1 00:00:08,039 --> 00:00:11,039 Sean Aylmer: Welcome to Fear and Greed, The Week Ahead. I'm Sean Aylmer, and as 2 00:00:11,039 --> 00:00:13,440 Sean Aylmer: always at this time on a Monday morning, I'm joined 3 00:00:13,440 --> 00:00:17,579 Sean Aylmer: by economist Stephen Koukoulas. You'll find him at thekouk. com, T- H- E- K- O- U- 4 00:00:17,579 --> 00:00:21,420 Sean Aylmer: K, thekouk. com, and on X using the handle TheKouk. 5 00:00:21,420 --> 00:00:22,500 Sean Aylmer: Stephen, good morning. 6 00:00:22,950 --> 00:00:25,590 Stephen Koukoulas: And good morning after a busy week last week, wasn't it? 7 00:00:25,590 --> 00:00:28,500 Sean Aylmer: It sure was. How did you think Michele Bullock went 8 00:00:28,559 --> 00:00:30,989 Sean Aylmer: at her first, or in fact, the first ever press 9 00:00:30,990 --> 00:00:33,870 Sean Aylmer: conference for a governor after a board meeting and obviously 10 00:00:33,870 --> 00:00:35,129 Sean Aylmer: the first one for Michele Bullock? 11 00:00:35,489 --> 00:00:37,650 Stephen Koukoulas: She did really well, and I think even she said a 12 00:00:37,650 --> 00:00:41,159 Stephen Koukoulas: bit of plain- speaking came through, and that was really 13 00:00:41,159 --> 00:00:43,920 Stephen Koukoulas: refreshing that, first of all, the decision to keep rates 14 00:00:43,920 --> 00:00:47,219 Stephen Koukoulas: steady, absolutely non- controversial. I don't think anybody was expecting 15 00:00:47,219 --> 00:00:50,309 Stephen Koukoulas: a move. But there was a debate about, well, is 16 00:00:50,309 --> 00:00:52,379 Stephen Koukoulas: the next move up or down? When will it occur? 17 00:00:52,379 --> 00:00:55,230 Stephen Koukoulas: Did they make a mistake in November with the rate 18 00:00:55,230 --> 00:00:56,970 Stephen Koukoulas: hike, which sort of came out of left field in 19 00:00:56,970 --> 00:01:00,990 Stephen Koukoulas: a sense? But she handled it well. The questions, as 20 00:01:00,990 --> 00:01:03,090 Stephen Koukoulas: always in these things, they're of mixed quality, but they 21 00:01:03,090 --> 00:01:06,390 Stephen Koukoulas: generally got to the key points. And the governor did 22 00:01:06,480 --> 00:01:10,319 Stephen Koukoulas: a really good job just even with a tiny dose 23 00:01:10,319 --> 00:01:13,260 Stephen Koukoulas: of humor attached to how she was answering these questions, 24 00:01:13,260 --> 00:01:16,770 Stephen Koukoulas: because they're important decisions. We know the economy's slowing down, 25 00:01:17,069 --> 00:01:19,080 Stephen Koukoulas: we know that the inflation rates falling, and that's where 26 00:01:19,080 --> 00:01:22,709 Stephen Koukoulas: the updated forecast came through, and she just simply articulated, 27 00:01:22,709 --> 00:01:25,709 Stephen Koukoulas: well, like all mere mortals looking at the data as 28 00:01:25,709 --> 00:01:28,289 Stephen Koukoulas: it comes out, do we need to hike or probably 29 00:01:28,289 --> 00:01:30,690 Stephen Koukoulas: not. Do we need to cut? Well, not yet because 30 00:01:30,690 --> 00:01:33,090 Stephen Koukoulas: we just want to be sure that that inflation momentum 31 00:01:33,090 --> 00:01:38,099 Stephen Koukoulas: has been extended into 2024. So she did a good 32 00:01:38,099 --> 00:01:38,910 Stephen Koukoulas: job. Very good job. 33 00:01:39,630 --> 00:01:42,719 Sean Aylmer: What about the forecast, Reserve Bank forecast? They certainly have 34 00:01:42,719 --> 00:01:46,650 Sean Aylmer: changed their view on inflation. They're much more sanguine about it. 35 00:01:47,069 --> 00:01:49,800 Stephen Koukoulas: Oh, yes, that was the killer point, and that's why, 36 00:01:50,280 --> 00:01:52,620 Stephen Koukoulas: as we sit here on Monday morning, the markets are 37 00:01:52,620 --> 00:01:56,429 Stephen Koukoulas: still pricing in interest rate cuts. Not yet, but they've 38 00:01:56,429 --> 00:01:58,710 Stephen Koukoulas: still got, if you look at the yield curve going 39 00:01:58,710 --> 00:02:02,160 Stephen Koukoulas: out to the next 12 to 18 to 24 months, there 40 00:02:02,160 --> 00:02:04,709 Stephen Koukoulas: are rate cuts in there. And the fundamental reason, of 41 00:02:04,709 --> 00:02:07,470 Stephen Koukoulas: course, is that inflation is falling. One of the simple, 42 00:02:07,470 --> 00:02:09,720 Stephen Koukoulas: simple rules of thumbs in economics that I've learned over 43 00:02:09,720 --> 00:02:12,180 Stephen Koukoulas: all those decades is that if you want to know 44 00:02:12,180 --> 00:02:15,480 Stephen Koukoulas: where interest rates are going, look at the momentum in inflation. If inflation is 45 00:02:15,480 --> 00:02:18,029 Stephen Koukoulas: going up, interest rates are probably going up; inflation is 46 00:02:18,030 --> 00:02:20,700 Stephen Koukoulas: coming down, interest rates will probably come down. And if 47 00:02:20,700 --> 00:02:23,520 Stephen Koukoulas: inflation is sort of broadly in the middle of the target, they're going to be on hold. 48 00:02:23,520 --> 00:02:26,610 Stephen Koukoulas: And we've got this clear deceleration in inflation. And the 49 00:02:26,610 --> 00:02:30,060 Stephen Koukoulas: RBA's own forecast, as you were touching on, given we 50 00:02:30,060 --> 00:02:32,849 Stephen Koukoulas: had the downside surprise, I suppose we call it for 51 00:02:32,849 --> 00:02:36,660 Stephen Koukoulas: the December quarter numbers, a week or two back, forced 52 00:02:36,660 --> 00:02:40,949 Stephen Koukoulas: them to revise down their profile for inflation. So they've 53 00:02:40,949 --> 00:02:43,019 Stephen Koukoulas: got inflation returning to the top end of the target 54 00:02:43,110 --> 00:02:45,630 Stephen Koukoulas: in about 12 months, and then gradually drifting a little 55 00:02:45,630 --> 00:02:46,530 Stephen Koukoulas: bit lower after that. 56 00:02:47,220 --> 00:02:49,139 Sean Aylmer: Okay, so the other side of the equation with the Reserve 57 00:02:49,139 --> 00:02:51,960 Sean Aylmer: Bank, they've got price stability and full employment are their 58 00:02:51,990 --> 00:02:55,889 Sean Aylmer: goals under their charter. So employment is the thing that 59 00:02:55,919 --> 00:02:58,500 Sean Aylmer: Michele Bullock spoke a bit about last week. It's also 60 00:02:58,500 --> 00:03:00,510 Sean Aylmer: an important figure out this week as we're getting the 61 00:03:00,510 --> 00:03:03,810 Sean Aylmer: unemployment numbers for January, is that right? 62 00:03:03,810 --> 00:03:06,840 Stephen Koukoulas: Yes, for January, yes. Yeah, and they're the critical issue. 63 00:03:07,260 --> 00:03:10,410 Stephen Koukoulas: If we'd have... I like to bore things down in 64 00:03:10,410 --> 00:03:12,900 Stephen Koukoulas: economics to try to keep it simple. Inflation we've just 65 00:03:12,900 --> 00:03:15,989 Stephen Koukoulas: discussed, absolutely vital to the interest rate outlook. But as 66 00:03:15,990 --> 00:03:19,410 Stephen Koukoulas: you said, the new mandate of the new RBA is to 67 00:03:19,410 --> 00:03:22,889 Stephen Koukoulas: put a greater emphasis on the labor market. On Thursday, 68 00:03:22,889 --> 00:03:27,419 Stephen Koukoulas: we've seeing the January labor force numbers, and as the 69 00:03:27,419 --> 00:03:30,089 Stephen Koukoulas: Bureau of Statistics have said, I don't want to get too 70 00:03:30,179 --> 00:03:34,739 Stephen Koukoulas: technical and funny here, but the seasonal adjustment between December 71 00:03:34,740 --> 00:03:37,890 Stephen Koukoulas: and January and even November with the bring forward of 72 00:03:37,890 --> 00:03:40,980 Stephen Koukoulas: the Black Friday sales impacting retail employment and all those 73 00:03:40,980 --> 00:03:43,290 Stephen Koukoulas: other things has really made it a choppy number. And 74 00:03:43,290 --> 00:03:47,279 Stephen Koukoulas: you might recall last month in December, we saw employment 75 00:03:47,280 --> 00:03:52,229 Stephen Koukoulas: falling 65 thousand. So