1 00:00:08,500 --> 00:00:11,180 Sean Aylmer: Welcome to Fear and Greed, The Week Ahead. As always, with economist, 2 00:00:11,539 --> 00:00:17,270 Sean Aylmer: Stephen Koukoulas. You'll find him at thekouk.com, T-H-E-K-O-U-K.com, and on Twitter 3 00:00:17,270 --> 00:00:19,979 Sean Aylmer: using the handle @TheKouk. Stephen, good morning. 4 00:00:20,300 --> 00:00:21,480 Stephen Koukoulas: Good morning to you, Sean. 5 00:00:21,890 --> 00:00:25,470 Sean Aylmer: Now, there hasn't been a lot of data around, but wow, 6 00:00:25,470 --> 00:00:27,770 Sean Aylmer: the stuff that came out last week, there was one day, 7 00:00:27,770 --> 00:00:31,310 Sean Aylmer: in particular, I think it was Thursday, where we got 8 00:00:31,310 --> 00:00:34,200 Sean Aylmer: the Fed moving on interest rates. We had an incredible 9 00:00:34,240 --> 00:00:38,010 Sean Aylmer: employment figure in Australia. What do you make of all that? 10 00:00:38,010 --> 00:00:40,199 Sean Aylmer: Let's start with the Fed. What did you think of 11 00:00:40,200 --> 00:00:43,060 Sean Aylmer: that announcement? They've lifted interest rates 25 basis points, but 12 00:00:43,060 --> 00:00:45,120 Sean Aylmer: they made a fairly clear outline of what they're going 13 00:00:45,120 --> 00:00:45,470 Sean Aylmer: to do. 14 00:00:45,800 --> 00:00:48,100 Stephen Koukoulas: They did. And in a way, there was no surprise. 15 00:00:48,100 --> 00:00:50,510 Stephen Koukoulas: When we look at what's happened to the U.S. economy 16 00:00:50,570 --> 00:00:53,159 Stephen Koukoulas: in the, I won't call it the post-COVID environment, but 17 00:00:53,159 --> 00:00:56,640 Stephen Koukoulas: as we are learning -to -live-with-COVID environment, they've got unemployment 18 00:00:57,080 --> 00:01:02,720 Stephen Koukoulas: below 4%. They've got CPI (Consumer Price Index) inflation at 7.9%, goodness me. 19 00:01:03,160 --> 00:01:06,090 Stephen Koukoulas: They've got wages growth picking up. And they had, until 20 00:01:06,090 --> 00:01:08,459 Stephen Koukoulas: last Thursday, the fed fund rate at a quarter of 21 00:01:08,459 --> 00:01:11,250 Stephen Koukoulas: a per cent, which was yeah, clearly too low. So they 22 00:01:11,250 --> 00:01:13,800 Stephen Koukoulas: came out and hiked 25 basis points. And as you 23 00:01:13,800 --> 00:01:17,110 Stephen Koukoulas: alluded to, they've signalled very clearly that there's going to 24 00:01:17,110 --> 00:01:20,319 Stephen Koukoulas: be a rate hike at every committee meeting between now 25 00:01:20,319 --> 00:01:23,360 Stephen Koukoulas: and year-end, and probably a few more into 2023. So 26 00:01:23,870 --> 00:01:26,940 Stephen Koukoulas: when we take a step back, digest what they said 27 00:01:27,080 --> 00:01:31,620 Stephen Koukoulas: and did, it's the start of a monetary policy tightening cycle. 28 00:01:31,980 --> 00:01:34,709 Stephen Koukoulas: We'll probably see, at this stage, as far as we 29 00:01:34,709 --> 00:01:38,720 Stephen Koukoulas: can forecast beyond a few months, we'll probably see another 30 00:01:39,740 --> 00:01:42,880 Stephen Koukoulas: 200 basis points of rate hikes from the U.S. And 31 00:01:42,880 --> 00:01:44,990 Stephen Koukoulas: then we will wait and see whether that's enough to 32 00:01:44,990 --> 00:01:46,440 Stephen Koukoulas: contain these inflation pressures. 33 00:01:46,910 --> 00:01:51,470 Sean Aylmer: Okay. Let's move on to the local labour market. Very strong figures, employment 34 00:01:51,470 --> 00:01:53,020 Sean Aylmer: figures last Thursday. 