1 00:00:05,640 --> 00:00:08,360 Speaker 1: Welcome to the Fear and Greed Business Interview. I'm sure, Aylmer. 2 00:00:08,480 --> 00:00:11,639 Speaker 1: It's been a very big twenty four hours the global economy. First, 3 00:00:11,720 --> 00:00:14,640 Speaker 1: the US Federal Reserve cut its key interest rate by 4 00:00:14,640 --> 00:00:17,759 Speaker 1: half a percentage point. Markets had been expecting a rate cut, 5 00:00:17,760 --> 00:00:20,280 Speaker 1: but fifty basis points was certainly at the larger end 6 00:00:20,280 --> 00:00:23,360 Speaker 1: of expectations. Then back home, the labor force numbers for 7 00:00:23,400 --> 00:00:25,800 Speaker 1: August saw the number of people with jobs increased by 8 00:00:25,840 --> 00:00:29,080 Speaker 1: forty seven five hundred, well above expectations, and all of 9 00:00:29,080 --> 00:00:32,080 Speaker 1: this coming just before the Reserve Bank Board meets next week. 10 00:00:32,280 --> 00:00:36,239 Speaker 1: Diana Messina is IMP's deputy chief economist. Deana Welcome back 11 00:00:36,240 --> 00:00:36,920 Speaker 1: to Fear and Greed. 12 00:00:37,400 --> 00:00:38,680 Speaker 2: Hey, Sean, nice to be back. 13 00:00:39,280 --> 00:00:43,560 Speaker 1: So let's start with the US fifty basis points. What's 14 00:00:43,560 --> 00:00:45,159 Speaker 1: that telling us about the US economy. 15 00:00:45,960 --> 00:00:48,840 Speaker 2: Well, Powell was very sort of clear that he didn't 16 00:00:48,880 --> 00:00:52,040 Speaker 2: want people to think that it was an emergency rate cut, 17 00:00:52,120 --> 00:00:54,440 Speaker 2: that fifty basis points was not going to be the 18 00:00:54,480 --> 00:00:58,920 Speaker 2: norm going forward in the meetings, that this was basically 19 00:00:59,160 --> 00:01:04,880 Speaker 2: what he called recalibration of the Fed's policy. So he 20 00:01:05,040 --> 00:01:07,680 Speaker 2: again reiterated that the Fed was not behind the curve. 21 00:01:07,720 --> 00:01:10,039 Speaker 2: They didn't think that they had to cut rates sooner. 22 00:01:10,080 --> 00:01:12,440 Speaker 2: It was more that they're trying to get interest rates 23 00:01:12,760 --> 00:01:16,720 Speaker 2: back to neutral. Most of the members agreed to the 24 00:01:16,720 --> 00:01:19,120 Speaker 2: fifty bas point cuts, at least they did in the meeting. 25 00:01:19,160 --> 00:01:21,319 Speaker 2: You know, they would have had a discussion beforehand, except 26 00:01:21,319 --> 00:01:24,080 Speaker 2: for one member thought that it was best to cut 27 00:01:24,080 --> 00:01:27,840 Speaker 2: by twenty five based points. So I think basically the 28 00:01:27,880 --> 00:01:31,480 Speaker 2: Fed is just indicating that the balance of risks are 29 00:01:31,520 --> 00:01:35,119 Speaker 2: now towards with a weaker labor market in particular, maybe 30 00:01:35,160 --> 00:01:37,080 Speaker 2: a weaker economy, although the data in the past week 31 00:01:37,160 --> 00:01:40,280 Speaker 2: certainly doesn't suggest that the US economy is softening that 32 00:01:40,400 --> 00:01:44,959 Speaker 2: much and that the risks towards higher inflation have completely 33 00:01:45,000 --> 00:01:48,560 Speaker 2: dissipated because the Feds aren't. Forecasts for inflation actually stepped 34 00:01:48,560 --> 00:01:50,080 Speaker 2: down from three months ago. 35 00:01:50,880 --> 00:01:54,960 Speaker 1: Okay. Jerom Powell, the chair of the Federal Reserve, made 36 00:01:54,960 --> 00:01:57,600 Speaker 1: it