulas: gave some less than accurate guidance on where rates would

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Stephen Koukoulas: be and those sorts of things. And the suggestion is that he didn’t

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Stephen Koukoulas: listen to the internal bank economists as much as perhaps

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Stephen Koukoulas: he should, that the other members of the board may

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Stephen Koukoulas: have had a few ideas from time to time that

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Stephen Koukoulas: again, he tended to not embrace when he was looking

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Stephen Koukoulas: at his forecast for inflation for growth and where interest

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Stephen Koukoulas: rates should be.
So if Michelle Bullock approaches it with

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Stephen Koukoulas: a very open mind, and again, with the new structure

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Stephen Koukoulas: of the bank, we’ve got to remember that she’ll be

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Stephen Koukoulas: managing a central bank that’s going to be very different

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Stephen Koukoulas: to the one that Phil Lowe was managing, I think

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Stephen Koukoulas: it’s going to be good, and I think it’s going

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Stephen Koukoulas: to be good for public policy. The proof of the

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Stephen Koukoulas: pudding of course is will she meet her inflation target?

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Stephen Koukoulas: Will she keep the economy growing at near full employment?

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Stephen Koukoulas: Because that’s the only benchmark you can really have for

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Stephen Koukoulas: a Central Bank governor. They can occasionally have a misstep,

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Stephen Koukoulas: but if they then correct that the following month or

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Stephen Koukoulas: the month after that, usually they can recoup any misstep

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Stephen Koukoulas: that they make. And again, Dr. Lowe did not appear

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Stephen Koukoulas: to do that, as well as Glen Stevens and Ian

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Stephen Koukoulas: MacFarlane, the former RBA governors.

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Sean Aylmer: Okay, so Michele Bullock takes over in a couple of

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Sean Aylmer: months. She’ll be faced with an economy, I mean, I’m

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Sean Aylmer: sure she’s part of the deliberations now anyway, but where

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Sean Aylmer: we’re at today, particularly given last week’s US CPI figures

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Sean Aylmer: and the comments from Phil Lowe about interest rates, it

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Sean Aylmer: looks like we’re getting towards the peak of that rate

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Sean Aylmer: cycle. I mean, we’ve been saying it for months, but

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Sean Aylmer: now we really mean it, Stephen.

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Stephen Koukoulas: I think we’re really that, yes, I think now, as

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Stephen Koukoulas: you mentioned, it wasn’t just the US inflation numbers, which

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Stephen Koukoulas: came at 3. 0% year on year. So that’s down

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Stephen Koukoulas: from 9% about a year ago. So inflation is certainly

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Stephen Koukoulas: going in the right direction. China’s got inflation at zero,

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Stephen Koukoulas: annual inflation, 0%. So you’ve got the global inflation environment

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Stephen Koukoulas: tilting all the right way. So again, regardless of whether

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Stephen Koukoulas: it’s for Lowe or Michele Bullock in a way, we

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Stephen Koukoulas: know that inflation in Australia is going to be falling

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Stephen Koukoulas: over the next six to 12 months, and that’s really

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Stephen Koukoulas: important. There is a debate about how quickly it falls

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Stephen Koukoulas: of course, and that’s still going to be there for

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Stephen Koukoulas: many months to come. But the new governor, she’s going

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Stephen Koukoulas: to be presiding over a weaker economy. There’s no doubt

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Stephen Koukoulas: about that. Unemployment will be creeping up. It’s just a

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Stephen Koukoulas: matter of how quickly it’s creeping up and inflation’s falling.

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Stephen Koukoulas: As you said, we might be at the peak of

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Stephen Koukoulas: the interest rate hiking cycle, which would be an interesting

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Stephen Koukoulas: phenomenon for her to preside over for the first few

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Stephen Koukoulas: months as governor.

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Sean Aylmer: So what’s up this week?