35 00:01:53,340 --> 00:01:56,350 Stephen Koukoulas: Oh, as an economist, I get thrills when I see 36 00:01:56,350 --> 00:02:01,550 Stephen Koukoulas: the labour market numbers this strong. We had 77,000 jobs 37 00:02:01,550 --> 00:02:04,320 Stephen Koukoulas: created in the month of February. The unemployment rate fell to 4.0%, 38 00:02:04,320 --> 00:02:08,250 Stephen Koukoulas: which is 1/10th of a per cent from being at the 39 00:02:08,250 --> 00:02:12,859 Stephen Koukoulas: lowest level since 1974. Not many people listening to this would have 40 00:02:12,860 --> 00:02:16,321 Stephen Koukoulas: been born back in 1974, I'm sure. And we did see- 41 00:02:16,320 --> 00:02:18,200 Sean Aylmer: Some of us were. Some of us were, Stephen. 42 00:02:19,700 --> 00:02:23,410 Stephen Koukoulas: Indeed. I was too. But we had an incredible lift 43 00:02:23,410 --> 00:02:27,410 Stephen Koukoulas: in the participation rate. The underemployment rate fell by another 1/10th. 44 00:02:27,990 --> 00:02:30,960 Stephen Koukoulas: So when you cut and dice those numbers, they were 45 00:02:30,960 --> 00:02:33,750 Stephen Koukoulas: remarkably strong, and they fit with all of the anecdotes 46 00:02:33,750 --> 00:02:36,680 Stephen Koukoulas: that we've been hearing for six months or so, that 47 00:02:36,680 --> 00:02:39,650 Stephen Koukoulas: the labour market is tight, that businesses can't find the 48 00:02:39,650 --> 00:02:42,179 Stephen Koukoulas: talent that they need, and they can't find the skilled 49 00:02:42,180 --> 00:02:45,200 Stephen Koukoulas: or even unskilled workers that they need. So it's showing 50 00:02:45,200 --> 00:02:47,650 Stephen Koukoulas: up in these labour force numbers in spades, that we 51 00:02:47,650 --> 00:02:52,780 Stephen Koukoulas: are seeing a really dynamic labour market unfold before our eyes. 52 00:02:52,780 --> 00:02:55,389 Stephen Koukoulas: And I think the question now, for financial markets and 53 00:02:55,389 --> 00:02:57,899 Stephen Koukoulas: our friends at the Reserve Bank, will be does this 54 00:02:57,900 --> 00:03:01,040 Stephen Koukoulas: actually show a pickup in labour costs coming down the track? 55 00:03:01,040 --> 00:03:04,490 Stephen Koukoulas: I think the answer is yes, unambiguously. And then, of course, 56 00:03:04,490 --> 00:03:07,680 Stephen Koukoulas: what's that mean for inflation and the future of monetary policy. So, 57 00:03:08,040 --> 00:03:11,760 Stephen Koukoulas: lovely to see good employment numbers. Brings a tear to 58 00:03:11,760 --> 00:03:13,240 Stephen Koukoulas: my eye, a happy tear, that is. 59 00:03:13,490 --> 00:03:16,760 Sean Aylmer: So, Stephen, you mentioned that those labour force numbers will 60 00:03:16,760 --> 00:03:19,590 Sean Aylmer: make the Reserve Bank take notice and think about the 61 00:03:19,590 --> 00:03:22,090 Sean Aylmer: pressures on wages and, of course, interest rates. What do 62 00:03:22,090 --> 00:03:26,440 Sean Aylmer: you think will happen? There must be an incredible amount 63 00:03:26,690 --> 00:03:30,489 Sean Aylmer: of pressure within Martin Place to do something. 64 00:03:30,960 --> 00:03:33,200 Stephen Koukoulas: Oh, look, I think the pressure is very strong now. 65 00:03:33,200 --> 00:03:37,180 Stephen Koukoulas: And again, it's not to say that there's anything necessarily 66 00:03:37,180 --> 00:03:41,090 Stephen Koukoulas: sinister going on. Of course, there probably isn't. But when 67 00:03:41,090 --> 00:03:43,530 Stephen Koukoulas: they sit down and take a step back and they 68 00:03:43,530 --> 00:03:45,820 Stephen Koukoulas: see the labour market doing what it's doing, I think 69 00:03:45,820 --> 00:03:48,050 Stephen Koukoulas: they can put their hand on their heart and say, "Hooray, 70 00:03:48,220 --> 00:03:51,670 Stephen Koukoulas: we've achieved full employment." And that's a great thing. They 71 00:03:51,670 --> 00:03:54,300 Stephen Koukoulas: can probably see that the