that's probably partly the trend, but 76 00:03:52,230 --> 00:03:54,449 Stephen Koukoulas: also partly just statistical noise. So I think we're looking 77 00:03:54,449 --> 00:03:56,790 Stephen Koukoulas: for a bit of a rebound, and I think when 78 00:03:56,790 --> 00:03:59,400 Stephen Koukoulas: we try to analyze and the Reserve Bank analyze what's happening to 79 00:03:59,400 --> 00:04:02,130 Stephen Koukoulas: those numbers, they'll put some sort of trend through there, 80 00:04:02,429 --> 00:04:05,639 Stephen Koukoulas: probably still detect that the labor market's slowing down. The 81 00:04:05,639 --> 00:04:08,369 Stephen Koukoulas: big question also will be, will we see the unemployment 82 00:04:08,370 --> 00:04:11,219 Stephen Koukoulas: rate with a four handle on it for, well, best 83 00:04:11,219 --> 00:04:13,619 Stephen Koukoulas: part of 18 months now, it's been three point something. 84 00:04:14,160 --> 00:04:17,640 Stephen Koukoulas: Last month was 3. 9, so obviously we're really close 85 00:04:17,640 --> 00:04:22,979 Stephen Koukoulas: to 4%. That'll be a really important signal to just confirm 86 00:04:23,219 --> 00:04:26,820 Stephen Koukoulas: interest rates are not going up, and that speculation about 87 00:04:26,880 --> 00:04:28,410 Stephen Koukoulas: when they come down will continue. 88 00:04:29,129 --> 00:04:31,980 Sean Aylmer: Something that Stephen Halmarick, the chief economist at Commonwealth Bank 89 00:04:32,040 --> 00:04:34,050 Sean Aylmer: last week, I was listening to him and he made 90 00:04:34,050 --> 00:04:36,779 Sean Aylmer: a really interesting point. You can get a higher unemployment 91 00:04:36,779 --> 00:04:40,710 Sean Aylmer: rate without anyone in the economy losing a job; it's 92 00:04:40,710 --> 00:04:43,319 Sean Aylmer: just that more people enter the workforce and we sort 93 00:04:43,320 --> 00:04:46,739 Sean Aylmer: of forget that. A couple of things here I want 94 00:04:46,740 --> 00:04:49,350 Sean Aylmer: to say is, so it's just that idea that people 95 00:04:49,350 --> 00:04:51,060 Sean Aylmer: don't have to lose jobs for the unemployment rate to 96 00:04:51,060 --> 00:04:56,310 Sean Aylmer: rise, but also even at 4.1, 4. 2, 4. 3, historically, 97 00:04:56,520 --> 00:04:57,659 Sean Aylmer: that ain't a bad result. 98 00:04:57,900 --> 00:05:01,080 Stephen Koukoulas: Oh, that's a terrific result. And in fact, pre- pandemic 99 00:05:01,080 --> 00:05:03,570 Stephen Koukoulas: even, when we were sort of analyzing the economy and 100 00:05:03,779 --> 00:05:06,570 Stephen Koukoulas: the unemployment rate was hovering around 5%, you might recall 101 00:05:06,570 --> 00:05:10,650 Stephen Koukoulas: in 2018, 2019, well, that's not bad. If we get it 102 00:05:10,650 --> 00:05:13,290 Stephen Koukoulas: to four and three- quarters, we'll be doing really well. 103 00:05:13,410 --> 00:05:14,730 Stephen Koukoulas: Now, here we're saying, " Well, if it goes up to four and 104 00:05:15,089 --> 00:05:17,339 Stephen Koukoulas: a half, we've got a real problem." But I think that 105 00:05:17,520 --> 00:05:21,240 Stephen Koukoulas: that point of a bigger economy is a really important 106 00:05:21,240 --> 00:05:23,878 Stephen Koukoulas: one. That immigration inflow that we've often spoken about in 107 00:05:23,879 --> 00:05:26,219 Stephen Koukoulas: terms of housing and these sorts of issues, yes, it 108 00:05:26,220 --> 00:05:29,279 Stephen Koukoulas: does help the labor market issues as well. In addition 109 00:05:29,279 --> 00:05:31,589 Stephen Koukoulas: to demand in the economy, as all these people come 110 00:05:31,589 --> 00:05:33,539 Stephen Koukoulas: in and buy houses and rent houses and all this 111 00:05:33,540 --> 00:05:36,779 Stephen Koukoulas: sort of stuff, they actually supply their labor. They want 112 00:05:36,779 --> 00:05:39,359 Stephen Koukoulas: to work, they need to work to get an income. 