The Week Ahead | 23 October 2023

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

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Sean Aylmer: And as always at this time on a Monday morning,

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Sean Aylmer: I’m joined by economist, Stephen Koukoulas. You’ll find him at thekouk.

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Sean Aylmer: com, T- H- E- K- O- U- K. I hope

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Sean Aylmer: you know how to spell that by now. I’ve been

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Sean Aylmer: saying it for about three years. Thekouk. com and on

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Sean Aylmer: Twitter and on X using the handle, TheKouk.
Stephen “The Kouk” Koukoulas,

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Sean Aylmer: good morning.

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Stephen Koukoulas: Good morning, Sean Aylmer.

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Sean Aylmer: Thank you very much. Very big week this week with

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Sean Aylmer: inflation numbers coming out, but let’s just briefly check in

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Sean Aylmer: on what happened last week. We had Michele Bullock making

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Sean Aylmer: her first speech as the Reserve Bank Governor, also labor

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Sean Aylmer: force stats.

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Stephen Koukoulas: Yes, and we’ll kick off with the labor force numbers

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Stephen Koukoulas: because they were something of a mixed bag, something for

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Stephen Koukoulas: everybody, as they say in the classics, because we had

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Stephen Koukoulas: quite a weak employment result, only up about 6, 700

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Stephen Koukoulas: people. The participation rate fell away quite sharply for a month- on-

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Stephen Koukoulas: month reading. I think that’s just the monthly volatility in

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Stephen Koukoulas: the way that the numbers are calculated.
But the good

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Stephen Koukoulas: news, I suppose, is that we had the unemployment rate

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Stephen Koukoulas: dropping from 3. 7% to 3.6%. So the employment momentum has been

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Stephen Koukoulas: lost, I suppose, in the economy, but the unemployment rate

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Stephen Koukoulas: isn’t going up. So that was the interesting thing about

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Stephen Koukoulas: the labor force stats. So I think they added not

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Stephen Koukoulas: much to the whole debate. The economy’s clearly still slowing.

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Stephen Koukoulas: The labor market has probably passed its best, but it

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Stephen Koukoulas: is not deteriorating at any sort of alarming pace.
And

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Stephen Koukoulas: I think Michele Bullock, when she spoke last week, look,

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Stephen Koukoulas: it was a good speech. It was refreshing, it was

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Stephen Koukoulas: really cutting through the issues that I think also came

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Stephen Koukoulas: out in the minutes that released of the RBA board

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Stephen Koukoulas: meeting for early October, and they’re not quite ready to

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Stephen Koukoulas: hike interest rates, but if inflation doesn’t fall as quickly

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Stephen Koukoulas: as they like, they will hike. If it does continue

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Stephen Koukoulas: on the trajectory back to the target range, they’ll sit

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Stephen Koukoulas: tight.
So it’s one of those ones where, like all

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Stephen Koukoulas: mere mortals, they’re going to be watching the inflation data

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Stephen Koukoulas: emerging, and of course, with an eagle eye on what’s

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Stephen Koukoulas: happening in the rest of the economy. So, interesting times

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Stephen Koukoulas: for the RBA.

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Sean Aylmer: Okay, so that brings us to this week. Big day

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Sean Aylmer: Wednesday. We have the September quarter consumer price index out

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Sean Aylmer: from the Bureau of Statistics. This is kind of the

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Sean Aylmer: big one, isn’t it?

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Stephen Koukoulas: Bigger than Ben- Hur, bigger than big. It’s huge. And

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Stephen Koukoulas: okay, we often can get carried away in economics with

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Stephen Koukoulas: one monthly or one quarterly number, and this is just

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Stephen Koukoulas: the September quarter CPI, the inflation data in the quarter.

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Stephen Koukoulas: But given what the Reserve Bank has been saying, Michele

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Stephen Koukoulas: Bullock as Governor, as I mentioned just a second ago,

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Stephen Koukoulas: in the minutes of the earlier board meeting in October,

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Stephen Koukoulas: if there’s any material upside surprise in these results on

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Stephen Koukoulas: Wednesday, the rate hike decision is well and truly on

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Stephen Koukoulas: the agenda for Melbourne Cup Day, as we like to

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Stephen Koukoulas: say. And upside surprise would be something above about 1 or 1.1%

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Stephen Koukoulas: for the headline CPI quarter- on- quarter. And for the (inaudible)

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Stephen Koukoulas: , a similar sort of result.
So if we were

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Stephen Koukoulas: to get a 1. 2 or 1. 3 increase quarter- on-

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Stephen Koukoulas: quarter, yep, it’s game on for the rate hike. If

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Stephen Koukoulas: we get a 1 or a 0. 9, that’s broadly consistent

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Stephen Koukoulas: with the RBAs forecasts. And again, in concert with the

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Stephen Koukoulas: slightly softer labor market numbers that we saw last week,

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Stephen Koukoulas: it had just reinforce this on hold, but with a

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Stephen Koukoulas: cautious rate hiking bias from the Reserve Bank.

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Sean Aylmer: Okay, just clarify, when you say quarter- on- quarter, you

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Sean Aylmer: say 1% quarter- on- quarter, you are talking about September

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Sean Aylmer: quarter compared to the?

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Stephen Koukoulas: June quarter.

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Sean Aylmer: Yeah. Righto. So it’s kind of the idea that you can

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Sean Aylmer: multiply that by four times and you’re getting the annualized

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Sean Aylmer: pace of inflation?

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Stephen Koukoulas: Correct, yes.

