1 00:00:07,950 --> 00:00:10,080 Sean Aylmer: Welcome to Fear and Greed - The Week Ahead. I'm Sean 2 00:00:10,170 --> 00:00:13,500 Sean Aylmer: Aylmer, and as always I'm joined by economist Stephen Koukoulas. 3 00:00:13,500 --> 00:00:16,410 Sean Aylmer: You'll find him at thekouk. com and on Twitter using 4 00:00:16,410 --> 00:00:18,300 Sean Aylmer: the handle TheKouk, he may not get back to you 5 00:00:18,300 --> 00:00:20,100 Sean Aylmer: this week because he's going to be very, very busy. 6 00:00:20,100 --> 00:00:21,240 Sean Aylmer: Stephen, good morning. 7 00:00:21,780 --> 00:00:24,180 Stephen Koukoulas: Oh, and after last week with the inflation data, this 8 00:00:24,180 --> 00:00:27,300 Stephen Koukoulas: week is an absolute corker. It's so much fun. 9 00:00:27,810 --> 00:00:30,360 Sean Aylmer: It is a corker, let's get onto that shortly, but 10 00:00:30,360 --> 00:00:33,810 Sean Aylmer: the inflation data last week, tell us about what's happening 11 00:00:33,870 --> 00:00:36,360 Sean Aylmer: in the economy and more importantly, what's going to happen 12 00:00:36,360 --> 00:00:37,890 Sean Aylmer: tomorrow when the Reserve Bank board meets. 13 00:00:38,280 --> 00:00:41,400 Stephen Koukoulas: Yeah. Look, the inflation number in my interpretation was a 14 00:00:41,400 --> 00:00:44,430 Stephen Koukoulas: little bit lower than most people were expecting. And I 15 00:00:44,430 --> 00:00:47,400 Stephen Koukoulas: know the focus has been on quarterly inflation because it 16 00:00:47,400 --> 00:00:51,000 Stephen Koukoulas: is a pure measure of inflation rather than the monthly 17 00:00:51,000 --> 00:00:54,000 Stephen Koukoulas: numbers that the Bureau of Statistics now produce. The quarterly 18 00:00:54,000 --> 00:00:57,750 Stephen Koukoulas: number did show that in headline inflation slowed from 7. 8% to 7%. 19 00:00:58,440 --> 00:01:02,160 Stephen Koukoulas: So two things there, it's coming down, but it's still 20 00:01:02,160 --> 00:01:05,130 Stephen Koukoulas: very elevated. But if we look at the monthly numbers, 21 00:01:05,310 --> 00:01:10,470 Stephen Koukoulas: which have the advantage of not incorporating the noise from 22 00:01:10,470 --> 00:01:13,710 Stephen Koukoulas: the quarterly averages if you like. So the March monthly 23 00:01:13,740 --> 00:01:17,880 Stephen Koukoulas: number was only 6. 3% in annual terms, down from 8. 24 00:01:18,209 --> 00:01:21,900 Stephen Koukoulas: 4% in December. So if we were sort of extrapolating, 25 00:01:21,930 --> 00:01:24,449 Stephen Koukoulas: sorry for taking a long- winded approach to this, but 26 00:01:24,630 --> 00:01:27,780 Stephen Koukoulas: if we extrapolate for what that implies for the June 27 00:01:27,780 --> 00:01:30,750 Stephen Koukoulas: quarter, obviously we just got the March quarter numbers, but 28 00:01:30,750 --> 00:01:32,069 Stephen Koukoulas: it suggests to me that we're going to be on 29 00:01:32,069 --> 00:01:35,910 Stephen Koukoulas: track to get that headline figure down from 7% in 30 00:01:35,910 --> 00:01:39,510 Stephen Koukoulas: the March quarter to something around about 6%. So we're 31 00:01:39,510 --> 00:01:42,480 Stephen Koukoulas: dropping a good percentage point or thereabouts each quarter and 32 00:01:42,600 --> 00:01:43,410 Stephen Koukoulas: that's good news 33 00:01:44,130 --> 00:01:46,289 Sean Aylmer: And we've still got the full impact of the rate 34 00:01:46,290 --> 00:01:48,390 Sean Aylmer: rises we've seen so far to feed through. 