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Fear & Greed, Fear and Greed

This is Fear and Greed – The Week Ahead, where Sean Aylmer and Stephen Koukoulas discuss the major events, reports and releases that provide insight into the economy this week (with a look back at the events of last week too).

Find out more: https://fearandgreed.com.au

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

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Sean Aylmer: and as usual, this time on a Monday morning, I’m

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Sean Aylmer: 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. com, or

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Sean Aylmer: on Twitter using the handle TheKouk. Stephen, good morning.

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Stephen Koukoulas: Good morning, Sean.

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Sean Aylmer: Quite the labor market we have here in Australia, Stephen.

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Stephen Koukoulas: Well, last week’s news was again a surprise to the

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Stephen Koukoulas: consensus. We had more than 30,000 jobs created. Again, the

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Stephen Koukoulas: unemployment rate stayed at 3. 5%, so just within a tiny

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Stephen Koukoulas: fraction of it being at a fresh 49- year low.

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Stephen Koukoulas: So whichever way you cut it, there’s still some residual

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Stephen Koukoulas: demand for workers. Even though the economy’s slowing down, there’s

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Stephen Koukoulas: still some hiring going on. So it might just be

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Stephen Koukoulas: still a little bit of catch up from the COVID

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Stephen Koukoulas: lockdowns, that when there was this very acute skills and

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Stephen Koukoulas: labor shortage. So maybe there’s that residual hiring going on,

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Stephen Koukoulas: but whichever way you cut it’s a good result. It’s

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Stephen Koukoulas: a really nice to see the unemployment rate staying at 3. 5%.

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Sean Aylmer: Yeah though it’s kind of a double- edged sword, isn’t

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Sean Aylmer: it? Because we heard Michele Bullock, the incoming Reserve Bank

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Sean Aylmer: governor, talk about the need for us to lose jobs

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Sean Aylmer: and to get the unemployment rate up to 4.5%. So

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Sean Aylmer: it’s not all good news when you have a strong

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Sean Aylmer: labor market.

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Stephen Koukoulas: Yeah, the lower the unemployment rate, the more likely we

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Stephen Koukoulas: are to see interest rates go up, as a rule

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Stephen Koukoulas: of thumb. It’s not, again, not locked into the mix.

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Stephen Koukoulas: But yeah, if we do get a very strong labor

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Stephen Koukoulas: market, it’s a sign that perhaps there’s some wage pressures

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Stephen Koukoulas: going. So Michele Bullock’s point was a good one. I

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Stephen Koukoulas: think when she’s discussing what sort of unemployment rate do

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Stephen Koukoulas: we need to keep wages in check and therefore inflation

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Stephen Koukoulas: in check, she and the Reserve Bank have come up

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Stephen Koukoulas: with a figure of about 4. 5%. The test of

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Stephen Koukoulas: that will actually be probably next month when we get

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Stephen Koukoulas: the June quarter wages numbers, because it would be quite

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Stephen Koukoulas: interesting and might well suggest that that 4. 5% that

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Stephen Koukoulas: Ms. Bullock was looking at might be a little high.

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Stephen Koukoulas: If we get wages growth still hanging around that 3.

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Stephen Koukoulas: 6, 3. 7 3. 8% annual growth rate with an

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Stephen Koukoulas: unemployment rate really locked in at 3.5%, maybe the 4. 5%

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Stephen Koukoulas: ‘s too high and the Reserve Bank fear of this

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Stephen Koukoulas: wage price spiral might not be quite as likely as

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Stephen Koukoulas: they’re hinting at.

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Sean Aylmer: You are an optimist, Stephen, no doubt about that. And

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Sean Aylmer: that of course brings us onto this week and the CPI, the

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Sean Aylmer: inflation figures are out. It’s the big one.

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Stephen Koukoulas: Huge. It’s the quarterly CPI as well as the monthly

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Stephen Koukoulas: CPI. We know that the Bureau of Statistics has been

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Stephen Koukoulas: experimenting, I suppose is the word, with a monthly inflation number, which

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Stephen Koukoulas: isn’t as comprehensive as the quarterly number. It’s still a

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Stephen Koukoulas: really interesting indicator of price pressures, particularly when inflation has

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Stephen Koukoulas: been the big worry for the economy over the last

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Stephen Koukoulas: couple of years. But the quarterly result, that’s the one

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Stephen Koukoulas: that’s got all of the bells and whistles included in

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Stephen Koukoulas: it. So the market’s looking for another further moderate deceleration

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Stephen Koukoulas: in inflation coming in annual terms from 7% down to

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Stephen Koukoulas: around about 6. 4%, I think, is the consensus. That

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Stephen Koukoulas: implies a quarterly increase of about 1. 2%. We know

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Stephen Koukoulas: that there’s still a few price pressures going on in

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Stephen Koukoulas: the services side of the economy. Anything lower than that

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Stephen Koukoulas: will be most welcome. It’ll be hinting that clearly that

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Stephen Koukoulas: inflation’s on a downward trajectory and let’s hope that there’s

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Stephen Koukoulas: downside surprise, the number that comes out later this week.