next couple of inflation numbers 72 00:03:54,300 --> 00:03:56,670 Stephen Koukoulas: will be very elevated, not just in headline terms with 73 00:03:56,670 --> 00:03:59,090 Stephen Koukoulas: petrol prices and these sorts of things filtering into the 74 00:03:59,090 --> 00:04:01,200 Stephen Koukoulas: measure of inflation, but in underlying terms, we're going to 75 00:04:01,200 --> 00:04:04,440 Stephen Koukoulas: see inflation pressure building. And the question that I keep 76 00:04:04,440 --> 00:04:06,360 Stephen Koukoulas: coming back to when I look at the RBA and look 77 00:04:06,360 --> 00:04:09,420 Stephen Koukoulas: at what their policy pressures are, if you like, is 78 00:04:09,420 --> 00:04:15,340 Stephen Koukoulas: that is a 0.1% cash rate appropriate for 2022, remembering 79 00:04:15,660 --> 00:04:19,750 Stephen Koukoulas: that they cut rates to 0.1% when they thought unemployment would 80 00:04:19,750 --> 00:04:22,830 Stephen Koukoulas: be going towards 10% when they thought inflation would be 81 00:04:23,050 --> 00:04:27,719 Stephen Koukoulas: hovering around 1, 1.5%. And here we are in early 2022, and, 82 00:04:27,720 --> 00:04:29,910 Stephen Koukoulas: as we've just been discussing, the labour market numbers have 83 00:04:29,980 --> 00:04:34,300 Stephen Koukoulas: blown those forecasts way out of the water. And as 84 00:04:34,300 --> 00:04:37,229 Stephen Koukoulas: we're saying, inflation's picking up. So the answer's no, the 0.1% 85 00:04:37,230 --> 00:04:40,430 Stephen Koukoulas: is not appropriate. It's the question about how they start 86 00:04:40,430 --> 00:04:44,099 Stephen Koukoulas: to sway the markets or inform the markets that interest 87 00:04:44,100 --> 00:04:46,570 Stephen Koukoulas: rate hikes are coming, and perhaps sooner than the market's 88 00:04:46,570 --> 00:04:47,300 Stephen Koukoulas: currently thinking. 89 00:04:47,770 --> 00:04:51,130 Sean Aylmer: I think under previous governors who have thought about targeting 90 00:04:51,160 --> 00:04:55,970 Sean Aylmer: inflation, Glenn Stevens, certainly Ian Macfarlane, the difference between those 91 00:04:55,970 --> 00:04:58,480 Sean Aylmer: guys and Philip Lowe now, Philip Lowe wants to actually 92 00:04:58,480 --> 00:05:02,130 Sean Aylmer: see inflation at a certain level, and wage growth at 93 00:05:02,130 --> 00:05:05,589 Sean Aylmer: a certain level, before moving, whereas previously, they always moved 94 00:05:05,589 --> 00:05:07,920 Sean Aylmer: ahead of time. That seems to be a big difference 95 00:05:08,230 --> 00:05:09,210 Sean Aylmer: this time around. 96 00:05:09,500 --> 00:05:12,409 Stephen Koukoulas: Oh, that's a really pertinent point. Again, I'm old enough 97 00:05:12,470 --> 00:05:15,909 Stephen Koukoulas: to remember both Glenn Stevens and Ian Macfarlane and their preemptive 98 00:05:16,180 --> 00:05:19,900 Stephen Koukoulas: monetary policy settings. Look, it takes a bit of courage 99 00:05:19,900 --> 00:05:23,170 Stephen Koukoulas: because you're hiking or cutting rates on anticipation of the 100 00:05:23,170 --> 00:05:26,200 Stephen Koukoulas: economy strengthening or weakening. So in a sense, there is 101 00:05:26,200 --> 00:05:28,570 Stephen Koukoulas: a bit of a risky strategy there when there was 102 00:05:28,570 --> 00:05:31,140 Stephen Koukoulas: that preemptive policy. And to be fair, I think that 103 00:05:31,510 --> 00:05:33,870 Stephen Koukoulas: both Stevens and Macfarlane did a pretty good job that 104 00:05:33,870 --> 00:05:37,190 Stephen Koukoulas: they hiked and generally got the pressures right, although I 105 00:05:37,190 --> 00:05:39,630 Stephen Koukoulas: think there was one example where the economy didn't unfold 106 00:05:39,630 --> 00:05:41,630 Stephen Koukoulas: as they expected, but they reversed it. See, that's the 107 00:05:41,720 --> 00:05:44,309 Stephen Koukoulas: beauty about monetary policy. The board meets every month. And 108 00:05:44,610 --> 00:05:47,150 Stephen Koukoulas: if you make a mistake, in inverted commas, this month, 109 00:05:47,150 --> 00:05:49,650 Stephen Koukoulas: then you can reverse it next month, and you don't lose credibility. 