1 00:00:06,120 --> 00:00:08,160 Speaker 1: Welcome to Fear and Greed Q and A, where we 2 00:00:08,200 --> 00:00:12,040 Speaker 1: ask and answer questions about business, investing, economics, politics and more. 3 00:00:12,119 --> 00:00:14,400 Speaker 1: I'm Michael Thompson, and every Monday we take a look 4 00:00:14,400 --> 00:00:17,159 Speaker 1: at the week ahead for the economy. Diana Messina is 5 00:00:17,200 --> 00:00:20,279 Speaker 1: the deputy Chief Economist at AMPANA. Welcome back to Fear 6 00:00:20,280 --> 00:00:21,000 Speaker 1: and Greed Q and A. 7 00:00:21,400 --> 00:00:23,880 Speaker 2: Hey, Michael, Wow. 8 00:00:23,720 --> 00:00:27,480 Speaker 1: We've got the Reserve Bank Board meeting today and tomorrow. 9 00:00:28,240 --> 00:00:30,840 Speaker 1: I suspect it's probably a vastly different meeting to what 10 00:00:31,000 --> 00:00:34,080 Speaker 1: we were speculating it would be last week, where we 11 00:00:34,080 --> 00:00:37,200 Speaker 1: were talking about it potentially being a lineball decision really 12 00:00:37,240 --> 00:00:41,960 Speaker 1: on interest rates. The September quarter inflation data last week 13 00:00:42,000 --> 00:00:45,280 Speaker 1: has made it a very easy call, one would imagine. 14 00:00:45,840 --> 00:00:47,159 Speaker 2: Yeah. I mean, I'd love to be a fly on 15 00:00:47,200 --> 00:00:50,400 Speaker 2: the wall at those board meetings, but like I would 16 00:00:50,400 --> 00:00:52,720 Speaker 2: at any sort of any meeting that they have during them, 17 00:00:52,800 --> 00:00:55,080 Speaker 2: but probably this one in particular. I mean, it would 18 00:00:55,160 --> 00:00:57,520 Speaker 2: be interesting to see if there are, if there are 19 00:00:57,560 --> 00:01:01,920 Speaker 2: any board members that's still think that the RBA should 20 00:01:01,920 --> 00:01:05,679 Speaker 2: be easing sooner rather later. And that's really because the 21 00:01:05,760 --> 00:01:09,560 Speaker 2: labor market figures have deteriorated, and I think it's interesting 22 00:01:09,600 --> 00:01:13,680 Speaker 2: that in a lot of other global central banks, like 23 00:01:14,040 --> 00:01:17,560 Speaker 2: the US Federal Reserve, the Bank of Canada, the Bank 24 00:01:17,600 --> 00:01:19,720 Speaker 2: of England, even the Reserve Bank of New Zealand, their 25 00:01:19,720 --> 00:01:23,440 Speaker 2: inflation figures are pretty similar to ours now and they 26 00:01:23,440 --> 00:01:27,560 Speaker 2: have still been easing interest rates more. I guess some 27 00:01:27,600 --> 00:01:30,160 Speaker 2: would argue that their labor markets are a bit weaker 28 00:01:30,200 --> 00:01:33,959 Speaker 2: than Australia's, but their rates of inflation are basically the 29 00:01:34,000 --> 00:01:37,720 Speaker 2: same as Australia's now after we've got last week's bad 30 00:01:37,880 --> 00:01:39,720 Speaker 2: or horror inflation figures. 31 00:01:40,680 --> 00:01:43,440 Speaker 1: So if we just take a closer look, then at 32 00:01:43,480 --> 00:01:48,760 Speaker 1: those CBI figures from last week, they were significantly higher 33 00:01:48,880 --> 00:01:53,040 Speaker 1: than the Reserve Bank had been forecasting, significantly higher as 34 00:01:53,040 --> 00:01:57,040 Speaker 1: well than most economists were expecting. How is it that 35 00:01:58,680 --> 00:02:01,640 Speaker 1: everybody can be blind by this? Is it almost a 36 00:02:01,720 --> 00:02:05,320 Speaker 1: cumulative effect of everything just being a little bit higher 37 00:02:05,400 --> 00:02:06,200 Speaker 1: than expected? 38 00:02:07,240 --> 00:02:09,480 Speaker 2: Did you read my note? Because you took the exact 39 00:02:09,520 --> 00:02:12,440 Speaker 2: line I was going to say, it was a cumulative 40 00:02:12,440 --> 00:02:19,000 Speaker 2: impact of everything. The monthly figures for July and August 41 00:02:19,160 --> 00:02:22,079 Speaker 2: definitely indicated that there was some upside risk to inflation, 42 00:02:22,200 --> 00:02:26,280 Speaker 2: particularly in market services and dwelling construction costs and food 43 00:02:26,280 --> 00:02:31,200 Speaker 2: inflation too, and we were forecasting food prices, for example, 44 00:02:31,200 --> 00:02:33,240 Speaker 2: to be a bit softer in the month of September. 