pretty clear that this won't be a one off cut. 37 00:01:57,640 --> 00:01:59,520 Speaker 1: They didn't he there will be more. 38 00:02:00,280 --> 00:02:02,720 Speaker 2: So when you look at the Fed's own projections of 39 00:02:02,720 --> 00:02:05,000 Speaker 2: interest rates, that doesn't mean that that's what will happen 40 00:02:05,000 --> 00:02:07,520 Speaker 2: to policy, but the Fed members all indicate where they 41 00:02:07,520 --> 00:02:09,560 Speaker 2: think interest rates will go. That's otherwise known as the 42 00:02:09,639 --> 00:02:13,639 Speaker 2: dot plot, that median dot is indicating two more rate 43 00:02:13,680 --> 00:02:15,680 Speaker 2: cuts before the end of this year, two more twenty 44 00:02:15,720 --> 00:02:18,000 Speaker 2: five basis point rate cuts before the end of this year. 45 00:02:18,040 --> 00:02:20,880 Speaker 2: So another rate cut at each of the next two 46 00:02:20,960 --> 00:02:25,400 Speaker 2: meetings before Christmas, and the market is pricing about thirty 47 00:02:25,400 --> 00:02:29,000 Speaker 2: five basis points of rate cuts, so another fifty from 48 00:02:29,040 --> 00:02:31,760 Speaker 2: here and then a twenty five and then basically one 49 00:02:31,840 --> 00:02:35,560 Speaker 2: rate cut every quarter next year. So we get the 50 00:02:35,560 --> 00:02:38,240 Speaker 2: cash rate, or the FED funds rate I should say, 51 00:02:38,320 --> 00:02:40,200 Speaker 2: to about three point four percent by the end of 52 00:02:40,200 --> 00:02:43,560 Speaker 2: twenty twenty five. So pretty I guess it's not a 53 00:02:43,600 --> 00:02:47,680 Speaker 2: significantly easy cutting cycle. I'd say it's quite modest, just 54 00:02:47,720 --> 00:02:50,800 Speaker 2: taking interest rates back to where the Fed sees neutral 55 00:02:50,800 --> 00:02:53,320 Speaker 2: to be, which it indicates is somewhere at around three percent. 56 00:02:54,160 --> 00:02:57,720 Speaker 1: Okay, notwithstanding everything you've just said, there are still fears 57 00:02:57,720 --> 00:03:01,359 Speaker 1: though that the US economy will go into recession. And 58 00:03:01,440 --> 00:03:04,000 Speaker 1: I know Jerome Powell made it very clear that you know, 59 00:03:04,040 --> 00:03:07,880 Speaker 1: it's no penic stations here, it's just the recalibration. But 60 00:03:07,919 --> 00:03:09,800 Speaker 1: there is a chance that the US will go into recession, 61 00:03:09,880 --> 00:03:10,320 Speaker 1: isn't there? 62 00:03:10,960 --> 00:03:13,799 Speaker 2: Well, there's always some chance, I suppose where where is 63 00:03:13,840 --> 00:03:16,480 Speaker 2: that balance of probabilities right now. I mean, even in 64 00:03:16,520 --> 00:03:18,640 Speaker 2: any sort of normal cycle, you'd say that the chance 65 00:03:18,680 --> 00:03:21,720 Speaker 2: of recession has to be somewhere at somewhere like ten percent. 66 00:03:21,800 --> 00:03:23,840 Speaker 2: I think a five to ten percent just based on 67 00:03:23,880 --> 00:03:26,840 Speaker 2: a normal economic cycle, particularly for a country like the US, 68 00:03:27,160 --> 00:03:30,600 Speaker 2: which has experienced more recession than compared to somewhere like Australia, 69 00:03:30,639 --> 00:03:33,239 Speaker 2: where we didn't have a recession for thirty years until 70 00:03:33,280 --> 00:03:36,040 Speaker 2: the pandemic, and even then that wasn't really a true recession. 