1 00:00:09,070 --> 00:00:11,600 Sean Aylmer: Welcome to " Fear and Greed: the week ahead." I'm Sean 2 00:00:11,880 --> 00:00:15,270 Sean Aylmer: Aylmer. As always, I'm joined by economist, Stephen Koukoulas. You'll 3 00:00:15,270 --> 00:00:17,860 Sean Aylmer: find him at thekouk. com, T H E, K O 4 00:00:17,860 --> 00:00:21,239 Sean Aylmer: U K, dot com, and on Twitter, using the handle " 5 00:00:21,239 --> 00:00:23,590 Sean Aylmer: the kouk." Stephen, good morning, 6 00:00:24,020 --> 00:00:25,470 Stephen Koukoulas: A very good morning, Sean. 7 00:00:26,090 --> 00:00:29,450 Sean Aylmer: These are the glory days for economists at the moment, 8 00:00:29,450 --> 00:00:31,300 Sean Aylmer: isn't it? Something's going to actually happen. 9 00:00:31,540 --> 00:00:34,530 Stephen Koukoulas: Big things are happening. I think, as we've been alluding 10 00:00:34,530 --> 00:00:39,540 Stephen Koukoulas: to in recent weeks of our week ahead podcasts, inflation 11 00:00:40,010 --> 00:00:43,489 Stephen Koukoulas: was brewing. We had confirmation week that the March quarter 12 00:00:43,490 --> 00:00:46,830 Stephen Koukoulas: CPI blew the lid off just about every forecast that 13 00:00:46,970 --> 00:00:51,190 Stephen Koukoulas: I could see. Headline: inflation at 5.1%. The trimmed mean, 14 00:00:51,190 --> 00:00:54,090 Stephen Koukoulas: that underlying measure that the reserve bank likes to look 15 00:00:54,090 --> 00:00:58,900 Stephen Koukoulas: at to strip out volatile items, like petrol, tobacco prices, 16 00:00:58,900 --> 00:01:03,100 Stephen Koukoulas: and these things, 3.7%. Remember, that's in the context of 17 00:01:04,030 --> 00:01:06,929 Stephen Koukoulas: the target of 2% to 3%. " Wow," I think, was 18 00:01:06,930 --> 00:01:10,610 Stephen Koukoulas: the answer. You've every person and their dog now shouting, " 19 00:01:11,480 --> 00:01:14,550 Stephen Koukoulas: The 0.1% cash rate is no longer appropriate. The RBA needs to 20 00:01:14,550 --> 00:01:18,100 Stephen Koukoulas: start going and hiking," and doing what's happening in the U. 21 00:01:18,100 --> 00:01:21,680 Stephen Koukoulas: S., in New Zealand, Canada, the UK, South Korea, whatnot, 22 00:01:21,680 --> 00:01:22,500 Stephen Koukoulas: and hike rates. 23 00:01:22,500 --> 00:01:27,509 Sean Aylmer: Okay. We'll get on to tomorrow's board meeting, but one 24 00:01:27,510 --> 00:01:31,420 Sean Aylmer: thing that Josh Frydenberg said last week, and obviously he's 25 00:01:31,420 --> 00:01:36,330 Sean Aylmer: in electioneering mode, he gently reminded the reserve bank that 26 00:01:36,330 --> 00:01:39,500 Sean Aylmer: it was also waiting for wages to get between 2% 27 00:01:39,500 --> 00:01:43,220 Sean Aylmer: and 3%. That information we won't know for another three 28 00:01:43,220 --> 00:01:48,419 Sean Aylmer: weeks or so. Now, Frydenberg also said the reserve bank's independent, 29 00:01:48,420 --> 00:01:51,400 Sean Aylmer: but it was a gentle nudge. Is it the fact 30 00:01:51,400 --> 00:01:54,779 Sean Aylmer: that the inflation figures were so strong last week, that the 31 00:01:55,010 --> 00:02:00,180 Sean Aylmer: wage information that the reserve bank's waiting on probably has 32 00:02:00,180 --> 00:02:01,210 Sean Aylmer: become overwhelmed? 