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, T- H- E- K- O- U- K.
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Sean Aylmer: com, and on Twitter using the handle thekouk. Stephen, good morning.
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Stephen Koukoulas: Good morning and a happy new financial year to everybody, too.
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Sean Aylmer: Yes. We’ve got quite a remarkable last financial year, what,
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Sean Aylmer: more rate rises last financial year than ever before.
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Stephen Koukoulas: That’s right. Yes, we had one virtually every month. Obviously,
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Stephen Koukoulas: the bank doesn’t meet in January, so there was no
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Stephen Koukoulas: move then and they paused in April. But I think
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Stephen Koukoulas: for every other month, so for 10 of the 12 months, they
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Stephen Koukoulas: hike rates.
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Sean Aylmer: Pretty incredible. Now, just very quickly, we’ll talk about last
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Sean Aylmer: week, but this week we’ve got the Reserve Bank meeting
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Sean Aylmer: tomorrow, so that’s what we’re interested in. Those inflation numbers
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Sean Aylmer: last week were kind of interesting, though.
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Stephen Koukoulas: They were. They undershot everybody’s expectations. They came in at an
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Stephen Koukoulas: annual rate of 5. 6%. The market consensus I think
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Stephen Koukoulas: was around about 6.1% so it came in well below
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Stephen Koukoulas: expectations. That was after the previous month was above expectations.
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Stephen Koukoulas: So a couple of things they want to highlight, the
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Stephen Koukoulas: volatility and monthly inflation numbers, petrol prices going up and down.
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Stephen Koukoulas: I think we all noticed that when we fill up
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Stephen Koukoulas: our car. So that has a big impact on month- on-
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Stephen Koukoulas: month CPI.
But the important thing is that the momentum
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Stephen Koukoulas: in inflation is clearly down in December last year when
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Stephen Koukoulas: inflation was running at 8. 4%. That was that really
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Stephen Koukoulas: painful cost of living pressure, now down to 5. 6, so
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Stephen Koukoulas: well above the RBA’s target range. But it’s something that
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Stephen Koukoulas: I think the RBO would be, first of all, pleased
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Stephen Koukoulas: to see. But given that the last board meeting was
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Stephen Koukoulas: a line ball decision to hike and the reason they
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Stephen Koukoulas: did hike was partly wages, partly that inflation shock that
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Stephen Koukoulas: we saw last month so I think, on balance, they’re
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Stephen Koukoulas: probably on hold, but, but it is a line ball call.
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Sean Aylmer: Okay. So they’re meeting tomorrow. What is it that would
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Sean Aylmer: push rates higher? Is it wages that’s a big problem
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Sean Aylmer: or the big concern for the Reserve Bank board?
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Stephen Koukoulas: Yeah. Well, we haven’t had any fresh news on wages
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Stephen Koukoulas: in the last month so, in a sense, maybe there’s
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Stephen Koukoulas: a case to wait until we get the next, well,
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Stephen Koukoulas: next labor force numbers as well as the next wages
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Stephen Koukoulas: data and they’re not out for another month, of course.
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Stephen Koukoulas: The other things that have occurred, which might tilt them
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Stephen Koukoulas: in that direction and, of course, we’ll see this in
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Stephen Koukoulas: data today that we’ve got the house price index coming
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Stephen Koukoulas: out from CoreLogic and that will show a jump in
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Stephen Koukoulas: house prices. And that’s something, not that the RBA target
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Stephen Koukoulas: house prices, but there is a wealth effect when house
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Stephen Koukoulas: prices go up. We Australians tend to feel wealthier, we
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Stephen Koukoulas: tend to spend more when that’s the case. And the
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Stephen Koukoulas: RBA would probably want to lean against this rebound in
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Stephen Koukoulas: house prices if, in fact, that’s what we’re seeing.
Also
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Stephen Koukoulas: last week we had a retail sales number, which while
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Stephen Koukoulas: I don’t think, again, the month- to- month volatility in
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Stephen Koukoulas: retail sales is a bit like the inflation numbers, you
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Stephen Koukoulas: can get these choppy results, but it was above expectations.