71 00:03:36,120 --> 00:03:40,000 Speaker 2: I'd say, so the probability of a US recession is 72 00:03:40,040 --> 00:03:42,560 Speaker 2: probably somewhere between forty and fifty percent in the next 73 00:03:42,600 --> 00:03:46,080 Speaker 2: twelve months. I suppose the issues though, were that the 74 00:03:46,160 --> 00:03:49,520 Speaker 2: leading indicators, so things like the US Leading Index, things 75 00:03:49,640 --> 00:03:52,640 Speaker 2: like the two year minus atten your bond yield, or 76 00:03:52,680 --> 00:03:56,000 Speaker 2: the two year and the Fed funds rate interest rate, 77 00:03:56,280 --> 00:03:59,680 Speaker 2: they're all pointing to a much softer economy than the 78 00:03:59,760 --> 00:04:03,360 Speaker 2: high data indicate. So the hard data, the GDP figures, 79 00:04:03,560 --> 00:04:07,640 Speaker 2: industrial production, retail volumes, business investment, those are still all 80 00:04:07,640 --> 00:04:10,600 Speaker 2: holding up quite well. And then, of course the balancing 81 00:04:10,640 --> 00:04:13,520 Speaker 2: factor is the labor market, which sort of is meant 82 00:04:13,520 --> 00:04:15,800 Speaker 2: to give you the best guide as to the picture 83 00:04:15,800 --> 00:04:19,479 Speaker 2: of the consumer. And usually historically, when the unemployment rate 84 00:04:19,520 --> 00:04:22,200 Speaker 2: goes up in the US, it goes up a lot. 85 00:04:22,560 --> 00:04:24,760 Speaker 2: And it's gone up so far by about zero point 86 00:04:24,839 --> 00:04:28,080 Speaker 2: eight percentage points, not really that much compared to its 87 00:04:28,200 --> 00:04:32,680 Speaker 2: normal historical increase in a cycle where the economy is softening, 88 00:04:32,960 --> 00:04:36,840 Speaker 2: so the expectations at the unemployment rate could go much higher, 89 00:04:36,880 --> 00:04:40,080 Speaker 2: although the FED the Fed's forecasts indicate that they think 90 00:04:40,120 --> 00:04:42,400 Speaker 2: this time is different. They only they think the unemployment 91 00:04:42,520 --> 00:04:45,880 Speaker 2: rate will get to about four point four percent, so 92 00:04:46,160 --> 00:04:49,560 Speaker 2: not really too much further from its current level in 93 00:04:49,600 --> 00:04:52,599 Speaker 2: their mind, I suppose the unemployment rate is not going 94 00:04:52,640 --> 00:04:54,320 Speaker 2: to surge like it has in the past. 95 00:04:54,920 --> 00:05:00,200 Speaker 1: Stay with me, Diana, we'll be back in a minute. 96 00:05:03,680 --> 00:05:08,400 Speaker 1: I'm speaking to IMP Deputy Chief Economist Dianamusina. We had 97 00:05:08,480 --> 00:05:12,400 Speaker 1: the labor force statistics from the Bureau of Statistics yesterday. 98 00:05:12,440 --> 00:05:14,240 Speaker 1: What did you make of the four point two percent 99 00:05:14,480 --> 00:05:15,720 Speaker 1: and all those new jobs. 100 00:05:16,480 --> 00:05:19,040 Speaker 2: I think it's more of the same for the labor market. Really, 101 00:05:19,080 --> 00:05:22,200 Speaker 2: we've seen this quite strong pace of employment growth in 102 00:05:22,200 --> 00:05:25,080 Speaker 2: Australia in the past six months. A part of the 103 00:05:25,120 --> 00:05:27,720 Speaker 2: strong employment growth is basically that we have a lot 104 00:05:27,760 --> 00:05:29,960 Speaker 2: of supply going into the labor force every month. So 105 00:05:30,320 --> 00:05:34,080 Speaker 2: the working age population is increasing by somewhere fifty to 106 00:05:34,120 --> 00:05:37,360 Speaker 2: sixty thousand people every single month because