45 00:02:33,280 --> 00:02:36,440 Speaker 2: We thought dwelling construction costs would moderate. We thought things 46 00:02:36,440 --> 00:02:38,920 Speaker 2: like holiday travel prices would moderate as well, because they 47 00:02:38,960 --> 00:02:42,480 Speaker 2: had a lot of seasonal increases in the first two months. 48 00:02:42,520 --> 00:02:46,520 Speaker 2: But it doesn't look like that happened. And the surprise 49 00:02:47,040 --> 00:02:50,240 Speaker 2: to our forecast was basically just that everything was just 50 00:02:50,320 --> 00:02:52,200 Speaker 2: a little bit higher that we thought it would be. 51 00:02:52,240 --> 00:02:56,239 Speaker 2: We didn't get that moderation in some categories as we expected. 52 00:02:56,720 --> 00:03:01,120 Speaker 2: I think Australia's inflation problem is still a service's problem, though, 53 00:03:01,280 --> 00:03:04,720 Speaker 2: and when I looked at the breakdown of items, a 54 00:03:04,720 --> 00:03:07,720 Speaker 2: lot of it was still in the administered or the 55 00:03:07,760 --> 00:03:10,720 Speaker 2: indexed price increases. Market prices did go up over the 56 00:03:10,800 --> 00:03:14,959 Speaker 2: quarter too, but in comparison to everything else, it was marginal, 57 00:03:15,680 --> 00:03:19,440 Speaker 2: and administered prices are basically those that market forces have 58 00:03:19,560 --> 00:03:25,359 Speaker 2: no control over, so government related areas education, health, transport, 59 00:03:25,639 --> 00:03:28,480 Speaker 2: index prices maybe things that are just linked to CPI, 60 00:03:28,639 --> 00:03:33,760 Speaker 2: So that's things like transport increases as well other payments 61 00:03:33,800 --> 00:03:36,640 Speaker 2: that are going to households. And so I think that 62 00:03:37,160 --> 00:03:40,400 Speaker 2: if we expect the labor market to weaken or to 63 00:03:40,480 --> 00:03:43,280 Speaker 2: remain around its current levels for employment growth not really 64 00:03:43,360 --> 00:03:46,520 Speaker 2: to bounce back much further. I think services inflation is 65 00:03:46,560 --> 00:03:48,920 Speaker 2: going to soften because we're going to see lower wages 66 00:03:48,960 --> 00:03:53,120 Speaker 2: growth come through. And when we looked at a forward 67 00:03:53,120 --> 00:03:56,600 Speaker 2: looking guide to inflation and we put together a pipeline 68 00:03:56,600 --> 00:04:00,320 Speaker 2: inflation tracker, it's still pointing to lower inflation ahead. So 69 00:04:00,360 --> 00:04:03,560 Speaker 2: I sort of think maybe the September quarter was just 70 00:04:03,600 --> 00:04:07,000 Speaker 2: a bit of a blip. I mean, we definitely still 71 00:04:07,000 --> 00:04:09,440 Speaker 2: have elevated service inflash. I don't want to downplay that, 72 00:04:09,560 --> 00:04:11,720 Speaker 2: but I think the extent to which we saw that 73 00:04:11,800 --> 00:04:14,640 Speaker 2: increase in prices is not going to be repeated again 74 00:04:14,760 --> 00:04:17,560 Speaker 2: in the next quarter. And if it is, then I 75 00:04:17,600 --> 00:04:21,599 Speaker 2: think that it definitely raises the case for the RBA 76 00:04:21,680 --> 00:04:24,160 Speaker 2: to hold rates from here. But I just don't see 77 00:04:24,160 --> 00:04:26,800 Speaker 2: it being repeated again in the next quarter, given that 78 00:04:26,839 --> 00:04:29,200 Speaker 2: we have this week new labor market right now. 79 00:04:29,920 --> 00:04:33,359 Speaker 1: Okay, so we can say then that tomorrow when the 80 00:04:33,400 --> 00:04:37,039 Speaker 1: interest rate decision comes down, there won't be a cut. 81 00:04:37,240 --> 00:04:39,760 Speaker 1: But are you saying that there might still be the 82 00:04:39,880 --> 