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Sean Aylmer: Okay. So you mean you get a 1.2, 1. 3, suddenly you’re at a 5% plus annualized pace

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Sean Aylmer: of inflation. The Reserve Bank wouldn’t like that. Otherwise, you’re

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Sean Aylmer: under 4%. I mean, if you can get 0. 9%, you’re

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Sean Aylmer: under 4%. They wouldn’t be too worried about that.

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Stephen Koukoulas: And the path is lower, yes. And it’s as simple

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Stephen Koukoulas: as that. In theory, with the 400 basis points of

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Stephen Koukoulas: rate hikes that were delivered since May, 2022, May last

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Stephen Koukoulas: year, you think that the economy and the inflation momentum

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Stephen Koukoulas: would be falling. However, these numbers in the latter part

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Stephen Koukoulas: of the quarter pick up a lot of this oil

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Stephen Koukoulas: price, the petrol price shock that we’ve all been seeing

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Stephen Koukoulas: when we’ve been filling up our cars and paying, oh

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Stephen Koukoulas: my goodness, $ 2. 10, $ 2. 20 a liter, that feeds

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Stephen Koukoulas: directly into the inflation numbers.
Now, I think as we

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Stephen Koukoulas: discussed a couple of weeks ago, or it might been

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Stephen Koukoulas: with Jen that we discussed, is that the RBA would not be

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Stephen Koukoulas: hiking solely on the basis of a petrol price increase

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Stephen Koukoulas: because the oil price globally is so fickle and goodness

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Stephen Koukoulas: knows what’s happening in the Middle East and the supply

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Stephen Koukoulas: of oil over there. It’s such an extraordinarily difficult thing

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Stephen Koukoulas: to analyze, I suppose. But just as quickly as it

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Stephen Koukoulas: went from 75 to $ 90 a barrel, it could fall

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Stephen Koukoulas: back down and you wouldn’t want to be hiking rates

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Stephen Koukoulas: and then find that there’s some sort of peaceful resolution

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Stephen Koukoulas: and the oil starts getting pumped again and the oil

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Stephen Koukoulas: price falls again. So that’s where it’s the next nuance to

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Stephen Koukoulas: this number.
So I don’t think we’ll be able to

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Stephen Koukoulas: just have that knee- jerk reaction when the number comes

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Stephen Koukoulas: out at 11:30 Eastern summertime on Wednesday. We’ll need to

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Stephen Koukoulas: work out why it was a bit up or why

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Stephen Koukoulas: it was a bit down, depending, of course, what the

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Stephen Koukoulas: result is.

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Sean Aylmer: Okay. And you mentioned the Middle East then, and Michele

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Sean Aylmer: Bullock did mention that last week, obviously a humanitarian crisis.

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Sean Aylmer: In terms of the economy, it probably, I mean, higher

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Sean Aylmer: oil prices tends to hurt economic growth, I suppose that’s

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Sean Aylmer: what I’m trying to say.

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Stephen Koukoulas: It’s a tax on growth. And whether you’re a business

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Stephen Koukoulas: person or a householder, it’s one of those things that’s

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Stephen Koukoulas: really a non- discretionary spend. I suppose we could catch

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Stephen Koukoulas: a bus or a train and leave the car at

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Stephen Koukoulas: home, but really, it’s a non- discretionary thing for, well

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Stephen Koukoulas: for transport companies as they shuffle goods around the economy

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Stephen Koukoulas: and we fly up and down and around the place.

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Stephen Koukoulas: So oil is one of those ones where the higher

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Stephen Koukoulas: the price, it actually does dampen the economy. Yes, it

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Stephen Koukoulas: feeds directly into higher inflation. And I think as we

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Stephen Koukoulas: learn from the, gosh, the first oil shock in the

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Stephen Koukoulas: mid ’70s, you don’t hike interest rates because of that

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Stephen Koukoulas: sort of outcome. A little bit like the floods. Remember,

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Stephen Koukoulas: gosh, 18 months ago, two years ago when we had the floods in

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Stephen Koukoulas: Lismore and lettuce prices got to $ 10 and bean prices

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Stephen Koukoulas: were 45 a kilo, those things, you’re not going to

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Stephen Koukoulas: hike because of that, even though it does mean higher

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Stephen Koukoulas: inflation, it means that we substitute away from lettuce and we

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Stephen Koukoulas: eat cabbages instead or something like that.

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Sean Aylmer: Cabbage, yeah.

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Stephen Koukoulas: But there’s not quite that flexibility when it comes to

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Stephen Koukoulas: oil. So of course, you look at it, of course

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Stephen Koukoulas: there’s some secondary effects when oil prices go up, but

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Stephen Koukoulas: when they go back down again, which history shows us

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Stephen Koukoulas: they tend to go back down after one of these

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Stephen Koukoulas: little episodes when they move higher, you don’t want to be

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Stephen Koukoulas: hiking interest rates. Then all of a sudden you find a

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Stephen Koukoulas: month or two or three later, the oil price is

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Stephen Koukoulas: back down, you’ve hit your economy really hard, even though

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Stephen Koukoulas: that inflation pressure was, well, as I said, the classics, transitory.

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Sean Aylmer: Transitory.
Stephen, have a great week.

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Stephen Koukoulas: Thank you, Sean. You too.

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Sean Aylmer: That was economist Stephen Koukoulas, better known as The Kouk.

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Sean Aylmer: You can find him at thekouk. com and follow him

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Sean Aylmer: on X using the handle TheKouk.
I’m Sean Aylmer, and this is Fear & Greed, The

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Sean Aylmer: Week Ahead.