of the high 107 00:05:37,520 --> 00:05:41,039 Speaker 2: levels of immigration flowing into Australia. But a lot of 108 00:05:41,040 --> 00:05:43,159 Speaker 2: those jobs, and most of those jobs are actually matched 109 00:05:43,160 --> 00:05:46,360 Speaker 2: to employment, which you can see through the unemployment rate. 110 00:05:46,440 --> 00:05:49,320 Speaker 2: The unemployment rate in Australia bottom to three and a 111 00:05:49,360 --> 00:05:51,800 Speaker 2: half percent in twenty twenty two, has gone up to 112 00:05:51,839 --> 00:05:53,840 Speaker 2: four point two percent, so in line actually with the 113 00:05:53,960 --> 00:05:56,840 Speaker 2: US economy. But a four point two percent unemployment rate 114 00:05:56,880 --> 00:06:00,320 Speaker 2: for Australia is pretty low. Before the pandemic, aaron ployment 115 00:06:00,400 --> 00:06:02,599 Speaker 2: rate was tracking it over five percent and it was 116 00:06:02,680 --> 00:06:05,480 Speaker 2: sort of hard to get it below five percent. So 117 00:06:05,760 --> 00:06:07,640 Speaker 2: this is why the Reserve Bank still thinks that the 118 00:06:07,720 --> 00:06:11,920 Speaker 2: labor market is not tight, but it's not loose either, 119 00:06:12,080 --> 00:06:16,160 Speaker 2: and it's still probably running somewhere around those tight levels. 120 00:06:16,200 --> 00:06:20,320 Speaker 2: Capacity utilization is still high. The leading indicators have softened 121 00:06:20,760 --> 00:06:23,400 Speaker 2: in line with hours work, but we're not seeing that 122 00:06:23,440 --> 00:06:26,080 Speaker 2: flow through to the labor market. And I think it's 123 00:06:26,120 --> 00:06:28,440 Speaker 2: still quite clear the labor market's going to soften from 124 00:06:28,440 --> 00:06:31,240 Speaker 2: here based on those leading indicators. But the Reserve Bank 125 00:06:31,279 --> 00:06:34,400 Speaker 2: thinks it's not really going to soften that much, Okay. 126 00:06:34,400 --> 00:06:37,360 Speaker 1: And so when you're talking about the labor market being tied, 127 00:06:38,040 --> 00:06:42,640 Speaker 1: that basically means that there are still inflationary pressures flowing 128 00:06:42,960 --> 00:06:45,919 Speaker 1: from the labor market, and that makes it hard for 129 00:06:45,960 --> 00:06:47,479 Speaker 1: the Reserve Bank to cut interest rates. 130 00:06:48,080 --> 00:06:50,280 Speaker 2: Yeah, Basically, when the lab market is tight, it's another 131 00:06:50,279 --> 00:06:53,120 Speaker 2: way of saying that demand for jobs is still exceeding 132 00:06:53,160 --> 00:06:56,279 Speaker 2: the supply of jobs. And you can still see that 133 00:06:56,400 --> 00:06:59,520 Speaker 2: in the job Baconcy's figure. So when you just plot 134 00:07:00,120 --> 00:07:05,119 Speaker 2: six jobs demand which is employment and job vacancy's MNUS, 135 00:07:05,160 --> 00:07:08,159 Speaker 2: A supply of jobs which is the working age population 136 00:07:08,560 --> 00:07:10,960 Speaker 2: and those who are in the labor force, so employed 137 00:07:11,040 --> 00:07:14,440 Speaker 2: or unemployed in the laborforce, jobs demand is still outstripping 138 00:07:14,840 --> 00:07:17,800 Speaker 2: that supply until you get to a point where those 139 00:07:18,120 --> 00:07:21,600 Speaker 2: two come into equilibrium, or supply starts to exceed demand, 140 00:07:21,600 --> 00:07:24,080 Speaker 2: which is what's happening in the US. Now, that's when 141 00:07:24,080 --> 00:07:26,280 Speaker 2: you really start to see a weakening in the labor market. 