00:04:45,279 Speaker 1: chance then for a cut next year, that this cycle 83 00:04:45,360 --> 00:04:46,039 Speaker 1: is not yet over. 84 00:04:47,040 --> 00:04:49,120 Speaker 2: Well, we think that there will still be a cut, 85 00:04:49,200 --> 00:04:52,160 Speaker 2: and the two main reasons for that is one that 86 00:04:52,200 --> 00:04:56,000 Speaker 2: we expect the unemployment rate to be above forecasts. Although 87 00:04:56,080 --> 00:04:58,080 Speaker 2: the Reserve Bank is about to publish it's a new 88 00:04:58,080 --> 00:05:00,400 Speaker 2: set of forecasts, and I think that it will show 89 00:05:00,400 --> 00:05:02,719 Speaker 2: a bit of a tick up to the unemployment rate projections, 90 00:05:02,760 --> 00:05:04,479 Speaker 2: but we think the lead marker is going to remain 91 00:05:05,480 --> 00:05:08,479 Speaker 2: not particularly tight and more around balanced or running a 92 00:05:08,520 --> 00:05:12,600 Speaker 2: little bit below its potential. And secondly, interest rates are 93 00:05:12,680 --> 00:05:15,680 Speaker 2: still at a restrictive level at three point six percent, 94 00:05:15,760 --> 00:05:18,080 Speaker 2: I think the cash rate is still putting downward pressure 95 00:05:18,120 --> 00:05:21,840 Speaker 2: on the economy when you just think about all the 96 00:05:21,839 --> 00:05:25,920 Speaker 2: factors that put the neutral rate together when we did 97 00:05:25,960 --> 00:05:29,680 Speaker 2: that analysis, In our view, the neutral interest rate is 98 00:05:30,080 --> 00:05:32,080 Speaker 2: three percent or a little bit below that. So at 99 00:05:32,080 --> 00:05:34,400 Speaker 2: three point six percent, I think we're still putting more 100 00:05:34,440 --> 00:05:36,520 Speaker 2: downward pressure on the economy, and I think we need 101 00:05:36,560 --> 00:05:39,280 Speaker 2: a little bit more support. Do we need it right now? 102 00:05:39,400 --> 00:05:43,800 Speaker 2: Probably not because inflation's too high. But for example, the 103 00:05:43,839 --> 00:05:46,960 Speaker 2: Fed went on an extended pause of nine months before 104 00:05:47,000 --> 00:05:49,839 Speaker 2: it cut rates earlier this year. It hadn't moved for 105 00:05:49,880 --> 00:05:53,120 Speaker 2: a nine month period, so this rate cutting cycle could 106 00:05:53,160 --> 00:05:56,120 Speaker 2: be quite elongated, and it was always likely to be 107 00:05:56,240 --> 00:05:58,600 Speaker 2: the case that services inflation, it would be a little 108 00:05:58,600 --> 00:06:00,559 Speaker 2: bit sticky. I mean, we've been talking about your service 109 00:06:00,560 --> 00:06:03,000 Speaker 2: inflation for years now. I think this is just a 110 00:06:03,040 --> 00:06:07,520 Speaker 2: normal post pandemic normalization in developed markets. A lot of 111 00:06:07,560 --> 00:06:09,400 Speaker 2: it is driven by labor markets. 112 00:06:09,960 --> 00:06:11,880 Speaker 1: And yes, I do have to confess I did read 113 00:06:11,960 --> 00:06:15,599 Speaker 1: your note about inflation, and so that might not have 114 00:06:15,640 --> 00:06:18,400 Speaker 1: been entirely my own work when I asked you that 115 00:06:18,480 --> 00:06:21,479 Speaker 1: question before. Look, this is a bump a week for 116 00:06:21,560 --> 00:06:23,960 Speaker 1: the economy. There's so much stuff happening, obviously with the 117 00:06:24,040 --> 00:06:28,320 Speaker 1: RBA board meeting, but today we've got Core Logic home 118 00:06:28,360 --> 00:06:31,719 Speaker 1: price figures, which I mean, we know prices are strong, 119 00:06:31,760 --> 00:06:33,880 Speaker 1: we know the market is really strong at the moment. 