35 00:01:48,810 --> 00:01:51,960 Stephen Koukoulas: Oh, definitely, yes. Recall that the RBA did hike in both 36 00:01:52,200 --> 00:01:54,870 Stephen Koukoulas: February and March of this year, and they'll have clearly 37 00:01:54,870 --> 00:01:58,110 Stephen Koukoulas: had no impact on the inflation data that we're seeing. 38 00:01:58,560 --> 00:02:01,500 Stephen Koukoulas: That extra 50 basis points of rate hikes will show 39 00:02:01,500 --> 00:02:03,420 Stephen Koukoulas: up. There's no doubt about that. It's just a question 40 00:02:03,420 --> 00:02:07,170 Stephen Koukoulas: of exactly when and exactly how much. And remember that 41 00:02:07,170 --> 00:02:10,290 Stephen Koukoulas: it's also building on the prior rate hikes of 2022 42 00:02:10,620 --> 00:02:12,750 Stephen Koukoulas: when we saw 300 basis points. So there's a lot 43 00:02:12,750 --> 00:02:15,600 Stephen Koukoulas: of monetary tightening in the system. It is starting to 44 00:02:15,600 --> 00:02:18,000 Stephen Koukoulas: work. We're seeing that with the economy slowing down and 45 00:02:18,000 --> 00:02:20,790 Stephen Koukoulas: inflation starting to tilt a little bit lower, but there's 46 00:02:20,790 --> 00:02:23,489 Stephen Koukoulas: a lot of action still to come from this monetary 47 00:02:23,490 --> 00:02:23,881 Stephen Koukoulas: policy tightening. 48 00:02:23,880 --> 00:02:30,059 Sean Aylmer: Okay, so surely the board can't lift rates this week, Stephen, 49 00:02:30,060 --> 00:02:33,240 Sean Aylmer: surely he says as a mortgage holder. Mind you, if 50 00:02:33,240 --> 00:02:35,370 Sean Aylmer: I'm a pensioner, I'm probably delighted if we get another 51 00:02:35,370 --> 00:02:35,880 Sean Aylmer: rate rise. 52 00:02:36,270 --> 00:02:38,639 Stephen Koukoulas: Indeed. Look, no, I think they're on hold and certainly 53 00:02:38,639 --> 00:02:41,669 Stephen Koukoulas: the market pricing is for a very low probability. It's 54 00:02:41,669 --> 00:02:44,190 Stephen Koukoulas: just a little above 0% that we get a rate 55 00:02:44,190 --> 00:02:46,709 Stephen Koukoulas: hike. Now, that can change in the market is sometimes 56 00:02:46,710 --> 00:02:49,139 Stephen Koukoulas: wrong, but I think yeah, as we're just discussing with 57 00:02:49,139 --> 00:02:53,100 Stephen Koukoulas: the inflation numbers, there was enough in them. And particularly 58 00:02:53,100 --> 00:02:55,740 Stephen Koukoulas: what the RBA said at the April meeting when it 59 00:02:55,830 --> 00:02:59,490 Stephen Koukoulas: also paused that they're going to be sitting back watching 60 00:02:59,490 --> 00:03:02,579 Stephen Koukoulas: the economic data come through. Now, that doesn't necessarily guarantee 61 00:03:02,580 --> 00:03:05,040 Stephen Koukoulas: that we've seen the last rate hike in the cycle 62 00:03:05,040 --> 00:03:07,590 Stephen Koukoulas: because as we've seen in previous hiking cycles over the 63 00:03:07,590 --> 00:03:11,370 Stephen Koukoulas: last 20 or 25 years, it is quite often in fact it's 64 00:03:11,370 --> 00:03:15,480 Stephen Koukoulas: more common than not that the RBA hikes pauses a few 65 00:03:15,480 --> 00:03:18,300 Stephen Koukoulas: months, reconsiders and then they hike again. And that's been 66 00:03:18,480 --> 00:03:22,110 Stephen Koukoulas: entirely appropriate. So for now, while the market's pricing in 67 00:03:22,139 --> 00:03:25,169 Stephen Koukoulas: no change and I think there's going to be no 68 00:03:25,169 --> 00:03:27,210 Stephen Koukoulas: more change in interest rates probably for the rest of 69 00:03:27,210 --> 00:03:29,430 Stephen Koukoulas: this calendar