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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

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Sean Aylmer: Aylmer, and for the second time this year I’m joined

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Sean Aylmer: by Economist Stephen Koukoulas. You’ll find him at thekouk. com

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Sean Aylmer: and on X using the handle “TheKouk”, and of course, at

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Sean Aylmer: Fear and Greed every Monday Morning. Stephen, good morning.

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Stephen Koukoulas: Good morning to you, Sean.

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Sean Aylmer: Very big week coming up. Can’t wait to get into

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Sean Aylmer: it, but just quickly, last week, locally, we had the

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Sean Aylmer: NAB Business Survey, but international, globally, we had a bunch

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Sean Aylmer: of central banks not doing much. So let’s start with

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Sean Aylmer: National Australia Bank, then on to the global central banks,

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Sean Aylmer: but really it’s all about this week.

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Stephen Koukoulas: Yeah, it’s a big week this week, but last week

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Stephen Koukoulas: we had the NAB Survey, which we alluded to in

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Stephen Koukoulas: The Week Ahead, this time a week ago, and it

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Stephen Koukoulas: showed that the slowdown in the economy is well entrenched. It

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Stephen Koukoulas: had, as we again alluded to, the price indicators. So,

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Stephen Koukoulas: the NAB Survey, they ask businesses, ” What’s going to happen

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Stephen Koukoulas: to your selling prices? Your labor costs? Your input prices?”

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Stephen Koukoulas: All these sorts of things which are leading indicators of

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Stephen Koukoulas: inflation. They’re all tilting down again. So the market interpreted

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Stephen Koukoulas: that to say that that inflation momentum, which has been

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Stephen Koukoulas: down since the end of 2022, is continuing into the

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Stephen Koukoulas: early part of 2024, and that’s a good news sign.

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Stephen Koukoulas: Business conditions were still okay. They’re not strong, but they’re

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Stephen Koukoulas: not near that recessionary level either. So, in terms of

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Stephen Koukoulas: activity, the business sectors muddling along, but the price pressures

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Stephen Koukoulas: are coming off. And in terms of the four central bank

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Stephen Koukoulas: meetings, wow. Well, there’s a lot of noise and not

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Stephen Koukoulas: much action, but again, that was not unexpected. Inflation, gosh,

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Stephen Koukoulas: in the ECB, in the Bank of Canada, it’s still

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Stephen Koukoulas: a little elevated. It’s all coming down, and they were

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Stephen Koukoulas: dovish on hold decisions, if you like, and that was

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Stephen Koukoulas: part of the reason why the market’s still waiting to see

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Stephen Koukoulas: that next bout of inflation coming down. The one thing

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Stephen Koukoulas: that is dominating markets too is the, what do we

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Stephen Koukoulas: call it, the inflationary effects of the blockages in the

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Stephen Koukoulas: Red Sea and the trade flows and the shipping container rate

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Stephen Koukoulas: problem, which will put a bit of a floor under

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Stephen Koukoulas: prices coming down in the next few months. But whether

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Stephen Koukoulas: that’s enough to derail central banks, we’ll wait and see.

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Sean Aylmer: Okay, that’s the week that was. But in the Australian

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Sean Aylmer: economy, this is the big one. We have the December

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Sean Aylmer: quarter Consumer Price Index data out, which of course is

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Sean Aylmer: all important for the Reserve Bank’s decision on interest rates, Stephen.

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Stephen Koukoulas: All important, that’s the understatement of the year so far,

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Stephen Koukoulas: and I know we’re only 20 something days into the

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Stephen Koukoulas: year, but it is more than all important. That inflation

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Stephen Koukoulas: stuff is the important issue for central bank interest rates

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Stephen Koukoulas: settings, including from our friends at the RBA. The market’s looking for

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Stephen Koukoulas: a further step down in the inflation rate. In the

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Stephen Koukoulas: quarterly numbers, it’ll be in the low fours, and that

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Stephen Koukoulas: means 4.2, 4. 3% in annual terms, quarterly, probably a

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Stephen Koukoulas: touch below 1%, which is good news again, that that

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Stephen Koukoulas: disinflation is coming through. The trimmed means, all these underlying

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Stephen Koukoulas: measures of inflation, are also probably just ticking down to

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Stephen Koukoulas: that 4. 25% in annual terms. The other interesting part

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Stephen Koukoulas: of that, and I don’t want to be cherry- picking

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Stephen Koukoulas: data to suit a particular argument, but the monthly reading

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Stephen Koukoulas: on inflation will also be pretty important, and there’s a

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Stephen Koukoulas: strong probability, I know my friends at CBA are saying

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Stephen Koukoulas: this, they’re thinking that the annual inflation rate will be in the

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Stephen Koukoulas: low threes when we get the monthly number, because they

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Stephen Koukoulas: are picking the trajectory of lower inflation through the quarter.

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Stephen Koukoulas: So, it’s always on this inflation read and just how

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Stephen Koukoulas: low it goes, and that’ll obviously feed into the RBA

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Stephen Koukoulas: next week.

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Sean Aylmer: So, this is the $ 64 question, I suppose. How low does it

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Sean Aylmer: need to be for the Reserve Bank to think, ” Ah,

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Sean Aylmer: maybe we need to cut rates”?

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Stephen Koukoulas: A little bit lower. I think that’s the short answer.

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Stephen Koukoulas: It’s the trajectory in the forecast for inflation that matters.

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Stephen Koukoulas: In a funny sense, that annual figure does capture inflation

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Stephen Koukoulas: three and four quarters ago. If we’re getting quarterly readings

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Stephen Koukoulas: of arguably 0. 6s and 0.7s, now, I’m not saying we’re getting that

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Stephen Koukoulas: for the December quarter, but if the March quarter data is a 0.

