The Reserve Bank is risking a recession

1. The Reserve Bank is risking a recession

2. Why falling equity markets make sense

3. Can selling its cheap plonk save Treasury Wine?

4. The Olympics are great to watch, but not the ads

Until late last year, Luci Ellis was Assistant Governor and Chief Economist at the Reserve Bank of Australia. She's now Chief Economist at Westpac, and shares her unique insight into why the RBA board won't be cutting rates anytime soon.

Listener Duncan asks:

"Why does government policy always seem to be at loggerheads with Productivity Commission guidance?"

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Thanks for reading my opinions on the week's biggest stories.

- Sean Aylmer

The Reserve Bank of Australia is starting to look overly stubborn, a bit like it looked before lifting interest rates in mid-2022. This week Governor Michele Bullock made it clear that cutting interest rates isn't anywhere on the horizon. At the central bank's board meeting on Monday and Tuesday, the assembled only discussed two options - lifting rates, or keeping them on hold for the foreseeable future. Inflation is falling but not fast enough. The central bank is worried about "aggregate demand" being too strong. It's hard to know what that means but maybe it's code for governments are spending too much. The biggest criticism of the RBA post-COVID was that it took too long to act. In 2021 and early 2022, then-Governor Phil Lowe predicted rates wouldn't rise until 2024, lulling people into a false sense of security. The first hike was in May 2022, and the tightening cycle was the sharpest on record. The RBA stubbornly kept rates too low and lost control of inflation. That stubbornness might be playing out again. The RBA this week made it clear it does not want to cut rates. Given the precarious nature of economic growth, that determination could send the economy into recession. If the Reserve Bank doesn't cut rates this year, then a recession is more than likely.

The convulsions in global equity markets over the past week are rational. The ASX200 lost 5.5 per cent in two sessions, Wall Street tumbled, and the Japanese market fell 13 per cent one day only to rebound ten per cent the next. (Okay, maybe the Japanese market hasn't been so rational). The reason for the moves: over recent months, investors had convinced themselves that the US economy isn't going into recession. Then late last week measures of the manufacturing and services sector, and the labour market, were uniformly weak. Investors are great at picking out the bits of economic data that suit their argument, but when everything looks bad, everyone has to re-assess. The likelihood of a recession in the US went from almost nothing, to maybe around 30 per cent. Equity markets repriced to reflect that. They were near record levels when the sell-off began. Now both Wall Street and the ASX are trading around where they've been for the past four or five months. The good news is that it's unlikely that we are in the middle of a crash. It's more of a readjustment. Briefly on the Japanese market, a couple of things happening there. Interest rates are rising, and could continue to do so, for the first time in 25 years. Bonds are looking more attractive relative to equities. Related to this is the unwinding of something known as the "carry trade". For years, investors have been borrowing Japanese money, taking advantage of low rates, to invest elsewhere. Lifting rates in Japan changes the economics of the carry trade.  

If you Google "monopolist", one of the first results is the US Federal Trade Commission which says the word means a firm with significant and durable market power. It says that generally a company needs to have at least 50 per cent market share to be considered a monopoly and it's illegal for a single firm to unreasonably restrain competition by creating or maintaining monopoly power. So where does Google, owned by Alphabet, fit into this definition? According to a judge in the US District Court, Alphabet's Google is a monopolist, and the ubiquitous search engine has been illegally exploiting its dominance to squash and stifle innovation in the sector. It's a very, very big win for the US Justice Department, which has been trying to break Google's hold on search for years. On mobiles, 95 per cent of search is via Google. On laptops, it's 89 per cent. (I had to google "other search engines" to remember the other options.) "Google" has gone from a noun to a verb. Today search results reflect what Google wants us to see. If the ruling sticks - and it is being appealed - Alphabet will have to let other players into the search world. Let's hope that happens, with AI just around the corner. 

The coverage of the Olympics on Channel Nine and its streaming service, Stan, has been extensive and complete. The Australians have done well, with female athletes outperforming the males, while individuals have outperformed teams. (And while I'm on it, I don't like a medal tally that is based on how many golds are won. I think how many medals are won, a.k.a. the US system, is better.) What I have learnt from the Olympic Games is that I won't be watching many free-to-air broadcasts again. Why? The advertisements are intrusive and irritating. It is remarkable how quickly we have gotten used to paying money each month to stream, and not watch ads. When you are forced to watch advertisements, it jars. However, what mainstream media does much better than streaming is curation. So if there are many events going on and you want to keep across them, you end up on Nine's main channel. And you see all the ads. I hope Nine makes a motza out of the Olympics. But the Games have reinforced why the free-to-air model is going the way of the dodo.

Treasury Wine Estates' share price has been mostly flat since the beginning of COVID. It peaked in the post-pandemic consumer boom and fell when prohibitive tariffs were placed on Aussie wine imports to China. But generally this is a stock that has had several reboots over recent years, to achieve not a lot. This week's structural shift is to offload the cheaper brands - Wolf Blass, Lindeman's, Yellowglen and Blossom Hill. Treasury wants to move away from the mass market, $10 bottles of wine. Instead it will concentrate on its premium brands in Australia and the US, which includes the diamond that is Penfolds. The argument is that while people are consuming less wine, the stuff they are buying tends to be more expensive. Wine production last year was 23.7 billion litres globally, according to Wine Australia. It was the weakest output in 60 years. Yet consumption was even lower at 22.1 billion litres. That was a near 30 year low. Going niche, as Treasury is, intuitively makes sense, but it is a very tough market to compete in.  

5. Google really is a monopolist

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AND ONE LAST THING...

This week we talked about Woodside's $30 billion gas project off the WA coast being rejected because of the risk to - among other things - the pygmy blue whale. That led to a conversation about this news report from 1970, when US officials used too much dynamite to blow up a whale carcass on a beach. It's not exactly business news, but it's a classic.