113 00:05:39,599 --> 00:05:42,960 Stephen Koukoulas: So you actually get the employment edging higher in a 114 00:05:43,680 --> 00:05:47,460 Stephen Koukoulas: reasonably growing economy, but the unemployment rate can edge up. But 115 00:05:47,550 --> 00:05:49,349 Stephen Koukoulas: the unemployment rate's a percentage of the workforce. So if you've got 116 00:05:49,350 --> 00:05:52,260 Stephen Koukoulas: a bigger workforce, you get unemployment going up at a 117 00:05:52,260 --> 00:05:55,349 Stephen Koukoulas: time when you've got even okay levels of job creation. 118 00:05:55,349 --> 00:05:57,029 Stephen Koukoulas: So yeah, it'll be interesting sort of thing, but I 119 00:05:57,029 --> 00:06:00,150 Stephen Koukoulas: think the critical point will be the unemployment rate, what 120 00:06:00,150 --> 00:06:03,719 Stephen Koukoulas: proportion of the labor force is unemployed, and even the 121 00:06:03,719 --> 00:06:08,518 Stephen Koukoulas: underemployment rate is important to people who have a job but who want to work more hours because they 122 00:06:08,520 --> 00:06:11,009 Stephen Koukoulas: need more hours to earn more money to pay the bills. 123 00:06:11,339 --> 00:06:14,639 Sean Aylmer: One final thing, Stephen, just quickly, we've got National Australia 124 00:06:14,639 --> 00:06:18,659 Sean Aylmer: Bank business conditions and confidence. We've got Westpac consumer sentiment 125 00:06:18,660 --> 00:06:21,120 Sean Aylmer: this week. What do you expect? Any changes from them? 126 00:06:21,990 --> 00:06:25,980 Stephen Koukoulas: Consumers are feeling a little less gloomy. I'm wondering whether 127 00:06:25,980 --> 00:06:28,650 Stephen Koukoulas: the talk of rates on hold and possibility of rate 128 00:06:28,650 --> 00:06:31,738 Stephen Koukoulas: cuts, the fact that wages growth has been lifting a 129 00:06:31,740 --> 00:06:33,839 Stephen Koukoulas: little bit and inflation is coming down, so helping cost 130 00:06:33,839 --> 00:06:36,419 Stephen Koukoulas: of living pressures, we'll see the consumer for the first 131 00:06:36,450 --> 00:06:39,419 Stephen Koukoulas: time in a long time being just a smidge more 132 00:06:39,420 --> 00:06:44,279 Stephen Koukoulas: optimistic. Businesses have been more resilient through this whole slowdown 133 00:06:44,279 --> 00:06:47,099 Stephen Koukoulas: that we saw in 2023, but alas, it's catching up 134 00:06:47,099 --> 00:06:50,549 Stephen Koukoulas: on them. So we've seen a trend weakening in business 135 00:06:50,549 --> 00:06:53,460 Stephen Koukoulas: conditions. Again, it's still way more optimistic than consumers. So 136 00:06:53,699 --> 00:06:56,099 Stephen Koukoulas: we'll be watching that lab survey for clues on how 137 00:06:56,100 --> 00:06:59,339 Stephen Koukoulas: business is going. And importantly, from the subcomponents of the 138 00:06:59,339 --> 00:07:03,928 Stephen Koukoulas: survey, what's happening to employment intentions, profitability, there's all these 139 00:07:03,928 --> 00:07:06,628 Stephen Koukoulas: questions that get asked as well, which actually add a 140 00:07:06,630 --> 00:07:09,389 Stephen Koukoulas: lot of flesh to how the business sector is going. 141 00:07:09,389 --> 00:07:11,789 Stephen Koukoulas: So yep, labor force is the big one, but we'll 142 00:07:11,789 --> 00:07:14,280 Stephen Koukoulas: be watching the consumer and the business sentiment numbers really 143 00:07:14,280 --> 00:07:15,060 Stephen Koukoulas: closely as well. 144 00:07:15,630 --> 00:07:16,650 Sean Aylmer: Enjoy your week, Stephen. 145 00:07:16,950 --> 00:07:17,340 Stephen Koukoulas: Thank you, Sean. 146 00:07:18,060 --> 00:07:20,250 Sean Aylmer: That was economist Stephen Koukoulas, better known as The Kouk. 147 00:07:20,250 --> 00:07:22,290 Sean Aylmer: You can find him at thekouk. com and then follow 148 00:07:22,290 --> 00:07:25,049 Sean Aylmer: him on X using the handle TheKouk. I'm Sean Aylmer 149 00:07:25,049 --> 00:07:27,480 Sean Aylmer: and this is Fear and Greed, The Week Ahead.