120 00:06:34,480 --> 00:06:38,080 Speaker 2: It looks like that from the daily data. I think 121 00:06:38,200 --> 00:06:41,200 Speaker 2: is going to be another strong monthly increase in price, 122 00:06:41,279 --> 00:06:42,960 Speaker 2: isn't it. And we think that in twenty twenty six 123 00:06:42,960 --> 00:06:45,080 Speaker 2: we're going to get another strong year of growth. But 124 00:06:45,520 --> 00:06:48,280 Speaker 2: we had been thinking eight to ten percent home price 125 00:06:48,360 --> 00:06:50,160 Speaker 2: growth in twenty twenty six, but maybe it's a little 126 00:06:50,160 --> 00:06:52,200 Speaker 2: bit lower than that. If the RBA is not going 127 00:06:52,200 --> 00:06:54,800 Speaker 2: to be cutting as quickly as we've thought that they may. 128 00:06:55,480 --> 00:06:59,400 Speaker 1: Okay, we'll run through the others quite quickly. Melbourne Institute 129 00:06:59,760 --> 00:07:03,240 Speaker 1: in Inflation Gauge, What are you expecting? 130 00:07:03,880 --> 00:07:05,840 Speaker 2: Well, this has not really been a good guy head 131 00:07:05,920 --> 00:07:11,080 Speaker 2: to inflation. Actually, it's been suggesting that the TRIUM means 132 00:07:11,080 --> 00:07:13,320 Speaker 2: should be much lower than where it is, So I'm 133 00:07:13,320 --> 00:07:15,720 Speaker 2: not really taking too much signal from it right now. 134 00:07:15,720 --> 00:07:18,760 Speaker 2: It bounces around too much, I think, and zen job ads, 135 00:07:18,800 --> 00:07:21,760 Speaker 2: I think they're going to be flat to down as well. 136 00:07:21,880 --> 00:07:26,480 Speaker 2: Building approvals and household spending. So those are important things 137 00:07:26,480 --> 00:07:29,679 Speaker 2: that the RBA looks at. Just the normal monthly flow 138 00:07:29,720 --> 00:07:30,200 Speaker 2: of data. 139 00:07:30,840 --> 00:07:33,080 Speaker 1: Okay, if you had to pick one of those that 140 00:07:33,240 --> 00:07:36,440 Speaker 1: was going to give you something meaningful this week, which 141 00:07:36,480 --> 00:07:37,160 Speaker 1: is your favorite? 142 00:07:37,880 --> 00:07:42,800 Speaker 2: Well, the household spending indicator. It's replaced the retail figure 143 00:07:42,920 --> 00:07:44,600 Speaker 2: that we used to get, so it's meant to be 144 00:07:45,200 --> 00:07:48,640 Speaker 2: a broader set of spending data on the household. I 145 00:07:48,640 --> 00:07:50,320 Speaker 2: mean the numbers have sort of been a bit mixed 146 00:07:50,320 --> 00:07:51,760 Speaker 2: the last few months. We've seen a bit of a 147 00:07:51,800 --> 00:07:54,160 Speaker 2: pickup now on six month period, there's definitely been a 148 00:07:54,200 --> 00:07:57,120 Speaker 2: trend up. But I'd like to see the breakdown of 149 00:07:57,160 --> 00:08:01,480 Speaker 2: where consumers are spending. If retail spending is still soft, 150 00:08:02,280 --> 00:08:04,040 Speaker 2: if we're seeing a bit of a rebound in that 151 00:08:04,160 --> 00:08:07,120 Speaker 2: then there is case that the consumer probably looks a 152 00:08:07,160 --> 00:08:10,000 Speaker 2: little bit stronger, given that we have had three rate 153 00:08:10,040 --> 00:08:12,480 Speaker 2: cuts and we've had some tax cuts as well, inflations lower. 154 00:08:12,760 --> 00:08:14,560 Speaker 2: I think there is a base we'll be paying close 155 00:08:14,560 --> 00:08:15,240 Speaker 2: attention to that. 156 00:08:15,560 --> 00:08:19,200 Speaker 1: Okay, now, you did mention the Fed earlier and how 157 00:08:19,280 --> 00:08:22,640 Speaker 1: long it took to cut rates, and last week the 158 00:08:22,640 --> 00:08:25,640 Speaker 1: Fed did cut rates, but signaled at the same time 159 00:08:25,720 --> 00:08:28,640 Speaker 1: that it may not be doing it again anytime soon, 160 00:08:28,680 --> 00:08:30,400 Speaker 1: that it's really a kind of a weight and see 161 00:08:30,400 --> 00:08:31,440 Speaker 1: and proceed with caution. 