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).
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Sean Aylmer: Welcome to Fear and Greed, The Week Ahead. I’m Sean Aylmer; and as
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Sean Aylmer: always, I’m joined by economist, Stephen Koukoulas. You’ll find him
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Sean Aylmer: at TheKouk. com and on Twitter using the handle TheKouk.
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Sean Aylmer: Stephen, good morning.
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Stephen Koukoulas: Good morning, Sean.
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Sean Aylmer: We’ve got a pretty exciting week coming up. We know
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Sean Aylmer: next week we’ve got the Reserve Bank making a decision
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Sean Aylmer: on interest rates, but a fair bit of information this
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Sean Aylmer: week will help them make that decision. Monthly inflation is
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Sean Aylmer: a good starting point.
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Stephen Koukoulas: It’s a very good starting point. And I think where
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Stephen Koukoulas: we had the shock decision, and this is from the
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Stephen Koukoulas: minutes of the RBA meeting that were released last week,
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Stephen Koukoulas: and that shock decision to hike in June was pretty
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Stephen Koukoulas: much predicated on two things: one was the surprisingly high
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Stephen Koukoulas: monthly CPI previously, and house prices going up, so the
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Stephen Koukoulas: inflation numbers which come out this week will be really
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Stephen Koukoulas: important for the RBA. If it remains elevated, or we
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Stephen Koukoulas: don’t get that deceleration which the consensus is looking for,
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Stephen Koukoulas: then it feeds into the RBA probably just chugging along
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Stephen Koukoulas: and delivering another rate hike next week. It’s always on
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Stephen Koukoulas: a monthly CPI.
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Sean Aylmer: Okay. It’s interesting how in the last two or three
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Sean Aylmer: weeks there really has been a shift towards more rate
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Sean Aylmer: hikes on the back of inflation, it seems, and certainly
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Sean Aylmer: a slowing in economic growth, but people are talking about
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Sean Aylmer: two more rate hikes, potentially three more rate hikes. Where
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Sean Aylmer: do you stand on that?
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Stephen Koukoulas: Look, it’s incredible, and it’s being reflected in the bond
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Stephen Koukoulas: market. We’ve had basically close to 100 basis points in
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Stephen Koukoulas: bond yields… and that’s from let’s call it roughly 3%
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Stephen Koukoulas: about a month ago, to roughly 4% as we speak
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Stephen Koukoulas: now… so that’s a big movement. Of course, as you’re
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Stephen Koukoulas: alluding to, on a reassessment of the inflation persistence, if
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Stephen Koukoulas: we can call it that, and of course what the
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Stephen Koukoulas: Reserve Bank might be doing to get that inflation rate
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Stephen Koukoulas: back down… Gosh, I’m still looking at a range of
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Stephen Koukoulas: indicators. Look, I’ve missed the last three RBA rate hikes. I’m looking
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Stephen Koukoulas: at inflation decelerating, so I’ve got a big eye on
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Stephen Koukoulas: the inflation numbers, but also the economy’s weak. We know
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Stephen Koukoulas: that business confidence is down, retail spending is down. We’ve
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Stephen Koukoulas: got a scenario where the lagging indicators, and don’t want
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Stephen Koukoulas: to be talking too much like an economist, but the things that always turn last in the
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Stephen Koukoulas: business cycle are unemployment and inflation. They’re the things that
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Stephen Koukoulas: are still sticky, stubborn, whatever you want to call it.
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Stephen Koukoulas: Whereas the leading indicators… building approvals, retail spending, consumer confidence…
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Stephen Koukoulas: other ones that are really under downward pressure.
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Sean Aylmer: We’ll get retail sales this week as well for May. There’s
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Sean Aylmer: a lot of pressure on the Reserve Bank though to
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Sean Aylmer: not go too hard on all this.
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Stephen Koukoulas: Yes, and I guess that’s a delicate balancing act that
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Stephen Koukoulas: it’s trying to grapple with at the moment. But clearly,
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Stephen Koukoulas: we’ve had 400 points of rate hikes. Wow. That’s been
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Stephen Koukoulas: a pretty chunky tightening cycle from May last year. So in
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Stephen Koukoulas: the space of about 14 months or so, we’ve had
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Stephen Koukoulas: a really big lift in official interest rates. The risk
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Stephen Koukoulas: is that you do too much too late in the
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Stephen Koukoulas: cycle, but it takes a while for the data to
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Stephen Koukoulas: catch up with the interest rate action. In a sense,
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Stephen Koukoulas: we’re looking at the inflation numbers, the retail numbers, the
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Stephen Koukoulas: unemployment numbers, and they’re really reflecting where policy was, I don’t
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Stephen Koukoulas: know, six or eight or nine months ago, so that’s the risk that the RBA
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Stephen Koukoulas: is trying to grapple with. That’s why, earlier in the
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Stephen Koukoulas: year, they were being a little bit more cautious. But
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Stephen Koukoulas: of course, in the last couple of months, they’ve found
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Stephen Koukoulas: a problem with inflation and they’ve kept on hiking.