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Stephen Koukoulas: Well, there’s really only two things of material note from

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Stephen Koukoulas: the domestic economy. One, we actually get the RBA minutes

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Stephen Koukoulas: from the July board meeting when they surprised some in

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Stephen Koukoulas: the market by holding rates steady. So obviously Dr. Lowe

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Stephen Koukoulas: gave a speech just recently about what they were talking

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Stephen Koukoulas: about. So I’d imagine the minutes will just simply cover

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Stephen Koukoulas: that. There was a debate between do they hold or

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Stephen Koukoulas: do they go 25 points, and obviously they decided to

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Stephen Koukoulas: hold. A discussion about how quickly inflation’s falling and the

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Stephen Koukoulas: like. So they’re always a good read.
But arguably more

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Stephen Koukoulas: important than that, and Dr. Lowe made this point, that

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Stephen Koukoulas: the labor market numbers will be something that they look

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Stephen Koukoulas: at, and I’m sure Michele Bullock will look at them

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Stephen Koukoulas: too. But on Thursday we’ve got the labor force numbers

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Stephen Koukoulas: and they’ve been choppy month- to- month. We had a

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Stephen Koukoulas: fall and rise and the fall and a rise, all this

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Stephen Koukoulas: sawtooth pattern on employment and the unemployment rate. But they’re going

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Stephen Koukoulas: to be really important.
If we get another strong employment

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Stephen Koukoulas: number, say a plus 30,000 employment, unemployment staying at 3.5 Or 3.

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Stephen Koukoulas: 6%, maybe that feeds into the rate hike scenario. But

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Stephen Koukoulas: of course, the obverse of that is if we get

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Stephen Koukoulas: confirmation that employment growth is slowing, the unemployment rate is

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Stephen Koukoulas: ticking up, then the reserve bank can comfortably put their

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Stephen Koukoulas: hand on their heart and say, look, we can pause

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Stephen Koukoulas: another month and let’s see how the economy goes. So

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Stephen Koukoulas: they’re a really important indicator, but of course, let’s not

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Stephen Koukoulas: forget that next week we get the inflation data and

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Stephen Koukoulas: they’re going to be important as well as these labor

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Stephen Koukoulas: force data this week.

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Sean Aylmer: Not often can you cheer on higher unemployment, but I

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Sean Aylmer: reckon this week we can. Actually, it was Michele Bullock wasn’t

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Sean Aylmer: it, who a couple of weeks ago actually talked about

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Sean Aylmer: the need to lose jobs in the economy?

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Stephen Koukoulas: Well, yes, it wasn’t her speech of approximately three weeks

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Stephen Koukoulas: ago, I’d just have to check the date, but she

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Stephen Koukoulas: actually was talking about how their assessment of NAIRU, heaven

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Stephen Koukoulas: forbid, the full employment rate of unemployment, was about 4. 5%.

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Stephen Koukoulas: That below 4.5% you get wage pressures, you get capacity constraints,

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Stephen Koukoulas: you get labor shortages, skill shortages, and you can have

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Stephen Koukoulas: too much of a good thing. Like good red wine,

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Stephen Koukoulas: you can have a little bit too much from time to time.

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Sean Aylmer: No, no, you can’t. No you can’t.

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Stephen Koukoulas: Like an unemployment rate, it can be too low. And when

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Stephen Koukoulas: you run out of workers, which Australia did have, you

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Stephen Koukoulas: need to just put the economy back on an even

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Stephen Koukoulas: keel. And so when she gave that speech a few

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Stephen Koukoulas: weeks ago, Ms. Bullock was talking about that, about 4, 4.5%. So

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Stephen Koukoulas: if we get the unemployment rate edging up towards that

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Stephen Koukoulas: sort of level in the months ahead, again, it’d be

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Stephen Koukoulas: just another indicator that, yep, we’ve done enough on interest

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Stephen Koukoulas: rates, hold steady, let’s wait for this inflation rate to

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Stephen Koukoulas: fall, and then reassess things as more information comes to

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Stephen Koukoulas: hand as they say.

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Sean Aylmer: Plenty to look forward to Stephen. Enjoy your week.

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Stephen Koukoulas: Thank you, Sean. Lots to digest and lots to look

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Stephen Koukoulas: forward to. You’re spot on.

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Sean Aylmer: That’s economist Stephen Koukoulas. You can find him at thekouk.

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Sean Aylmer: com or on Twitter using the handle Thekouk. I’m Sean

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Sean Aylmer: Aylmer and this is Fear and Greed: The Week Ahead.