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Stephen Koukoulas: 6 and the unemployment rates heading up still to 4.

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Stephen Koukoulas: 25% from the 3. 9 that we’re currently seeing in

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Stephen Koukoulas: the economy, and the world economy is still fragile, that

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Stephen Koukoulas: there’s concerns in the US and Europe and the like,

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Stephen Koukoulas: the RBA will have an easing bias, but to pull

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Stephen Koukoulas: the trigger, they probably want to see that momentum really coming

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Stephen Koukoulas: off on inflation. And not that they want to see

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Stephen Koukoulas: the unemployment rate going up, but if it does, that’ll

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Stephen Koukoulas: be the catalyst for that rate cut, which is starting

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Stephen Koukoulas: to get a little bit more, well, a little bit more

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Stephen Koukoulas: coverage, a little bit more speculation in financial markets.

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Sean Aylmer: So, your take on it at the moment then is that we’ll get

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Sean Aylmer: reasonably okay inflation numbers in terms of they won’t be

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Sean Aylmer: too high, and then the Reserve Bank the following week

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Sean Aylmer: will be on hold. Is that what your view is?

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Stephen Koukoulas: Yeah. February, I think that’s the easiest forecast I’ve ever

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Stephen Koukoulas: made. Oh, maybe not. They can’t do anything. They’re not

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Stephen Koukoulas: going to hike. There’s enough information to say no hike, but to cut, no, there’s not enough

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Stephen Koukoulas: information either. So it’s one of those ones where I

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Stephen Koukoulas: dare say if I was hosting that board meeting or

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Stephen Koukoulas: participating, I’d want to see some scenario planning, some war

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Stephen Koukoulas: gaming if you like. ” What do we need to see?”

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Stephen Koukoulas: So just like we’ve had our two- minute question here, what’s the

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Stephen Koukoulas: RBA staff thinking about that inflation risk? ” What do we

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Stephen Koukoulas: need to see?” Will inflation fall to 2%, or will it be

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Stephen Koukoulas: sticky at 4%?” What are these scenarios and war game

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Stephen Koukoulas: them, and then with their next meeting, see whether any

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Stephen Koukoulas: of those war games have come to a reality.

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Sean Aylmer: Okay. So, everything I suppose diminishes somewhat compared to the

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Sean Aylmer: CPI figures, but there is a bit of stuff around.

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Sean Aylmer: We’ve got retail figures, we’ve got credit, and we’re going

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Sean Aylmer: to find out how the January house price growth went.

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Stephen Koukoulas: Yeah, all important too. Not as high profile as the CPI, but

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Stephen Koukoulas: they feed into this activity indicator or mindset of the

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Stephen Koukoulas: economy as well. Retail sales, they’re really important, because these are

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Stephen Koukoulas: the December numbers. Normally a strong month for Christmas reasons,

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Stephen Koukoulas: obviously, even though the ABS seasonally adjusts them, but with

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Stephen Koukoulas: the Black Friday fashion, if you like, people’s spending up

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Stephen Koukoulas: and a lot of businesses offering specials and discounts and

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Stephen Koukoulas: the like, we know that in November, retail sales jumped

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Stephen Koukoulas: 2%, which was nice and strong. The market’s got a

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Stephen Koukoulas: really big range about what might happen to retail sales

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Stephen Koukoulas: in December. I think the consensus is about minus two,

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Stephen Koukoulas: so we have it up to minus two, so we’re

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Stephen Koukoulas: dead flat. So again, that’ll be interesting to see whether we, consumers, are still

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Stephen Koukoulas: under cost of living pressures, the rate hikes are impacting

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Stephen Koukoulas: our cashflow, so not an unimportant indicator of how we

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Stephen Koukoulas: consumers are going.
Not unrelated to all of that, house

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Stephen Koukoulas: prices. We know from the CoreLogic numbers, they’re slowing down,

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Stephen Koukoulas: probably a little bit negative in Melbourne, flat in Sydney

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Stephen Koukoulas: for the first time in over a year. They’re still

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Stephen Koukoulas: going up a lot in Perth, Adelaide, Brisbane. But the

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Stephen Koukoulas: overall national picture is still of a slowing housing market.

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Stephen Koukoulas: I think that there’s a few things happening in terms

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Stephen Koukoulas: of the labor market, as we mentioned, people becoming unemployed.

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Stephen Koukoulas: You don’t buy as many houses when that happens, but

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Stephen Koukoulas: that’ll be an interesting thing to look at just where this

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Stephen Koukoulas: housing cycle is going.

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Sean Aylmer: Stephen, plenty to chew on, and we’ll be back the

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Sean Aylmer: next week, well, in a week’s time, we’ll be back

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Sean Aylmer: to talk about interest rates, because that’s when the Reserve

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Sean Aylmer: Bank will be meeting. Enjoy the week, especially the CPI figures.

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Stephen Koukoulas: Oh, look, they’re going to be so much fun and

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Stephen Koukoulas: there’s so much information to dig into; what happened to

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Stephen Koukoulas: petrol prices, the price of meat, and with this, oh,

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Stephen Koukoulas: the government’s attempt to jawbone or to force the supermarkets

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Stephen Koukoulas: into cutting prices. Maybe a low CPI will dissipate some

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Stephen Koukoulas: of that concern that the supermarkets are price gouging. I

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Stephen Koukoulas: don’t think they are, but let’s see these inflation numbers.

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Stephen Koukoulas: I love them.

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Sean Aylmer: Yeah. We’ll see how that goes. Thank you very much. That was economist Stephen Koukoulas,

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Sean Aylmer: better known as The Kouk. You can find him at thekouk.

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

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Sean Aylmer: and follow him on X using the handle ” TheKouk”. I’m

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