year. If there is a move, as they 70 00:03:29,430 --> 00:03:31,050 Stephen Koukoulas: say in the classics, it's going to be up not 71 00:03:31,050 --> 00:03:33,330 Stephen Koukoulas: down and we just need to see what happens to 72 00:03:33,330 --> 00:03:35,580 Stephen Koukoulas: the run of economic news. And indeed the next couple 73 00:03:35,580 --> 00:03:39,210 Stephen Koukoulas: of monthly inflation numbers to be sure that the momentum's 74 00:03:39,210 --> 00:03:42,030 Stephen Koukoulas: back towards having inflation back at the target. 75 00:03:42,570 --> 00:03:44,760 Sean Aylmer: We'll also get a fair bit of information this week 76 00:03:44,760 --> 00:03:46,890 Sean Aylmer: on what the Reserve Bank's thinking. We've got the Governor 77 00:03:46,890 --> 00:03:49,950 Sean Aylmer: Philip Lowe speaking, we've got the statement on monetary policy 78 00:03:49,950 --> 00:03:52,530 Sean Aylmer: out at the end of the week. We should have 79 00:03:52,530 --> 00:03:54,810 Sean Aylmer: a pretty idea of what's going on this time next 80 00:03:54,810 --> 00:03:57,090 Sean Aylmer: week hopefully, or at least what the Reserve Bank thinks 81 00:03:57,090 --> 00:03:57,570 Sean Aylmer: is going on. 82 00:03:57,570 --> 00:04:01,200 Stephen Koukoulas: Ah, yes. A lot of information. So the RBA governor 83 00:04:01,200 --> 00:04:05,550 Stephen Koukoulas: is giving a speech after the formal announcement tomorrow night, 84 00:04:05,550 --> 00:04:07,740 Stephen Koukoulas: it is in fact, yes. So he's giving a speech 85 00:04:07,740 --> 00:04:11,400 Stephen Koukoulas: to outline, probably flesh out the details of what the 86 00:04:11,400 --> 00:04:14,670 Stephen Koukoulas: RBA's thinking and why they made that particular decision. And 87 00:04:14,670 --> 00:04:16,770 Stephen Koukoulas: it's probably going to preempt as you alluded to the 88 00:04:16,770 --> 00:04:20,279 Stephen Koukoulas: statement on monetary policy on Friday, which is the quarterly 89 00:04:20,430 --> 00:04:24,900 Stephen Koukoulas: revamp if you like, of the RBA's forecasts, a revamp of 90 00:04:24,900 --> 00:04:27,600 Stephen Koukoulas: their analysis of the economy, what's actually happened from the 91 00:04:27,600 --> 00:04:31,109 Stephen Koukoulas: February statement to the May statement, this will be. And 92 00:04:31,110 --> 00:04:33,089 Stephen Koukoulas: it's going to be just sort of outlining importantly from 93 00:04:33,089 --> 00:04:37,350 Stephen Koukoulas: my perspective, what will probably be a downward revision to 94 00:04:37,350 --> 00:04:42,810 Stephen Koukoulas: the inflation profile. Previously they were expecting inflation to fall 95 00:04:42,810 --> 00:04:45,510 Stephen Koukoulas: back to the target range by the middle of 2025. 96 00:04:45,510 --> 00:04:48,630 Stephen Koukoulas: So still another couple of years away. My hunch based 97 00:04:48,630 --> 00:04:50,520 Stephen Koukoulas: on what we've seen on inflation in the growth in the 98 00:04:50,520 --> 00:04:54,990 Stephen Koukoulas: economy, they'll bring that forward probably to the latter half 99 00:04:54,990 --> 00:04:58,680 Stephen Koukoulas: of 2024, where inflation falls to the target such as 100 00:04:58,680 --> 00:05:01,289 Stephen Koukoulas: that little bit of an undershoot on inflation and the 101 00:05:01,290 --> 00:05:04,320 Stephen Koukoulas: downside risk to growth. So that's going to be absolutely 102 00:05:04,320 --> 00:05:07,589 Stephen Koukoulas: vital to see what the RBA is doing, but also 103 00:05:07,589 --> 00:05:09,810 Stephen Koukoulas: what it's saying and how it's analyzing the economy. 