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Speaker 1: Welcome to Fear and Greed Q and A, where we

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Speaker 1: ask and answer questions about business, investing, economics, politics and more.

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Speaker 1: I'm Michael Thompson and every Monday we take a look

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Speaker 1: at the week ahead for the economy. Diana Messina is

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Speaker 1: the deputy Chief Economist at AMP Deana. Welcome back to

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Speaker 1: Fear and Greed Q and A Thanks Michael. It's great

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Speaker 1: to be here this week. I suppose it's a little

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Speaker 1: bit quiet, really, isn't it on the domestic front, A

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Speaker 1: couple of things happening internationally. We almost need a little

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Speaker 1: bit of a breather after last week because we had

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Speaker 1: a heck of a week last week, and it's kind

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Speaker 1: of a story of a whole lot of data coming

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Speaker 1: out and a lot of commentary around from the RBA,

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Speaker 1: And we saw the minutes from the last board meeting

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Speaker 1: saying there's no rush to cut rates, and then we

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Speaker 1: had commentary from the RBA chief economists and everything kind

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Speaker 1: of pointing in one direction. Then on Thursday, the unemployment

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Speaker 1: rate came in at four point five percent, well above expectations,

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Speaker 1: and kind of flipped everything on its head. Let's start

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Speaker 1: with that the unemployment figure, what do we take from that.

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Speaker 2: Well, I sort of think, well, finally, finally the unemployment

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Speaker 2: rates reached the level that we've been forecasting for a

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Speaker 2: while now. Not that I want to talk up a

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Speaker 2: higher unemployment rate, but our view for a while at

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Speaker 2: AMP anyways has been that the unemployment rate has to

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Speaker 2: tick up a little bit more based on the job figures, sorry,

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Speaker 2: based on the forward looking job indicators, things like job advertisements,

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Speaker 2: hiring intentions, the stock of jobs available. Those have basically

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Speaker 2: tracked sideways to down in the last few months, and

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Speaker 2: we're also seeing a softening in some of the non

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Speaker 2: market services jobs, mainly those that are related to the

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Speaker 2: public service, while the private sector has been quite weak,

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Speaker 2: which we've known from the GDP figure. So I think

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Speaker 2: it's sort of like we've been expecting it for so

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Speaker 2: long that I wasn't. I was surprised that we had

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Speaker 2: that big jump over one month, and the labor force

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Speaker 2: figures are volatile, so I think next month the unemployment

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Speaker 2: rate may tick down again to four point four percent,

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Speaker 2: but the overall trend is very clearly up, and the

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Speaker 2: unemployment rate now is going to average above the RBA's forecast.

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Speaker 2: They were basically expecting a peak of four point three percent,

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Speaker 2: and their view has been that the unemployment rate, the

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Speaker 2: natural or the neutral unemployment rate, I should say, which

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Speaker 2: is basically, you know where you're where you're where you've

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Speaker 2: reached full employment is probably somewhrate around four and a

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Speaker 2: half percent, but our view is that it's probably a

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Speaker 2: little bit below that. So what's happening now is that

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Speaker 2: we're running the economy below its potential and now below

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Speaker 2: its potential in the labor flore So it should lead

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Speaker 2: to a slowing in wages growth, which will be good

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Speaker 2: news for the RBA's two to three percent inflation target

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Speaker 2: and services inflation more broadly. But I guess it then

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Speaker 2: put also puts into question which part of the dual

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Speaker 2: mandate is sort of more important right now? Does the

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Speaker 2: RBA want to focus on employment or is it going

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Speaker 2: to be worried about tick up in inflation that we've

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Speaker 2: had in the past two months?

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Speaker 1: All right, then how does that feed into their interest

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Speaker 1: rate decision then, Because I mean, we did start last

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Speaker 1: week with commentary that the labor market was still a

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Speaker 1: bit tight, and then all of a sudden we get

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Speaker 1: this figure that was slightly higher than expected. And as

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Speaker 1: you say, kind of in line with where they thought

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Speaker 1: we'd get to eventually, but just probably not as quickly

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Speaker 1: as we did. Is this going to be enough now

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Speaker 1: to change the thinking on interest rates for the next meeting?

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Speaker 1: Or is it really all going to hinge on that

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Speaker 1: that September quarter of inflation data.

