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
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Sean Aylmer: Aylmer, and as always, I’m joined by economist Stephen Koukoulas.
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Sean Aylmer: You’ll find him at thekouk. com and on Twitter using
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Sean Aylmer: the handle TheKouk. Stephen, good morning.
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Stephen Koukoulas: And a very good morning to you, Sean.
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Sean Aylmer: Massive week coming up. Before we get that, we better
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Sean Aylmer: have a quick check in on credit and retail sales
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Sean Aylmer: and building approvals and stuff like that. Last week, I
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Sean Aylmer: mean, I suppose actually the big news last week, really
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Sean Aylmer: was the US Fed decision.
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Stephen Koukoulas: It was, and that sparked a rally in stocks, that
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Stephen Koukoulas: sparked a rally in the bond market. The bond market, which had
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Stephen Koukoulas: been absolutely hammered for the last couple of months, took
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Stephen Koukoulas: relief from the fact, not so much that they were
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Stephen Koukoulas: on hold, everybody thought that they weren’t going to be
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Stephen Koukoulas: adjusting interest rates at the meeting, but the chairperson of
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Stephen Koukoulas: the Federal Reserve Jerome Powell, came out and while he
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Stephen Koukoulas: said that there’s still a possibility of a rate hike,
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Stephen Koukoulas: it was seen to be quite dovish. And given the
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Stephen Koukoulas: extent of the selloff in the bond market, given that
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Stephen Koukoulas: equities had been tracking sideways to down for some period
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Stephen Koukoulas: of time, there was this proverbial relief rally and we
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Stephen Koukoulas: saw bond yields come back down. We saw the stock
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Stephen Koukoulas: market have a couple of powerful days as well, which
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Stephen Koukoulas: was good news I suppose. But we also had the
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Stephen Koukoulas: likes of the ECB, the European Central Bank, the Bank of England, all
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Stephen Koukoulas: on hold as well. So we’ve got this growing probability
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Stephen Koukoulas: and quite a high probability the rate hiking cycle globally
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Stephen Koukoulas: in general terms, it’s reaching an end.
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Sean Aylmer: That would be exciting. We’ve got a big week coming
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Sean Aylmer: up, so I want to get onto that, but just
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Sean Aylmer: the local data last week, was there anything of particular interest?
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Stephen Koukoulas: The local data? Yes, retail sales, a touch stronger than
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Stephen Koukoulas: expected, and it was linked to warmer weather, so people
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Stephen Koukoulas: checked their wardrobe and found out that their old clothes
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Stephen Koukoulas: either didn’t fit or were so much out of fashion that
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Stephen Koukoulas: we had a bit of an uptick in department store
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Stephen Koukoulas: sales. Not a terribly strong number, but it was just
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Stephen Koukoulas: a little bit better than the market was really assuming.
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Stephen Koukoulas: The credit numbers, again, a touch stronger, but mainly it
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Stephen Koukoulas: was business credit. So it’s in line with the business
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Stephen Koukoulas: sector ramping up some of its CapEx, which is a
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Stephen Koukoulas: theme that we’ve spoken about in the past, that one
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Stephen Koukoulas: of the reasons the economy is holding up reasonably well
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Stephen Koukoulas: in Australia is that businesses are investing and they’re buying
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Stephen Koukoulas: machinery and equipment. And that was showing up in the
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Stephen Koukoulas: international goods trade balance, which saw a much narrower surplus,
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Stephen Koukoulas: down to about $ 6 billion down from 9 billion, and
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Stephen Koukoulas: it was all due to imports getting higher, imports of
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Stephen Koukoulas: machinery and equipment. Which dovetails perfectly into this scenario where
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Stephen Koukoulas: the CapEx side of the economy, private sector business investment,
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Stephen Koukoulas: is doing okay.
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Sean Aylmer: We like that. Let’s move on. Well, a couple of
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Sean Aylmer: big things tomorrow, obviously the Reserve Bank, but who are
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Sean Aylmer: you going for in the Melbourne Cup?
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Stephen Koukoulas: Melbourne Cup, Gold Trip,
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Sean Aylmer: Ooh. Two in a row, you reckon?
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Stephen Koukoulas: Two in a row. It’s just a fabulous horse that
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Stephen Koukoulas: ran well in the wonderful Cox Plate. So Gold Trip’s
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Stephen Koukoulas: it, and I’m just looking through some of the other
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Stephen Koukoulas: Maher Eustace horses. I’ve got a sneaking suspicion that tomorrow
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Stephen Koukoulas: they may get close to training the trifecta, which would
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Stephen Koukoulas: be a phenomenal thing for those absolute wonderful horse whisperers. Yeah.
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Sean Aylmer: We digress somewhat. We’ve also got a Reserve Bank decision tomorrow.
