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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, 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, X, I think it is, using

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Sean Aylmer: the handle TheKouk. Stephen, good morning.

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Stephen Koukoulas: And a very good morning, Sean.

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Sean Aylmer: Now, are you an X fan rather than Twitter?

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Stephen Koukoulas: An X fan? I don’t like the name change. I’ve

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Stephen Koukoulas: got so used to the old blue bird and all the rest of it. Yeah. So I

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Stephen Koukoulas: hope Mr. Musk knows what he’s doing there and that

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Stephen Koukoulas: it still becomes or remains a way to see different

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Stephen Koukoulas: things, exchange a few views and the like. It’s a

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Stephen Koukoulas: useful, for me anyway, a data source and just to put a

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Stephen Koukoulas: few arguments out there. So anyway, we’ll see what happens

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Stephen Koukoulas: with X. The X factor.

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Sean Aylmer: Now let’s get into it. Massive week coming up, the

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Sean Aylmer: Reserve Bank meets tomorrow, the Reserve Bank Board meets tomorrow,

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Sean Aylmer: but we can’t talk about that without mentioning what happened

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Sean Aylmer: last week, which was the inflation figures in Australia for

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Sean Aylmer: the June quarter, not quite as hot as we thought

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Sean Aylmer: they might be.

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Stephen Koukoulas: Yes. It was welcome news and not only from what

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Stephen Koukoulas: the market consensus was forecasting for the inflation rate but

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Stephen Koukoulas: also from what the Reserve Bank had been putting in

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Stephen Koukoulas: their recent statements on monetary policy where, of course, they

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Stephen Koukoulas: outlined a whole range of their forecast for GDP, wages,

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Stephen Koukoulas: unemployment, and, of course, inflation. So the fact that we

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Stephen Koukoulas: had the headline figure in angle terms coming in at

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Stephen Koukoulas: 6%, quarterly was 0. 8, the lowest in about three

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Stephen Koukoulas: years, so that was encouraging to see. But even the

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Stephen Koukoulas: trimmed mean, which is sort of the underlying measure which

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Stephen Koukoulas: excludes a range of volatile items, it came in at 0.

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Stephen Koukoulas: 9 for the quarter, 5. 9 for the year.
So

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Stephen Koukoulas: look, inflation’s still high, but we’ve got to be careful

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Stephen Koukoulas: not to double count the very high inflation numbers in

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Stephen Koukoulas: the second half of 2022, which are still in the year- on-

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Stephen Koukoulas: year run rate. Instead, focus on the more recent trends,

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Stephen Koukoulas: which are clearly down. I think that’ll give the Reserve

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Stephen Koukoulas: Bank Board tomorrow a degree of pause for thought, remembering

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Stephen Koukoulas: that they’ve paused a few times so far this year.

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Stephen Koukoulas: I think the case for another pause is very strong

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Stephen Koukoulas: now, partly because that inflation number was just so much

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Stephen Koukoulas: lower than they were expecting, put it that way.

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Sean Aylmer: It’s kind of hard for the Reserve Bank, given what

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Sean Aylmer: they said four weeks ago about wanting to see the

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Sean Aylmer: data before making any decision, to then see soft data.

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Sean Aylmer: I suppose you can argue that the labor market’s still hot, to be

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Sean Aylmer: fair, but it kind of puts them in a bit

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Sean Aylmer: of a difficult position if they want to lift rates.

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Stephen Koukoulas: If they want to lift rates, yes. On the labor

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Stephen Koukoulas: force numbers, as you quite rightly pointed out, they came out a couple

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Stephen Koukoulas: of weeks ago and they were really strong, three and

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Stephen Koukoulas: a half unemployment rate still, despite the fact that the economy’s

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Stephen Koukoulas: slowing down. But on the inflation front, if they were

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Stephen Koukoulas: to put them up now, the sort of sales pitch or the vocalizing of

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Stephen Koukoulas: what they’re doing would be very difficult, I think, for

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Stephen Koukoulas: Dr. Lowe. And remembering that he’s only got a couple

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Stephen Koukoulas: of board meetings to go until he hands over to

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Stephen Koukoulas: Michele Bullock.
I know the Fed hiked last week, too,

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Stephen Koukoulas: to towards 5.5% for the Fed funds rate and the

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Stephen Koukoulas: like. But we’ve had pauses from other central banks coming

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Stephen Koukoulas: through loud and clear as inflation’s fallen. And given that

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Stephen Koukoulas: the Reserve Bank has really got an eye on inflation

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Stephen Koukoulas: and they’ve said, both Michele Bullock and Philip Lowe have

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Stephen Koukoulas: said, they do have more than just a casting eye

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Stephen Koukoulas: on the unemployment rate, and that ” narrow path,” to use

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Stephen Koukoulas: that quote, that they want to get the economy going

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Stephen Koukoulas: through, they don’t want to cause recession and unemployment to

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Stephen Koukoulas: spike prohibitively. They want to get the economy slowing, inflation down.

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Stephen Koukoulas: And maybe, just maybe they’ll tolerate inflation being a few

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Stephen Koukoulas: ticks higher for a few quarters longer if that means

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Stephen Koukoulas: that the unemployment rate can stay a little bit lower

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Stephen Koukoulas: than it might otherwise be.