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Speaker 2: It will matter a lot for the next meeting, in

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Speaker 2: particular for the November rate decision, which will happen after

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Speaker 2: the CPI the full quarterly CPI figures, the RBA may

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Speaker 2: still be thinking, well, it's just one month's worth of figures,

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Speaker 2: you know. It could the participation rate actually is still

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Speaker 2: around a record high, which is a good sign that

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Speaker 2: people are still engaged in the labor force. But at

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Speaker 2: the same time, I think they will be concerned that

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Speaker 2: labor demand is probably softening a little bit quicker than

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Speaker 2: they expected. So I think it probably gives us a

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Speaker 2: little bit more breathing room for the next quarterly CPI

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Speaker 2: print if it prints a little bit above expectations, and

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Speaker 2: actually it is going to print above the RBA's forecast,

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Speaker 2: that's sort of a certainty unless something really weird happens

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Speaker 2: to the figures, But it depends how much above.

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Speaker 1: The RBA's forecast it prints.

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Speaker 2: I think the inflation figures probably give the RBA a

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Speaker 2: bit more wiggle room for it to print a bit higher,

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Speaker 2: because a lot of the upside to inflation has been

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Speaker 2: in things like market services and nondually construction costs. Now

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Speaker 2: not a lot of those that I guess directly linked

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Speaker 2: to RBA rate changes. A lot of them are quite

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Speaker 2: slow moving, and we know that we know that numerous

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Speaker 2: countries have had problems with getting services inflation down after COVID,

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Speaker 2: so maybe they'll they'll try to look through I guess

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Speaker 2: some of those upside inflation risks, is what I'm trying

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Speaker 2: to say. I think that the labor force figures will

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Speaker 2: play a bit role in the November decision because I

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Speaker 2: think that part of their strategy has been to, what

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Speaker 2: they say, preserve the gains that have been made in

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Speaker 2: the labor market in the past few years. And if

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Speaker 2: we see the labor market unraveling quicker, then I think

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Speaker 2: that they would probably make the decision to cut rates

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Speaker 2: even if they were feeling a little bit uncomfortable about inflation.

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Speaker 2: And we're not talking about inflation running well above the targetbed.

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Speaker 2: We're just talking about the September quarter figures being a

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Speaker 2: little bit higher than where they've been hoping them to be.

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Speaker 1: So you reckon if it's kind of almost a flip

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Speaker 1: of the coin, they will go to the side of

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Speaker 1: cut rates rather than hold.

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Speaker 2: I'd say so. I mean, it really depends on which

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Speaker 2: parts of the inflation data for the September quarter are

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Speaker 2: showing upside. But we've seen this with the Fed. They've

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Speaker 2: actually taken the thought process that the labor market's a

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Speaker 2: little bit more important right now. Their core inflation and

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Speaker 2: their headline inflation figures are not too dissimilar to Australia's.

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Speaker 1: Actually, yeah, okay. One of the things that came out

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Speaker 1: last week, there was a bunch of commentary last week,

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Speaker 1: but one little tidbit that I thought was really interesting

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Speaker 1: was Michelle Bullock speaking in the US, where she was

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Speaker 1: talking about basically offering some advice to the federal government,

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Speaker 1: instructing them really to do a better job of reducing

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Speaker 1: the deficit when the economy is performing reasonably well, because

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Speaker 1: if you don't do it, now, what are you going

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Speaker 1: to do when there's a downturn. It's great to see

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Speaker 1: that kind of commentary being made. It's common sense though.

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Speaker 2: Right, absolutely, and it probably goes to the point that, well,

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Speaker 2: if we look at the budget projections for the our years,

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Speaker 2: they're still looking like deficits are going to keep getting larger.

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Speaker 2: And in the past few years, the government's just benefited

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Speaker 2: from a strong economy and very high commodity prices, which

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Speaker 2: has pushed us into a small budget surplus. It's not

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Speaker 2: been the force of any policy. It's literally been good luck.

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Speaker 2: I mean, I guess some could say, well, it's good

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Speaker 2: policy that the economy has been strong, but I'd say

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Speaker 2: it's more good luck and the revenue that we've gotten

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Speaker 2: from overseas basically, so I think it makes absolute sense.

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Speaker 1: Okay, let's turn to this week. We've got a few

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Speaker 1: RBA speeches. It does feel like we are hearing a

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Speaker 1: lot at the moment. How much of what we're going

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Speaker 1: to hear this week will be reflecting on the jobs

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Speaker 1: data from last week. Can we take much out of

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Speaker 1: what we're going to be hearing this week or is

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Speaker 1: it just all all dependent on future data releases.