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Stephen Koukoulas: Oh, that’s right. We do too. Yes. I’ve almost forgotten
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Stephen Koukoulas: about that. And look, that’s a fascinating one because I
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Stephen Koukoulas: think on the last survey that I saw from Bloomberg,
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Stephen Koukoulas: 33 out of 35 respondents to the survey thought that
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Stephen Koukoulas: the RBA would hike 25 basis points. There were two
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Stephen Koukoulas: sort of stragglers who thought probably possibly no change, but
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Stephen Koukoulas: the curious thing through the course of the week after
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Stephen Koukoulas: that CPI result 10 days ago or so, which sort
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Stephen Koukoulas: of sparked that rate hiking forecast frenzy, if we can
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Stephen Koukoulas: call it that, is that the probability just got scaled
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Stephen Koukoulas: back a little bit. So for tomorrow it’s about a
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Stephen Koukoulas: 60/40, approximately. 60/ 40 proposition that they’ll hike. So it’s by
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Stephen Koukoulas: no means that (inaudible) certainty that usually we go
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Stephen Koukoulas: into RBA meetings, oh, they’re definitely going to hold or
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Stephen Koukoulas: they’re definitely going to hike. This one is it’s likely,
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Stephen Koukoulas: but by no means certain.
So it’s an absolutely fascinating
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Stephen Koukoulas: one because the Reserve Bank, as we just mentioned, that
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Stephen Koukoulas: other central banks are on hold and have been on
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Stephen Koukoulas: hold for a few months, the economy here is slowing,
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Stephen Koukoulas: and even though that inflation number was a little higher
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Stephen Koukoulas: than expected, they could hold. They might just hold knowing and put
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Stephen Koukoulas: out the commentary that yes, the rest of the world
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Stephen Koukoulas: is seeing lower inflation, we’re seeing lower inflation, we’re on
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Stephen Koukoulas: track to get inflation back to that two to three
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Stephen Koukoulas: target range. Labor markets starting to soften a little bit
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Stephen Koukoulas: and they, oh gee, it’s a tough call. It’s genuinely
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Stephen Koukoulas: line ball from the chatter that’s going around. The board
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Stephen Koukoulas: papers, the papers that the reserve bank present and give
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Stephen Koukoulas: to the board members, well, at the end of last
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Stephen Koukoulas: week, had a recommendation of either on hold or a 25 point
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Stephen Koukoulas: hike. Of course, that’s what they’re going to be discussing.
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Stephen Koukoulas: The weight of the board, tough call, a really tough
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Stephen Koukoulas: call this one.
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Sean Aylmer: Damned if they do, because rates going up, damned if
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Sean Aylmer: they don’t. Because all those economists out there will be
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Sean Aylmer: upset that they saying that they haven’t signaled what they’re
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Sean Aylmer: going to do.
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Stephen Koukoulas: Correct. It’s one of those ones, well, there’s a little
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Stephen Koukoulas: bit of a fanciful call that given that the cash rate
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Stephen Koukoulas: is 4. 10%, so not in those nice quarter percentage
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Stephen Koukoulas: point increments, they might hike 15. You heard it here
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Stephen Koukoulas: first. I wouldn’t put my money on that. I’ll put
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Stephen Koukoulas: it on Gold Trip instead.
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Sean Aylmer: I’ll put it on Gold Trip instead.
The other really interesting thing this week of course
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Sean Aylmer: is that the Reserve Bank’s going to release its statement
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Sean Aylmer: on monetary policy. It’s going to have its updated forecast
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Sean Aylmer: for inflation and unemployment. Stephen.
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Stephen Koukoulas: Yes they do. So on Friday this week, they put
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Stephen Koukoulas: out their detailed analysis of the economy. They usually use
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Stephen Koukoulas: that as an opportunity to really put a lot of
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Stephen Koukoulas: flesh on the economic debate, international economy, financial conditions, inflation
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Stephen Koukoulas: pressures and the like. So the critical thing for the
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Stephen Koukoulas: markets will be, particularly after the decision tomorrow, hike or
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Stephen Koukoulas: no hike, will be what’s its forecast for inflation? Have
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Stephen Koukoulas: they dramatically changed those from the August statement on monetary
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Stephen Koukoulas: policy? What’s the outlook for unemployment? Is it still expecting
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Stephen Koukoulas: unemployment to hit 4.5%? So we’ll see not only the
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Stephen Koukoulas: detailed analysis of the minute details of the economy, but
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Stephen Koukoulas: the hard and fast forecast. What are they actually saying
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Stephen Koukoulas: is their view that for 2024 and 2025, where the economy will
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Stephen Koukoulas: go? So statement on monetary policy is always a good
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Stephen Koukoulas: read. It’s always about 60, 70 pages of stuff for us
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Stephen Koukoulas: economists to digest.
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Sean Aylmer: Stephen, have a great week and good luck on Gold
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Sean Aylmer: Trip tomorrow.
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Stephen Koukoulas: I’ll be cheering it home and I’ll be cheering home
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Stephen Koukoulas: the rates on hold decision from the RBA too.
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Sean Aylmer: We all would cheer that one home. That was economist
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Sean Aylmer: Stephen Koukoulas, better known as The Kouk. You can find
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Sean Aylmer: him at thekouk. com and follow him on Twitter using
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Sean Aylmer: the handle TheKouk. I’m Sean Aylmer and this is Fear and Greed, The
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Sean Aylmer: Week Ahead.