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Stephen Koukoulas: We had a 0. 7% rise in the month of
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Stephen Koukoulas: May and that’s sort of suggesting that maybe that cooling
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Stephen Koukoulas: in the economy that’s evident in a range of indicators
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Stephen Koukoulas: is not quite as severe as we were thinking in
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Stephen Koukoulas: terms of retail and consumer spending.
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Sean Aylmer: Yeah, it’s very hard to get your head around, well,
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Sean Aylmer: maybe not for you, but for me it’s very hard
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Sean Aylmer: to kind of work out exactly what’s going on right now.
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Stephen Koukoulas: Oh, it’s hard for me, too, because we’re getting this
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Stephen Koukoulas: choppy news and, again, it’s one of the… Look, one
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Stephen Koukoulas: of the joys in economics is that we do get
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Stephen Koukoulas: a high frequency run of data on housing, on building
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Stephen Koukoulas: approvals, retail spending, consumer sentiment, CapEx, business investment, a myriad
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Stephen Koukoulas: of things go on and rarely do they all point into one
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Stephen Koukoulas: direction. They’re rarely all super strong or all super weak.
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Stephen Koukoulas: I guess that’s the interpretation of these numbers, which is
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Stephen Koukoulas: the tricky thing for us, humble economists, but also for
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Stephen Koukoulas: the Reserve Bank. When they’re sitting down, they’re mere mortals,
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Stephen Koukoulas: too. Don’t forget. They’ve got lots of smart economists, there’s
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Stephen Koukoulas: some really-
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Sean Aylmer: No.
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Stephen Koukoulas: … (inaudible) economists. But they look at these numbers
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Stephen Koukoulas: and they see one up, one down, one up, one
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Stephen Koukoulas: down, and they think, ” Well, what do we do when we’ve already
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Stephen Koukoulas: hiked 400 basis points?” So yes, it is hard to
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Stephen Koukoulas: get a unambiguous read on just where the economy is.
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Sean Aylmer: And I suppose then all points of data become more
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Sean Aylmer: interesting. I mean, job ads this week, for example, will
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Sean Aylmer: be interesting because we know that the Reserve Bank wants
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Sean Aylmer: some of the heat to come out of the market.
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Stephen Koukoulas: Oh, indeed. And the deputy governor, I think we spoke
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Stephen Koukoulas: of this last week, Deputy Governor Michele Bullock mentioned that
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Stephen Koukoulas: one of the ways in which they’ll be confident that
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Stephen Koukoulas: inflation’s back to that 2 to 3% target range is
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Stephen Koukoulas: if wages growth is well contained. At the moment, the
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Stephen Koukoulas: RBA is a little concerned about the rate of wages
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Stephen Koukoulas: growth with the unemployment rate below 4%. And, in fact,
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Stephen Koukoulas: she was suggesting that we probably need an unemployment rate
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Stephen Koukoulas: around about four and half percent before we can be
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Stephen Koukoulas: sure that wages growth will not feed into inflation.
So
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Stephen Koukoulas: job ads, yes, in a sense, we need to see
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Stephen Koukoulas: them slowing down and I think they will. We do
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Stephen Koukoulas: know the economy is slowing more broadly. We saw the
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Stephen Koukoulas: Bureau of Stats job vacancy series last week down again,
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Stephen Koukoulas: so they’re down 10% from albeit an absolutely super strong
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Stephen Koukoulas: level. But the cards are falling into line that maybe,
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Stephen Koukoulas: just maybe we’re getting this turning point in the labor
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Stephen Koukoulas: market and some of these fears of unwelcome and unsustainable
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Stephen Koukoulas: increases in wages will not be there, simply because the
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Stephen Koukoulas: labor market’s starting to soften in line with the softening
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Stephen Koukoulas: in the economy more broadly.
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Sean Aylmer: Stephen, enjoy a very busy week.
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Stephen Koukoulas: It’ll be a great week, Sean. I can’t wait for
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Stephen Koukoulas: it. Thank you.
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Sean Aylmer: That’s economist Stephen Koukoulas, better known as The Kouk. You
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Sean Aylmer: can find him at thekouk. com and follow him on
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Sean Aylmer: Twitter using the handle thekouk. I’m Sean Aylmer, and this
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Sean Aylmer: is Fear and Greed, The Week Ahead.