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Speaker 2: Well, I hope that we get some sort of commentary

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Speaker 2: about the job figures, but you know, it is always

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Speaker 2: hard to know what the Central Bank officials are going

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Speaker 2: to say, it's interesting that market pricing for the November

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Speaker 2: meeting is now back to where it was before the

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Speaker 2: latest inflation figure. So now markets are pricing in again

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Speaker 2: a rate cut in November, whereas after inflation, because a

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Speaker 2: lot of economists actually took out expectations for that November

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Speaker 2: rate cut and even some were saying that the RBA

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Speaker 2: is not going to cut rates again. So maybe the

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Speaker 2: RBA will want to temper down some of those rate

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Speaker 2: cut expectations, trying to make a bit more balanced, more

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Speaker 2: like that, just indicating that it's going to be more

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Speaker 2: of a live meeting. And I think that the IRBA

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Speaker 2: will also try not to play up the unemployment rate

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Speaker 2: increase too much because they know that the labor force

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Speaker 2: figures can be quite volatile.

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Speaker 1: Out of the US this week, we should be getting

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Speaker 1: data but sho, but we're not because of the US

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Speaker 1: government shut down, which means that that a whole stack

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Speaker 1: of different data releases are all delayed. Just how big

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Speaker 1: an impact does that have first on the US not

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Speaker 1: being able to make decisions based on that information, but

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Speaker 1: then that obviously flows through to other markets and other

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Speaker 1: places around the world like Australia.

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Speaker 2: I guess everyone's just hoping that the shutdown finishes quickly

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Speaker 2: and that will get the data releases. But it's been

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Speaker 2: already two weeks, so it could be a bit of

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Speaker 2: a problem for the FED because they've been waiting for

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Speaker 2: that employment data and it just increases the risk that

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Speaker 2: at the next meeting they won't be able to do anything.

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Speaker 2: But I think that by the next meeting we will

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Speaker 2: have more of the data releases, and clearly the share

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Speaker 2: market doesn't care because it's just trading off commentary around

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Speaker 2: trade issues between the US and China and it's just

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Speaker 2: happy to keep rolling along. We've also got earning season

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Speaker 2: in the US and that's a big driver of US

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Speaker 2: S and P returns, so I think that will probably

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Speaker 2: be the key thing that investors looking at rather than

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Speaker 2: the economic figures this week.

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Speaker 1: Okay, in terms of Australia and the impact on Australia,

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Speaker 1: China has a massive impact. Whatever happens there as an

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Speaker 1: extraordinarily large impact on Australia, particularly because of our exports there.

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Speaker 1: In terms of iron ore. We are going to be

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Speaker 1: hearing a lot from China this week. In terms of GDP,

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Speaker 1: how the economy is traveling where they think it's going.

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Speaker 1: What are you expecting to see?

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Speaker 2: The China dart is quite mixed and has been for

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Speaker 2: a number of months. I mean, the GDP figures are

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Speaker 2: not necessarily bad, no, I think that they're basically running

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Speaker 2: in line with targets or the official targets. But it's

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Speaker 2: the split of GDP that invests are going to be

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Speaker 2: looking at. So part of the GDP story is quite strong.

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Speaker 2: Export growth is still really good in China. We've seen

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Speaker 2: that in the monthly trade figures that export growth is

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Speaker 2: still holding up really well. And fix that set investments

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Speaker 2: also doing okay, but the property sector is still under

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Speaker 2: a lot of pressure. Investments still down by it's something

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Speaker 2: like twenty percent over the past year. So it's a

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Speaker 2: mixed story within the Chinese economy itself. I mean, Chinese

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Speaker 2: shares have actually been rallying really strongly in the past

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Speaker 2: few weeks, and they've broken out and actually been outperforming

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Speaker 2: peers like the US and Europe. So if we get

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Speaker 2: some more positive data this week and that could provide

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Speaker 2: another leg up for the share market, I think that

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Speaker 2: the Chinese economy is still holding up okay. It's mixed,

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Speaker 2: but you know, it's much stronger than where it was

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Speaker 2: straight after COVID and there's a lot of investment that's

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Speaker 2: going into the green energy sector which is helping to

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Speaker 2: prop up growth.

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Speaker 1: All Right, plenty going on, Diana, thank you for talking

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Speaker 1: to fear and greed. Thank you. That was AMP Deputy

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Speaker 1: Chief Economist Fianna Messina. I'm Michael Thompson and this is

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Speaker 1: beer and grebe Q and a