33 00:02:01,630 --> 00:02:04,660 Stephen Koukoulas: Yeah. Look, in an ideal world, if this inflation report 34 00:02:04,660 --> 00:02:08,739 Stephen Koukoulas: that we saw last week was on expectations, elevated, but 35 00:02:08,740 --> 00:02:12,429 Stephen Koukoulas: not through the ceiling, if you like, then maybe, just 36 00:02:12,430 --> 00:02:14,850 Stephen Koukoulas: maybe, the RBA could have presented a case, and saying, " 37 00:02:14,850 --> 00:02:16,540 Stephen Koukoulas: Look, we really do want to see that this low 38 00:02:16,540 --> 00:02:20,670 Stephen Koukoulas: unemployment rate that's in Australia is filtering into this wage 39 00:02:20,740 --> 00:02:24,400 Stephen Koukoulas: acceleration," which everybody wants to see. We've had really weak wage growth 40 00:02:24,400 --> 00:02:26,190 Stephen Koukoulas: for many years now, we do want to see wage 41 00:02:26,470 --> 00:02:28,820 Stephen Koukoulas: growth picking up. The treasurer is right, in a way. 42 00:02:29,940 --> 00:02:34,359 Stephen Koukoulas: You usually don't get sustained increases in inflation unless you've 43 00:02:34,360 --> 00:02:38,639 Stephen Koukoulas: got sustained wages growth at 3%, or even a touch 44 00:02:38,639 --> 00:02:42,609 Stephen Koukoulas: above, depending on your productivity results. In theory, he's correct. 45 00:02:43,130 --> 00:02:47,190 Stephen Koukoulas: But, this number, that inflation number, and the anecdotes that 46 00:02:47,190 --> 00:02:49,730 Stephen Koukoulas: we're getting, and I know anecdotes are anecdotes. People walk around 47 00:02:50,169 --> 00:02:51,820 Stephen Koukoulas: the shopping center and say, " Oh, there's lots of people, 48 00:02:51,960 --> 00:02:54,820 Stephen Koukoulas: retail sales must be strong." Yeah, that's really bad. I 49 00:02:54,820 --> 00:02:57,180 Stephen Koukoulas: think on the labor market, with the job ad series, 50 00:02:57,180 --> 00:03:02,350 Stephen Koukoulas: the vacancy series, the NAB survey, which asks businesses, " Can 51 00:03:02,350 --> 00:03:05,530 Stephen Koukoulas: you find suitable labor," and these sorts of things, everybody's 52 00:03:05,530 --> 00:03:08,790 Stephen Koukoulas: screaming that the school shortages are there, and wage pressure... 53 00:03:09,010 --> 00:03:10,269 Stephen Koukoulas: I think it's just a matter of time before those 54 00:03:10,270 --> 00:03:12,880 Stephen Koukoulas: numbers pick up. The RBA has no need to wait anymore. 55 00:03:13,740 --> 00:03:15,400 Sean Aylmer: Okay. Tomorrow's a board meeting. What do you think they'll do? 56 00:03:16,200 --> 00:03:18,940 Stephen Koukoulas: Yeah, they're going to hike. There's a little bit of a debate, 57 00:03:19,320 --> 00:03:22,690 Stephen Koukoulas: and they've got to get the trajectory onto quarter percentage 58 00:03:22,690 --> 00:03:26,030 Stephen Koukoulas: point move. They'll either go 15 basis points, to 0. 59 00:03:26,080 --> 00:03:30,180 Stephen Koukoulas: 25%, from the current 0. 1. Or, they maybe go 60 00:03:30,200 --> 00:03:33,369 Stephen Koukoulas: 40. We've seen the Bank of Canada, and the RBNZ 61 00:03:34,090 --> 00:03:37,880 Stephen Koukoulas: hiking 50 basis points in recent weeks, and we are 62 00:03:37,880 --> 00:03:39,600 Stephen Koukoulas: starting from a position, as we were just saying, of 63 00:03:39,690 --> 00:03:43,100 Stephen Koukoulas: 0.1%. It wouldn't be the worst thing for them to 64 00:03:43,100 --> 00:03:46,630 Stephen Koukoulas: go 40 basis points, to get us the cash rate 65 00:03:46,630 --> 00:03:50,560 Stephen Koukoulas: at 0. 5%, and signaling probably more hikes than needed. 66 00:03:51,180 --> 00:03:54,300 Stephen Koukoulas: Really, they've got to acknowledge that, in a way, it's 67 00:03:54,300 --> 00:03:56,980 Stephen Koukoulas: a good news story. That unemployment rate being low is 68 00:03:56,980 --> 00:04:01,020 Stephen Koukoulas: good. Inflation has exceeded their target a couple of years 69 00:04:01,020 --> 00:04:03,980 Stephen Koukoulas: earlier than they were even thinking. In a sense, they 70 00:04:03,980 --> 00:04:07,000 Stephen Koukoulas: could craft the language, if you like, to say, " Look, 71 00:04:07,000 --> 00:04:10,900 Stephen Koukoulas: we're hiking rates because the economy has recovered more aggressively 72 00:04:10,970 --> 00:04:13,370 Stephen Koukoulas: and much earlier than we were forecasting when we set 73 00:04:13,370 --> 00:04:13,810 Stephen Koukoulas: the cash rate at 0. 