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Sean Aylmer: Now what I thought was interesting last week: Michele Bullock,
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Sean Aylmer: the Deputy Governor of the Reserve Bank, and a candidate
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Sean Aylmer: to take over from Phil Lowe if he doesn’t get
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Sean Aylmer: reappointed in September, she basically said we need to lose
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Sean Aylmer: a bunch of jobs, about 140,000 jobs, to get the
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Sean Aylmer: unemployment rate back up to about 4. 5%, which will
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Sean Aylmer: take pressure off wages, which will take pressure off inflation.
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Sean Aylmer: Tying that into job vacancy figures which are out this
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Sean Aylmer: week, firstly, do you think it makes sense what she’s
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Sean Aylmer: talking about? Secondly, do you think we’re going to get
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Sean Aylmer: there based on the vacancy rate?
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Stephen Koukoulas: Look, I think what she said, and she copped a
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Stephen Koukoulas: lot of flack for that comment, but it’s largely true.
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Stephen Koukoulas: Interest rates do not have a material long- run impact
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Stephen Koukoulas: on the unemployment rate. I posed the question on Twitter,
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Stephen Koukoulas: for those who are criticizing her, ” Why don’t we have
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Stephen Koukoulas: interest rate and monetary policy settings to have, I don’t know,
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Stephen Koukoulas: unemployment at 1%, 0%?” Because that’s not what the interest
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Stephen Koukoulas: rate settings are designed to achieve.
We’ve got the labor
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Stephen Koukoulas: market in the early stages of softening. We do know
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Stephen Koukoulas: that the job vacancies numbers are trending down, so this
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Stephen Koukoulas: week’s number would be very important. Another, even a moderate
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Stephen Koukoulas: fall, in the job vacancy series would suggest that the
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Stephen Koukoulas: labor market is coming off the boil, the unemployment rates
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Stephen Koukoulas: are going to be trending up over the second half
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Stephen Koukoulas: of 2023, so that will feed into this assessment that
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Stephen Koukoulas: Ms. Bullock made about the state of the labor market
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Stephen Koukoulas: and economy; and whether we’re going to get unemployment at
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Stephen Koukoulas: 4.5%, I don’t know, in six months, or we’ve got
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Stephen Koukoulas: to wait 18 months before we get there.
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Sean Aylmer: What’s going to happen on interest rates next week? I know we’re a week early,
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Sean Aylmer: but I have to ask you.
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Stephen Koukoulas: It’s all going to be predicated on the data this
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Stephen Koukoulas: week, I hate to say, Sean.
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Sean Aylmer: Fair enough. Good answer.
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Stephen Koukoulas: I wouldn’t do it. I wouldn’t hike, from what I
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Stephen Koukoulas: know now. As I said, the leading indicators on growth,
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Stephen Koukoulas: global pressures on inflation, are all pointing to lower inflation,
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Stephen Koukoulas: weaker growth, and higher unemployment, as we’re just touching, so
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Stephen Koukoulas: I’d do nothing. I guess if we saw a shock
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Stephen Koukoulas: assistance in inflation in the numbers… if we saw, for
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Stephen Koukoulas: example, retail- spending numbers being resilient, and even global events
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Stephen Koukoulas: being resilient… then of course that feeds into a possibility,
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Stephen Koukoulas: a probability, of an interest rate hike.
I would just
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Stephen Koukoulas: note in passing, when we’re focusing on the Bank of
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Stephen Koukoulas: England rate hikes, the fed being hawkish again last week,
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Stephen Koukoulas: these sorts of indicators: China, certainly our largest export market,
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Stephen Koukoulas: actually eased the interest rates last week because its economy
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Stephen Koukoulas: is a bit soggy, and its annual inflation rate is 0%.
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Stephen Koukoulas: So it’s not all inflation booming and rising for Australia.
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Stephen Koukoulas: I pay a lot of attention to what’s happening in China.
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Sean Aylmer: Yeah. 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, 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 Twitter using the handle TheKouk. I’m Sean Aylmer, and
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Sean Aylmer: this is Fear and Greed, The Week Ahead.