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Sean Aylmer: Okay, so if we do get a number that’s 6%

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Sean Aylmer: or lower, is that enough for the Reserve Bank to

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Sean Aylmer: stay on pause?

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Stephen Koukoulas: A very, very good question. In concert with the labor

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Stephen Koukoulas: force numbers and again, other global developments that’ll be part

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Stephen Koukoulas: of their thinking, I think when we look at the

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Stephen Koukoulas: annual figure, you’ve got to remember that, so even with

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Stephen Koukoulas: this June quarter 2023 number, we have got the quarterly

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Stephen Koukoulas: increases in inflation in September last year, December last year,

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Stephen Koukoulas: and they were higher results and the RBA hiked because

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Stephen Koukoulas: of them. So to have a look at them again,

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Stephen Koukoulas: you’d almost be double counting. So in a sense, that’s

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Stephen Koukoulas: where we look at the quarterly results. And so that’s

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Stephen Koukoulas: where the situation is. If the quarterly figure’s near 1%

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Stephen Koukoulas: say, you annualize that. That’s approximately 4%. So you can

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Stephen Koukoulas: cut and dice the numbers 101 different ways. But if we

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Stephen Koukoulas: get a figure below 6%, you are getting enough momentum

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Stephen Koukoulas: to the downside to at least keep the discussion at

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Stephen Koukoulas: the board meeting next week, that do we hold or

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Stephen Koukoulas: do we only go 25?

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Sean Aylmer: Okay, Stephen. So the other bit of economic news out

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Sean Aylmer: this week is retail sales.

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Stephen Koukoulas: Retail sales for June, and you might recall that in

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Stephen Koukoulas: May we had a bit of a jump in retail

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Stephen Koukoulas: sales. 0. 7% was the previous month’s result. It was

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Stephen Koukoulas: said to be linked to a few special sales, more

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Stephen Koukoulas: aggressive discounting from retailers as they’re dealing with the weakness

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Stephen Koukoulas: in retail spending. So the market consensus now is for

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Stephen Koukoulas: a flat result in the month of June, which will

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Stephen Koukoulas: be indicating that in volume terms for the June quarter,

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Stephen Koukoulas: the last three months together, we’ll get a figure that’s

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Stephen Koukoulas: broadly flat. So we consumers responding to cost of living

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Stephen Koukoulas: pressures, to the interest rate hikes that have been delivered

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Stephen Koukoulas: obviously, and we consumers and the retail sales numbers will

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Stephen Koukoulas: be pretty soggy. I don’t think we’re going to get

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Stephen Koukoulas: a strong number, particularly also given where consumer sentiment is,

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Stephen Koukoulas: and that’s been very, very weak for the last well

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Stephen Koukoulas: 12 months and getting weaker, in fact.

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Sean Aylmer: Indeed. Just quickly, we also have the US interest rate

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Sean Aylmer: setting body, the Fed Open Market Committee meeting this week.

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Sean Aylmer: Will they go on rates?

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Stephen Koukoulas: Look, I think so. Again, really important. You were discussing

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Stephen Koukoulas: what the Reserve Bank might think about next week at

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Stephen Koukoulas: its board meeting. What’s happening in the global economy is

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Stephen Koukoulas: very, very important. And so what happens in the US

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Stephen Koukoulas: of course dominates your market sentiment. It dominates economic conditions.

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Stephen Koukoulas: On balance, I think the Fed goes that even though

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Stephen Koukoulas: we had a lovely downward surprise to inflation in the

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Stephen Koukoulas: US a week or 10 days ago, your annual inflation’s

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Stephen Koukoulas: down to 3%, it hit 9%, it’s down to three.

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Stephen Koukoulas: So who says interest rates don’t work? They do. So

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Stephen Koukoulas: that’s the discussion that the Fed’s going to be looking at.

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Stephen Koukoulas: And similar to Australia, they’ve got signs that the economy

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Stephen Koukoulas: is slowing, inflation’s falling, but they’ve got a really resilient

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Stephen Koukoulas: labor market. They’ve got an unemployment rate around about 3.

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Stephen Koukoulas: 5% as well, and maybe just one final hike. That

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Stephen Koukoulas: might be the thing that the chairman of the Federal

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Stephen Koukoulas: Reserve delivers, Jerome Powell, a 25 point hike taking the

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Stephen Koukoulas: US interest rates to around 5.5%. That might just be

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Stephen Koukoulas: about it, but there’s a slight probability they’re on hold.

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Stephen Koukoulas: But yeah, it’s always a bit of a mugs game,

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Stephen Koukoulas: forecasting things when we don’t know exactly what they’re thinking.

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

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Stephen Koukoulas: Thank you, Sean.

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Sean Aylmer: That was economist Stephen Koukoulas. You can find him a thekouk.

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Sean Aylmer: com and 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.