1%." 74 00:04:15,220 --> 00:04:19,409 Sean Aylmer: Yeah. A rising interest rate environment is very different to 75 00:04:19,410 --> 00:04:24,310 Sean Aylmer: a falling interest rate environment for homeowners, for investors across 76 00:04:24,310 --> 00:04:27,470 Sean Aylmer: the board, for small businesses. It will be interesting, because 77 00:04:27,470 --> 00:04:30,550 Sean Aylmer: it's been 10 years since we've had rising home loan 78 00:04:30,550 --> 00:04:34,220 Sean Aylmer: rates. Even though they're very low at the moment, interest rates are 79 00:04:34,400 --> 00:04:36,960 Sean Aylmer: very low, record lows in fact. It is a very 80 00:04:36,960 --> 00:04:38,950 Sean Aylmer: different environment to be operating in. 81 00:04:39,500 --> 00:04:44,720 Stephen Koukoulas: It is. 2010 was the last rate hike that was announced from the RBA. Gosh, that's 82 00:04:45,980 --> 00:04:48,849 Stephen Koukoulas: a long time ago. Of course, we've had household debt 83 00:04:48,900 --> 00:04:53,160 Stephen Koukoulas: and leverage increasing quite dramatically. We shouldn't forget that businesses 84 00:04:53,200 --> 00:04:56,910 Stephen Koukoulas: carry debt. They've got overdrafts and lending facilities. They're going 85 00:04:56,910 --> 00:04:59,310 Stephen Koukoulas: to be paying more for their borrowing costs, inevitably, with 86 00:04:59,310 --> 00:05:01,010 Stephen Koukoulas: rates going up. That's what it's meant to do. 87 00:05:01,080 --> 00:05:01,190 Sean Aylmer: Yeah. 88 00:05:01,200 --> 00:05:03,900 Stephen Koukoulas: Rate hikes are meant to cool the economy down, to 89 00:05:03,900 --> 00:05:08,490 Stephen Koukoulas: get inflation back under control. When we hear what will 90 00:05:08,490 --> 00:05:12,320 Stephen Koukoulas: be, clearly, a lot of media coverage of various vox 91 00:05:12,320 --> 00:05:15,609 Stephen Koukoulas: pops of people saying, " My mortgage is a million bucks, 92 00:05:15,610 --> 00:05:18,570 Stephen Koukoulas: I'm paying an extra $ 500 a month on my repayments." 93 00:05:18,770 --> 00:05:23,370 Stephen Koukoulas: I do feel for those people. However, prudent borrowers should 94 00:05:23,370 --> 00:05:26,770 Stephen Koukoulas: have known that the 0. 1% cash rate wouldn't last forever. 95 00:05:26,779 --> 00:05:26,799 Sean Aylmer: Yeah. 96 00:05:26,850 --> 00:05:30,890 Stephen Koukoulas: That was clear, the timing was always open to question. When 97 00:05:30,890 --> 00:05:32,830 Stephen Koukoulas: the bank lent them the money, the bank should have 98 00:05:33,050 --> 00:05:34,760 Stephen Koukoulas: done the stress test, and plugged in, at a very 99 00:05:34,760 --> 00:05:37,670 Stephen Koukoulas: minimum, a two and a half percentage point increase in 100 00:05:37,700 --> 00:05:39,880 Stephen Koukoulas: mortgage rates. Of course, that was changed to 3% late 101 00:05:39,880 --> 00:05:43,440 Stephen Koukoulas: last year, as that buffer on lending. Otherwise, the person 102 00:05:43,440 --> 00:05:45,680 Stephen Koukoulas: shouldn't have got the loan. Yes, it's going to hurt 103 00:05:45,680 --> 00:05:47,250 Stephen Koukoulas: a lot of people with a lot of debt, but 104 00:05:47,250 --> 00:05:49,630 Stephen Koukoulas: that's what it's meant to do, I'm afraid to say. 105 00:05:50,440 --> 00:05:53,290 Stephen Koukoulas: That's how the economy cools back down, and inflation comes 106 00:05:53,290 --> 00:05:55,520 Stephen Koukoulas: back under control. That's how monetary policy works. 