142 00:07:26,320 --> 00:07:28,840 Speaker 2: We're just not at that point yet. It may take 143 00:07:28,880 --> 00:07:30,840 Speaker 2: a while to get to that point. We may actually 144 00:07:30,880 --> 00:07:32,920 Speaker 2: not get to that point in the cycle. We may 145 00:07:32,960 --> 00:07:36,720 Speaker 2: see the labor market remain in pretty good shape at AMP. 146 00:07:36,920 --> 00:07:38,840 Speaker 2: We think the unemployment rate is going to head a 147 00:07:38,920 --> 00:07:41,160 Speaker 2: bit higher at about four and a half percent. But 148 00:07:41,280 --> 00:07:42,960 Speaker 2: you know, even at four and a half percent, that's 149 00:07:43,000 --> 00:07:45,960 Speaker 2: not a significant weakening in the labor market. I'd say 150 00:07:46,000 --> 00:07:47,920 Speaker 2: that would be considered a soft landing. 151 00:07:48,800 --> 00:07:51,400 Speaker 1: What are the risks of a hard landing? What are 152 00:07:51,400 --> 00:07:53,560 Speaker 1: the risks of actually things going south? 153 00:07:54,240 --> 00:07:58,000 Speaker 2: I think that there are definitely risks of hard landing 154 00:07:58,040 --> 00:08:01,640 Speaker 2: in Australia or US as well globally, And I'd say 155 00:08:01,640 --> 00:08:04,200 Speaker 2: that in Australia for me, would have to be if 156 00:08:04,320 --> 00:08:07,400 Speaker 2: Mountrey policy stays tighter for longer, so say, the labor 157 00:08:07,400 --> 00:08:10,640 Speaker 2: market remains in this quite solid position and we don't 158 00:08:10,640 --> 00:08:14,000 Speaker 2: see rate cuts come through until you know, mid next year, 159 00:08:14,040 --> 00:08:17,040 Speaker 2: maybe even later, or if inflation remains quite high, so 160 00:08:17,080 --> 00:08:19,480 Speaker 2: the Reserve Bank feels like it has to keep interest 161 00:08:19,520 --> 00:08:22,120 Speaker 2: rates a bit higher for longer than we could see 162 00:08:22,160 --> 00:08:26,560 Speaker 2: the labor market unraveling a bit faster. And that's probably 163 00:08:26,680 --> 00:08:28,840 Speaker 2: you know, that's like a forty percent risk, i'd say 164 00:08:28,840 --> 00:08:29,680 Speaker 2: in Australia or so. 165 00:08:30,800 --> 00:08:33,040 Speaker 1: Okay, So what's it all mean for interest rates? We've 166 00:08:33,040 --> 00:08:35,880 Speaker 1: seen the US FED cut, but we don't think it's 167 00:08:35,920 --> 00:08:38,600 Speaker 1: going to happen. Well, Michelle Bullock, there was a bank 168 00:08:38,600 --> 00:08:40,839 Speaker 1: governor said it's not going to happen this year. Notwithstanding 169 00:08:41,040 --> 00:08:43,440 Speaker 1: financial markets are priced in the cut this year, and 170 00:08:44,040 --> 00:08:45,880 Speaker 1: some people I suspect you might be one of them, 171 00:08:45,960 --> 00:08:47,880 Speaker 1: wouldn't be surprised if there was a cut this year. 172 00:08:48,520 --> 00:08:51,440 Speaker 2: I wouldn't be surprised by an interest rate cut in 173 00:08:51,440 --> 00:08:53,560 Speaker 2: Australia only because I think that the data is going 174 00:08:53,600 --> 00:08:57,319 Speaker 2: to weaken up until Christmas and into next year, to 175 00:08:57,960 --> 00:09:01,000 Speaker 2: particularly the labor market data. But I think it is 176 00:09:01,080 --> 00:09:04,680 Speaker 2: quite hard to see the Reserve Bank cutting rates before 177 00:09:04,720 --> 00:09:06,520 Speaker 2: the end of this