104 00:05:10,290 --> 00:05:12,360 Sean Aylmer: Now, funny thing, Stephen I was at a conference late 105 00:05:12,360 --> 00:05:15,029 Sean Aylmer: last week. In fact, it was the Financial Reviews Alpha 106 00:05:15,029 --> 00:05:19,200 Sean Aylmer: Live Conference and for months everyone has been criticizing the 107 00:05:19,200 --> 00:05:21,089 Sean Aylmer: Reserve Bank. Then we got the big review of the 108 00:05:21,089 --> 00:05:23,729 Sean Aylmer: Reserve Bank, it was handed down, everyone read it and thought, " 109 00:05:24,570 --> 00:05:26,430 Sean Aylmer: Uh, maybe we better rethink this because I'm not sure 110 00:05:26,430 --> 00:05:31,560 Sean Aylmer: that the alternate option put out there is any better 111 00:05:31,560 --> 00:05:33,930 Sean Aylmer: than the current option." And what I did find interesting 112 00:05:33,930 --> 00:05:36,000 Sean Aylmer: at this conference last week was there a lot of 113 00:05:36,000 --> 00:05:38,909 Sean Aylmer: people standing up saying, " Look, the Reserve Bank and Philip 114 00:05:38,910 --> 00:05:44,130 Sean Aylmer: Lowe have done a great job." And it's interesting how the 115 00:05:44,130 --> 00:05:46,500 Sean Aylmer: sentiment is very pro- Reserve Bank at the moment. 116 00:05:47,070 --> 00:05:50,670 Stephen Koukoulas: It's an interesting call too. And the review was more 117 00:05:50,670 --> 00:05:53,970 Stephen Koukoulas: important for procedural matters, not necessarily much else because the 118 00:05:53,970 --> 00:05:58,410 Stephen Koukoulas: 2 to 3% inflation target's there. And it sort of did mull over why 119 00:05:58,410 --> 00:06:01,529 Stephen Koukoulas: they got it wrong, the interest rate hiking forecast from 120 00:06:01,529 --> 00:06:06,270 Stephen Koukoulas: 2021 that no hikes till 2024. And even prior to 121 00:06:06,270 --> 00:06:08,970 Stephen Koukoulas: that when they undershot the inflation target for about five 122 00:06:08,970 --> 00:06:12,360 Stephen Koukoulas: consecutive years. So in a sense, the things haven't changed, 123 00:06:12,360 --> 00:06:15,120 Stephen Koukoulas: but to me, the important issue, and this could have 124 00:06:15,120 --> 00:06:20,220 Stephen Koukoulas: happened without a 267- page review, is having more experts 125 00:06:20,220 --> 00:06:22,349 Stephen Koukoulas: on the board or a separate monetary policy board to 126 00:06:22,350 --> 00:06:24,750 Stephen Koukoulas: make the interest rate decisions. Because the RBA did get 127 00:06:24,750 --> 00:06:26,640 Stephen Koukoulas: it wrong. They should have cut it, no doubt. In 128 00:06:26,640 --> 00:06:30,480 Stephen Koukoulas: 2017, 18 or thereabouts, and they should have hiked late '21 or 129 00:06:30,480 --> 00:06:33,000 Stephen Koukoulas: much earlier in 2022. So in a sense, it's a 130 00:06:33,000 --> 00:06:35,760 Stephen Koukoulas: bit of a criticism that perhaps the composition of the 131 00:06:35,760 --> 00:06:38,490 Stephen Koukoulas: board as it existed, or it exists to this day, 132 00:06:39,180 --> 00:06:41,580 Stephen Koukoulas: wasn't the best for setting interest rates. But the two to 133 00:06:41,580 --> 00:06:43,830 Stephen Koukoulas: three target is still a good one for the inflation 134 00:06:43,830 --> 00:06:45,930 Stephen Koukoulas: rate. A bit more of an emphasis on the labor 135 00:06:45,930 --> 00:06:48,839 Stephen Koukoulas: market, full employment, fair enough to, we'd like everybody to 136 00:06:48,839 --> 00:06:50,940 Stephen Koukoulas: have a job. But at the end of the day, 137 00:06:50,970 --> 00:06:55,260 Stephen Koukoulas: yeah, well the changes aren't going to really materially alter 138 00:06:55,260 --> 00:06:57,419 Stephen Koukoulas: the way that the RBA is going to conduct monetary policy. 