110 00:05:49,650 --> 00:05:52,750 Stephen Koukoulas: Whereas Philip Lowe seems to be saying, "Well, I need 111 00:05:52,750 --> 00:05:56,680 Stephen Koukoulas: to see the writing on the wall," actual inflation, wages, 112 00:05:57,000 --> 00:06:00,730 Stephen Koukoulas: labour market conditions being so strong that justifies a rate hike. 113 00:06:00,730 --> 00:06:02,990 Stephen Koukoulas: And I think that's a slightly more risky strategy in 114 00:06:02,990 --> 00:06:04,589 Stephen Koukoulas: many ways, because does he let the cat out of 115 00:06:04,589 --> 00:06:07,310 Stephen Koukoulas: the bag by holding off rate hikes when perhaps, as 116 00:06:07,310 --> 00:06:10,260 Stephen Koukoulas: we're seeing in the U.S. and New Zealand and Bank 117 00:06:10,260 --> 00:06:12,170 Stephen Koukoulas: of England and Bank of Canada, where they've already hiked, 118 00:06:12,560 --> 00:06:13,940 Stephen Koukoulas: is he waiting just a bit too long? 119 00:06:14,220 --> 00:06:17,350 Sean Aylmer: Okay. Now he's talking this week at the Walkley Awards, 120 00:06:17,350 --> 00:06:21,610 Sean Aylmer: which is the annual journalist award show. What a crowd! 121 00:06:22,000 --> 00:06:25,020 Sean Aylmer: For Phil Lowe to have to stand in front of a bunch of journalists when they're all 122 00:06:25,020 --> 00:06:25,860 Sean Aylmer: going to be critical of what he's doing on monetary policy. 123 00:06:27,690 --> 00:06:30,480 Stephen Koukoulas: Yes. The Q&A might be interesting, or even just the 124 00:06:30,560 --> 00:06:33,390 Stephen Koukoulas: conversation at the main table, where no doubt he's going 125 00:06:33,470 --> 00:06:36,589 Stephen Koukoulas: to be sitting. So I think there'll be a fair bit of pressure on him 126 00:06:36,589 --> 00:06:39,820 Stephen Koukoulas: and look, again, it's just a chance for him to 127 00:06:39,870 --> 00:06:42,730 Stephen Koukoulas: be a bit more reflective. And as I said, to 128 00:06:42,760 --> 00:06:45,880 Stephen Koukoulas: celebrate the good economic news. Not being critical of them 129 00:06:45,880 --> 00:06:48,890 Stephen Koukoulas: for getting it wrong, again, in inverted commas, but to 130 00:06:48,890 --> 00:06:51,020 Stephen Koukoulas: just sort of say that we've achieved our full employment 131 00:06:51,020 --> 00:06:54,130 Stephen Koukoulas: objective way earlier than we thought, and that's a good thing. 132 00:06:54,600 --> 00:06:57,880 Stephen Koukoulas: And a 0.1% is not a sign of a good economy, 133 00:06:57,880 --> 00:07:00,330 Stephen Koukoulas: and we actually have a pretty good economy right now, 134 00:07:00,330 --> 00:07:03,279 Stephen Koukoulas: so we need to move away from that 0.1% official 135 00:07:03,279 --> 00:07:03,599 Stephen Koukoulas: cash rate. 136 00:07:04,120 --> 00:07:05,420 Sean Aylmer: Stephen, have a great week. 137 00:07:05,730 --> 00:07:06,770 Stephen Koukoulas: You too, Sean. Thanks. 138 00:07:06,900 --> 00:07:09,860 Sean Aylmer: That was economist Stephen Koukoulas, better known as The Kouk. You 139 00:07:09,860 --> 00:07:12,160 Sean Aylmer: can find him at thekouk.com and follow him on Twitter 140 00:07:12,160 --> 00:07:15,080 Sean Aylmer: using the handle @TheKouk. I'm Sean Aylmer, and this is 141 00:07:15,080 --> 00:07:16,360 Sean Aylmer: Fear and Greed, The Week Ahead.