107 00:05:56,150 --> 00:05:59,420 Sean Aylmer: Okay. It'll all be about inflation and interest rates this week, but there's still actually a 108 00:05:59,420 --> 00:06:01,990 Sean Aylmer: bunch of other bits and pieces of information that'll be 109 00:06:01,990 --> 00:06:05,370 Sean Aylmer: pretty interesting. The CoreLogic house prices for April. 110 00:06:05,990 --> 00:06:09,010 Stephen Koukoulas: Yes, that's going to be absolutely fascinating. It's going to confirm what 111 00:06:09,010 --> 00:06:12,289 Stephen Koukoulas: we've seen, because we do get their daily data, on their webpage. 112 00:06:13,020 --> 00:06:14,760 Stephen Koukoulas: What we've seen in the last few months is a clear 113 00:06:14,760 --> 00:06:18,250 Stephen Koukoulas: cooling in Sydney in Melbourne. Prices, I'll say are going 114 00:06:18,250 --> 00:06:22,950 Stephen Koukoulas: down, but it's only down 0.1 or 0. 2%. It's more a topping out, rather than 115 00:06:22,950 --> 00:06:25,470 Stephen Koukoulas: a fall in house prices. That's probably going to continue 116 00:06:25,870 --> 00:06:29,710 Stephen Koukoulas: to be reflected in the numbers that we see. Places 117 00:06:29,710 --> 00:06:33,469 Stephen Koukoulas: like Brisbane and Adelaide are still burning. They're having monthly 118 00:06:33,470 --> 00:06:38,410 Stephen Koukoulas: increases of close to 1. 5% or 2%, annual increases of 25% 119 00:06:38,410 --> 00:06:42,570 Stephen Koukoulas: to 30% still. They're not slowing down at all. I 120 00:06:42,570 --> 00:06:45,839 Stephen Koukoulas: think the CoreLogic series will probably show nationwide house prices 121 00:06:45,839 --> 00:06:48,529 Stephen Koukoulas: cooling off a bit. But, we don't have one housing 122 00:06:48,529 --> 00:06:50,779 Stephen Koukoulas: market in Australia. We've got the eight capital cities plus 123 00:06:50,779 --> 00:06:53,900 Stephen Koukoulas: the regions, which are still going gangbusters as well. A 124 00:06:53,900 --> 00:06:54,849 Stephen Koukoulas: really interesting report. 125 00:06:55,370 --> 00:06:57,869 Sean Aylmer: And the job ads, of course, we're all watching that at the moment, 126 00:06:58,430 --> 00:07:02,300 Sean Aylmer: in terms of inflation, of course. Wage costs, and whether 127 00:07:02,300 --> 00:07:04,820 Sean Aylmer: we can eventually get below 4% unemployment rate. 128 00:07:05,260 --> 00:07:08,250 Stephen Koukoulas: Yes, and they've been choppy. The job ads are a 129 00:07:08,250 --> 00:07:09,950 Stephen Koukoulas: bit of a hard thing to forecast, but they have 130 00:07:09,950 --> 00:07:12,590 Stephen Koukoulas: been strong. They are an indicator of hot demand for 131 00:07:12,590 --> 00:07:16,000 Stephen Koukoulas: labor. We'll see whether there's any material change in the 132 00:07:16,000 --> 00:07:19,010 Stephen Koukoulas: trend there, but for the moment, they have been very 133 00:07:19,010 --> 00:07:21,270 Stephen Koukoulas: strong, and they're signaling a hot demand for labor still. 134 00:07:22,550 --> 00:07:24,370 Sean Aylmer: Stephen, enjoy the week. I'm looking forward to next week 135 00:07:24,370 --> 00:07:27,700 Sean Aylmer: already, because we'll get the wash up from everything that's 136 00:07:27,700 --> 00:07:30,030 Sean Aylmer: happening this week, particularly around the reserve bank and rates. 137 00:07:30,030 --> 00:07:33,440 Stephen Koukoulas: We'll be able to dissect that beautifully. I'm looking forward 138 00:07:33,440 --> 00:07:33,520 Stephen Koukoulas: to it. 139 00:07:33,520 --> 00:07:37,120 Sean Aylmer: That's economist Stephen Koukoulas, better known as the Kouk. You can find 140 00:07:37,120 --> 00:07:39,830 Sean Aylmer: him at thekouk. com, and follow him on Twitter using 141 00:07:39,830 --> 00:07:43,730 Sean Aylmer: the handle, " the kouk." I'm Sean Aylmer, and this is Fear and Greed: the week ahead."