139 00:06:57,930 --> 00:06:59,790 Sean Aylmer: Now, we're running out of time, but we've got a 140 00:06:59,790 --> 00:07:03,360 Sean Aylmer: lot of data out this week, house prices, retail trade, 141 00:07:03,779 --> 00:07:07,529 Sean Aylmer: trade surpluses, all sorts of things. I mean, house prices 142 00:07:07,529 --> 00:07:09,450 Sean Aylmer: is probably the big one for many of us. What 143 00:07:09,450 --> 00:07:11,400 Sean Aylmer: do you think April will have shown? 144 00:07:11,940 --> 00:07:14,850 Stephen Koukoulas: Going up, going up. We know from the high- frequency 145 00:07:14,850 --> 00:07:17,880 Stephen Koukoulas: daily data from CoreLogic, we're going to have an increased month- on- 146 00:07:17,880 --> 00:07:21,030 Stephen Koukoulas: month for the month of April of about 0. 6 or 0. 147 00:07:21,030 --> 00:07:24,660 Stephen Koukoulas: 7%. Sydney leading the way up over 1% in the 148 00:07:24,660 --> 00:07:26,850 Stephen Koukoulas: month and 3% over the last two and a half 149 00:07:26,850 --> 00:07:30,000 Stephen Koukoulas: months. So you'll see a lot of stories later today. 150 00:07:30,000 --> 00:07:33,930 Stephen Koukoulas: It comes out later today on house prices increasing again. 151 00:07:34,620 --> 00:07:35,310 Sean Aylmer: And job ads. 152 00:07:35,460 --> 00:07:39,090 Stephen Koukoulas: Job ads, critical issue for the labor market, tilting down. 153 00:07:39,090 --> 00:07:42,000 Stephen Koukoulas: I think we've got more evidence that both immigration and 154 00:07:42,000 --> 00:07:44,910 Stephen Koukoulas: the slowing economy going to be seeing job ads tilt 155 00:07:44,910 --> 00:07:48,120 Stephen Koukoulas: low. Similar story with retail trade, we consumers are responding 156 00:07:48,120 --> 00:07:52,170 Stephen Koukoulas: to cost of living pressures, tightness in terms of interest 157 00:07:52,170 --> 00:07:55,830 Stephen Koukoulas: rate hikes. So retail sales will probably be another weak 158 00:07:55,830 --> 00:07:57,930 Stephen Koukoulas: result. But the good news will be on the international 159 00:07:57,930 --> 00:08:02,370 Stephen Koukoulas: trade front, again, another whopping surplus coming through somewhere around 160 00:08:02,370 --> 00:08:05,820 Stephen Koukoulas: that 13 or 14 billion per month with good old 161 00:08:06,150 --> 00:08:09,480 Stephen Koukoulas: iron ore, natural gas, coal being the big drivers of 162 00:08:09,810 --> 00:08:13,530 Stephen Koukoulas: our export earnings. And imports muddling along the domestic economy 163 00:08:13,530 --> 00:08:15,420 Stephen Koukoulas: slowing, so we're not importing quite as much as we 164 00:08:15,420 --> 00:08:15,810 Stephen Koukoulas: used to. 165 00:08:16,500 --> 00:08:18,450 Sean Aylmer: Well, enjoy this very, very busy week, Stephen. 166 00:08:18,840 --> 00:08:20,490 Stephen Koukoulas: I will. I can't wait for it to kick off. 167 00:08:20,970 --> 00:08:24,480 Sean Aylmer: That was economist Stephen Koukoulas, better known as TheKouk, T- H- E- K- O- U- 168 00:08:24,510 --> 00:08:27,120 Sean Aylmer: K. You can find him at thekouk. com and follow 169 00:08:27,120 --> 00:08:30,390 Sean Aylmer: him on Twitter using the handle TheKouk. I'm Sean Aylmer 170 00:08:30,390 --> 00:08:31,320 Sean Aylmer: and this is Fear and Greed - The Week Ahead.