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Sean Aylmer: We’ll find out more about what the Reserve Bank’s thinking

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Sean Aylmer: late in the week, too, because it puts out its

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Sean Aylmer: Statement on Monetary Policy.

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Stephen Koukoulas: Indeed, and that quarterly statement is something that all economists

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Stephen Koukoulas: and a whole bunch of other people look at, too.

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Stephen Koukoulas: It’s usually 60, 70 odd pages of really detailed analysis. They

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Stephen Koukoulas: usually pluck out a couple of really hot topics to

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Stephen Koukoulas: put in what they call their boxes, in between the

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Stephen Koukoulas: regular commentary on the economy. So what’s in there? I’m

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Stephen Koukoulas: not sure. We don’t know yet, but I would hazard

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Stephen Koukoulas: a guess it’ll be focused very much on the inflation

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Stephen Koukoulas: side.
But also, as I mentioned earlier, they put in

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Stephen Koukoulas: the comprehensive forecast for the economy, and what they say

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Stephen Koukoulas: about GDP, the unemployment rate and then wages and inflation

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Stephen Koukoulas: will be the benchmark for the next three months for

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Stephen Koukoulas: financial markets. So I dare say they’ll probably be revising

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Stephen Koukoulas: GDP down just a smidge. Not much. The growth performance

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Stephen Koukoulas: is slowing, as they thought. The unemployment rate’s probably on the trajectory

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Stephen Koukoulas: they thought. But as we mentioned before, that inflation number

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Stephen Koukoulas: last week was a good quarter to half a percentage

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Stephen Koukoulas: point below what they were assuming in February. So they’ll

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Stephen Koukoulas: probably have to tweak down the inflation forecast. And phew,

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Stephen Koukoulas: that’s a good thing. It’ll be nice to see some

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Stephen Koukoulas: good news on the inflation front.

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Sean Aylmer: And I mean in terms of how the economy’s going

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Sean Aylmer: in their forecasts, we have both retail trade and building

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Sean Aylmer: approval data out, too.

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Stephen Koukoulas: Two key indicators on GDP growth and spending and investment

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Stephen Koukoulas: and activity in the economy. We know retail sales have

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Stephen Koukoulas: been pretty weak, so we get both the monthly and the

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Stephen Koukoulas: quarterly number, which feeds into the GDP result for the

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Stephen Koukoulas: June quarter. A soft result, inevitably. We know that consumers

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Stephen Koukoulas: are hunkering down. Building approvals, gosh, they’re all over the

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Stephen Koukoulas: place. We had a plus 20% last month after many

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Stephen Koukoulas: months of decline, and that was because I think there

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Stephen Koukoulas: were two high- rise approval buildings in New South Wales or something.

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Sean Aylmer: That’s right. Yeah, yeah.

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Stephen Koukoulas: So they’re very, very choppy. So they’re probably going to be edging

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Stephen Koukoulas: down month on month. But, really, the trend for new

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Stephen Koukoulas: construction’s still pretty weak. We’ve got building companies going belly-

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Stephen Koukoulas: up, unfortunately, which is putting a bit more of a

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Stephen Koukoulas: constraint on the supply of new dwellings.

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Sean Aylmer: And it’s the end of the month, so we’ll get

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Sean Aylmer: CoreLogic Data’s information on house prices.

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Stephen Koukoulas: Indeed, and we know from the more high frequency daily

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Stephen Koukoulas: data that they put out, we’re going to see probably

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Stephen Koukoulas: a rise of around about 0. 8 or 0. 9% for

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Stephen Koukoulas: the month of July, which is another month, I think

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Stephen Koukoulas: we’re now up to five months in a row, where

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Stephen Koukoulas: house prices have been increasing. They’ve probably got from the

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Stephen Koukoulas: low point, which was recorded in February, a rise of

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Stephen Koukoulas: around about 4. 5%, give or take a few decimal points.

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Stephen Koukoulas: But the housing market’s doing reasonably well despite these high

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Stephen Koukoulas: interest rates. Good old supply and demand work. We’ve got

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Stephen Koukoulas: hot demand from a really strong level of immigration. Supply,

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Stephen Koukoulas: as we just mentioned, on the building approvals side is

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Stephen Koukoulas: pretty weak. We’re not building enough houses. And even with

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Stephen Koukoulas: interest rates where they are, the labor market’s strong, which

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Stephen Koukoulas: is allowing people to still borrow money, I suppose, and

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Stephen Koukoulas: bid that extra few bucks on a house. So we’ve

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Stephen Koukoulas: got this whole sort of mishmash of things impacting housing,

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Stephen Koukoulas: but for the moment it’s putting upward pressure on house prices.

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Sean Aylmer: Stephen, you’re going to have a great week, aren’t you,

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Sean Aylmer: with all this information coming out?

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Stephen Koukoulas: Oh, can’t wait. RBA weeks, and particularly when we’ve got a Statement

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Stephen Koukoulas: on Monetary Policy coming through, is just like a win- win

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Stephen Koukoulas: situation for me.

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Sean Aylmer: Enjoy it.

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Stephen Koukoulas: Thank you.

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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 this is Fear

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Sean Aylmer: and Greed – The Week Ahead.