162 00:08:32,080 --> 00:08:36,200 Speaker 2: Yeah, Power was very clear. He said that the December 163 00:08:36,280 --> 00:08:40,439 Speaker 2: decision is not a foregone conclusion. With his words, basically, 164 00:08:40,520 --> 00:08:43,560 Speaker 2: I think trying to say that market pricing for a 165 00:08:43,600 --> 00:08:46,920 Speaker 2: December rate cut was too aggressive, So market's pricing in 166 00:08:46,960 --> 00:08:49,959 Speaker 2: some chance of a December cut basically still pricing in 167 00:08:50,000 --> 00:08:53,240 Speaker 2: a few more cuts from the Fed next year. But 168 00:08:53,360 --> 00:08:56,120 Speaker 2: I think it just comes down to seeing how the 169 00:08:56,200 --> 00:08:59,000 Speaker 2: labor market figures are evolving, because this is really the 170 00:08:59,040 --> 00:09:00,760 Speaker 2: problem for the Fed now as well, is that the 171 00:09:00,840 --> 00:09:03,640 Speaker 2: labor market has weakened more than they'd like, and inflation 172 00:09:03,720 --> 00:09:05,360 Speaker 2: is still a little bit elevated, so they're not in 173 00:09:05,400 --> 00:09:08,000 Speaker 2: a rush to cut rates again. I think that they'd 174 00:09:08,000 --> 00:09:10,280 Speaker 2: probably like to cut rates one more time before the 175 00:09:10,360 --> 00:09:13,200 Speaker 2: end of the year. But given that we're in a shutdown, 176 00:09:13,280 --> 00:09:15,040 Speaker 2: so we may not actually get the next set of 177 00:09:15,080 --> 00:09:18,079 Speaker 2: inflation figures, it will put them into a difficult position, 178 00:09:18,200 --> 00:09:20,760 Speaker 2: so we may not see a cut before the end 179 00:09:20,760 --> 00:09:21,079 Speaker 2: of the year. 180 00:09:21,080 --> 00:09:23,840 Speaker 1: Again from the Fed, it would be such a difficult 181 00:09:23,960 --> 00:09:27,719 Speaker 1: job for the FED trying to do this when you've 182 00:09:27,720 --> 00:09:31,240 Speaker 1: got the Bureau of Labor Statistics staff not working and 183 00:09:31,280 --> 00:09:33,640 Speaker 1: so you're getting kind of patchy data if any kind 184 00:09:33,679 --> 00:09:35,840 Speaker 1: of coming through there. And then, as you say that, 185 00:09:35,880 --> 00:09:38,559 Speaker 1: the fact that they're not even collecting consumer price data 186 00:09:38,800 --> 00:09:40,640 Speaker 1: at the moment, so they might not get the next 187 00:09:40,640 --> 00:09:43,480 Speaker 1: inflation report at all. How on earth do you make 188 00:09:43,520 --> 00:09:46,720 Speaker 1: a decision without kind of all of the key components 189 00:09:46,760 --> 00:09:49,120 Speaker 1: that you need for it. We've seen, even just from Australia, 190 00:09:49,160 --> 00:09:53,160 Speaker 1: the importance of the data and the fact that Michelle 191 00:09:53,200 --> 00:09:55,920 Speaker 1: Bulloch just keeps on saying we don't make any decisions 192 00:09:55,920 --> 00:09:57,800 Speaker 1: without seeing all of the information. 193 00:09:58,760 --> 00:10:01,520 Speaker 2: I know, it's definitely put them in a difficult position. 194 00:10:01,559 --> 00:10:03,679 Speaker 2: I guess that they've got some private surveys like the 195 00:10:03,720 --> 00:10:09,120 Speaker 2: ism the pmis ADP employment. They're still getting the earnings results, 196 00:10:09,480 --> 00:10:11,400 Speaker 2: and I suppose if you're the central bank, you're sort 197 00:10:11,400 --> 00:10:13,959 Speaker 2: of trying to think, well, we're meant to be forward looking, 198 00:10:14,200 --> 00:10:18,360 Speaker 2: so let's think about, you know, how the economy feels 199 00:10:18,360 --> 00:10:21,760 Speaker 2: based on our liaison as well, relative to where we're 200 00:10:21,800 --> 00:10:24,160 Speaker 2: thinking it would be. So I suppose that they would 201 00:10:24,160 --> 00:10:26,600 Speaker 2: just try to be as forward looking as possible in 202 00:10:26,640 --> 00:10:29,040 Speaker 2: this situation, but of course it's difficult. 203 00:10:29,200 --> 00:10:31,880 Speaker 1: All Right, massive week coming up, Diana, Thank you very 204 00:10:31,920 --> 00:10:33,520 Speaker 1: much for joining Fear and Greed this morning. 205 00:10:33,800 --> 00:10:34,160 Speaker 2: Thank you. 206 00:10:34,440 --> 00:10:37,439 Speaker 1: That was IMP Deputy Chief Economist Diana Messina. I'm Michael 207 00:10:37,440 --> 00:10:39,240 Speaker 1: Thompson and this is Fear and Greed, Q and a