year, just because I don't think 178 00:09:06,559 --> 00:09:09,160 Speaker 2: that inflation's going to slow enough of their liking on 179 00:09:09,200 --> 00:09:11,920 Speaker 2: the core numbers. We're going to see good headline outcome, 180 00:09:11,960 --> 00:09:13,680 Speaker 2: but we know that those are influenced by some of 181 00:09:13,679 --> 00:09:15,640 Speaker 2: the subsidies and rebates that are going on, so we 182 00:09:15,679 --> 00:09:18,600 Speaker 2: really need to look at core inflation from here. It's 183 00:09:18,600 --> 00:09:21,800 Speaker 2: hard to see the unemployment rate increasing towards five percent 184 00:09:21,880 --> 00:09:24,160 Speaker 2: before the end of this year. We're already at September 185 00:09:25,200 --> 00:09:27,920 Speaker 2: and the growth numbers, while they're weak, you know, we're 186 00:09:27,960 --> 00:09:34,200 Speaker 2: clearly not in recessionary territory and around the balance of 187 00:09:34,520 --> 00:09:37,559 Speaker 2: risks for the consumer. We're still seeing low mortgage areas, 188 00:09:38,160 --> 00:09:40,960 Speaker 2: low areas in other parts of the market, like in 189 00:09:41,120 --> 00:09:44,800 Speaker 2: cars or in personal credit cards. It just doesn't seem 190 00:09:44,840 --> 00:09:47,400 Speaker 2: to be a push for the Reserve Bank to cut 191 00:09:47,480 --> 00:09:49,680 Speaker 2: rates right now. I think by the time we get 192 00:09:49,720 --> 00:09:52,600 Speaker 2: to early next year, though, we will see further softening 193 00:09:52,679 --> 00:09:55,920 Speaker 2: in core inflation, further weakening the labor market, which will 194 00:09:55,920 --> 00:10:00,400 Speaker 2: allow easier monetary policy. But of course there is bank 195 00:10:00,480 --> 00:10:02,520 Speaker 2: does not have to follow what the Fed does. Here. 196 00:10:02,520 --> 00:10:03,920 Speaker 2: I think a lot of people are getting a bit 197 00:10:03,960 --> 00:10:06,760 Speaker 2: excited thinking we're going to get some rate cuts in Australia. 198 00:10:06,800 --> 00:10:08,640 Speaker 2: Maybe we'll get a fifty base point cut from the 199 00:10:08,640 --> 00:10:11,120 Speaker 2: Reserve Bank. But it's not the case. We have seen 200 00:10:11,559 --> 00:10:15,400 Speaker 2: periods of time before in twenty fifteen during the GFC, 201 00:10:15,840 --> 00:10:18,320 Speaker 2: when the FED was going one way with interest rate's, 202 00:10:18,360 --> 00:10:20,680 Speaker 2: Australia was going the other way. The RBA has to 203 00:10:20,720 --> 00:10:23,880 Speaker 2: calibrate policy for the Australian economy. The US is doing 204 00:10:23,880 --> 00:10:26,600 Speaker 2: its own thing. We don't need to copy the US. 205 00:10:26,720 --> 00:10:28,880 Speaker 2: I think we will have an easy cycle next year, 206 00:10:29,240 --> 00:10:31,119 Speaker 2: but we're probably not there yet. 207 00:10:31,280 --> 00:10:33,600 Speaker 1: Diana, Thank you for talking to fear and Greed. Thanks 208 00:10:33,640 --> 00:10:36,280 Speaker 1: Jwan it was a pleasure that was Diana Messina, Deputy 209 00:10:36,360 --> 00:10:39,040 Speaker 1: chief Economist at AMP. This is a Fear and Greed 210 00:10:39,080 --> 00:10:41,440 Speaker 1: business interview. Join us every morning for the full episode 211 00:10:41,440 --> 00:10:44,000 Speaker 1: of Fear and Greed. Damie Business Years for people who 212 00:10:44,000 --> 00:10:51,319 Speaker 1: make their own decisions. I'm Sean Aylmer. Enjoy your day.