1 00:00:07,890 --> 00:00:10,020 Sean Aylmer: Welcome to Fear and Greed: The Week Ahead. I'm Sean 2 00:00:10,020 --> 00:00:13,228 Sean Aylmer: Aylmer, and as usual, I'm joined at this time on 3 00:00:13,230 --> 00:00:16,469 Sean Aylmer: a Monday morning by economist Stephen Koukoulas. You can find 4 00:00:16,469 --> 00:00:21,418 Sean Aylmer: him thekouk. com, T-H-E-K-O-U-K.com, or on Twitter using the handle TheKouk. 5 00:00:21,420 --> 00:00:22,590 Sean Aylmer: Stephen, good morning 6 00:00:23,220 --> 00:00:24,690 Stephen Koukoulas: And a great morning to you, Sean. 7 00:00:24,989 --> 00:00:27,810 Sean Aylmer: Yeah, now look, just scrap the data for a moment. 8 00:00:27,840 --> 00:00:30,780 Sean Aylmer: How about what happened at the Reserve Bank on Friday, 9 00:00:30,780 --> 00:00:32,189 Sean Aylmer: the new governor, Michele Bullock? 10 00:00:33,360 --> 00:00:35,789 Stephen Koukoulas: What a good move. I think that while there was 11 00:00:36,029 --> 00:00:38,400 Stephen Koukoulas: clearly a bit of a competition and the list of 12 00:00:38,400 --> 00:00:41,970 Stephen Koukoulas: potential candidates was a good one, the others that were 13 00:00:41,970 --> 00:00:46,920 Stephen Koukoulas: there, appointing Michele Bullock was a solid, steady appointment. She's 14 00:00:46,920 --> 00:00:50,219 Stephen Koukoulas: clearly got the knowledge, expertise, and experience to do a 15 00:00:50,219 --> 00:00:53,669 Stephen Koukoulas: good job. Obviously, she's going to be at the helm 16 00:00:53,670 --> 00:00:56,880 Stephen Koukoulas: to implement the recommendations of the review of the Reserve 17 00:00:56,880 --> 00:00:58,920 Stephen Koukoulas: Bank, which came out a few months ago. So that's 18 00:00:58,920 --> 00:01:03,900 Stephen Koukoulas: changing the number of board meetings, changing the transparency I 19 00:01:03,900 --> 00:01:06,959 Stephen Koukoulas: suppose, and the media conversations that she's going to be 20 00:01:06,959 --> 00:01:09,870 Stephen Koukoulas: having after every board meeting now, and a few other 21 00:01:09,870 --> 00:01:12,570 Stephen Koukoulas: procedural issues with the new Monetary Policy Board, which is 22 00:01:12,630 --> 00:01:16,290 Stephen Koukoulas: obviously yet to be appointed, but it's a good appointment. 23 00:01:16,290 --> 00:01:18,810 Stephen Koukoulas: It's a solid appointment, and it's one that I was 24 00:01:18,810 --> 00:01:20,849 Stephen Koukoulas: looking at the financial markets in the hour or two 25 00:01:20,849 --> 00:01:24,330 Stephen Koukoulas: after she was appointed, and I know there's more moving 26 00:01:24,330 --> 00:01:26,759 Stephen Koukoulas: parts than just the appointment of an RBA governor, but 27 00:01:26,880 --> 00:01:29,098 Stephen Koukoulas: the ASX was up, the dollar was up and bond 28 00:01:29,100 --> 00:01:32,310 Stephen Koukoulas: yields were down. So if they appointed the wrong person, 29 00:01:32,310 --> 00:01:35,759 Stephen Koukoulas: I dare say we'd get financial markets reacting negatively, but 30 00:01:35,760 --> 00:01:38,939 Stephen Koukoulas: we saw markets going in the right direction, and to 31 00:01:38,940 --> 00:01:40,500 Stephen Koukoulas: me, that's a vote of confidence as well. 32 00:01:40,889 --> 00:01:43,469 Sean Aylmer: She said the consensus seems to be that she'll be 33 00:01:43,469 --> 00:01:47,430 Sean Aylmer: a more consensus driven governor, shall we say? 34 00:01:47,910 --> 00:01:51,030 Stephen Koukoulas: Look, I think that's right, and I think that one 35 00:01:51,030 --> 00:01:54,300 Stephen Koukoulas: of the criticisms of Dr. Lowe, rightly or wrongly, but 36 00:01:54,600 --> 00:01:57,389 Stephen Koukoulas: clearly he missed his inflation target quite a lot and 37 00:01:57,389 --> 00:02:01,289 Stephen Koukoulas: gave some less than accurate guidance on where rates would 38 00:02:01,290 --> 00:02:04,230 Stephen Koukoulas: be and those sorts of things. And the suggestion is that he didn't 39 00:02:04,230 --> 00:02:08,160 Stephen Koukoulas: listen to the internal bank economists as much as perhaps 40 00:02:08,160 --> 00:02:11,130 Stephen Koukoulas: he should, that the other members of the board may 41 00:02:11,130 --> 00:02:12,870 Stephen Koukoulas: have had a few ideas from time to time that 42 00:02:12,870 --> 00:02:16,530 Stephen Koukoulas: again, he tended to not embrace when he was looking 43 00:02:16,530 --> 00:02:19,379 Stephen Koukoulas: at his forecast for inflation for growth and where interest 44 00:02:19,380 --> 00:02:22,859 Stephen Koukoulas: rates should be. So if Michelle Bullock approaches it with 45 00:02:22,859 --> 00:02:25,320 Stephen Koukoulas: a very open mind, and again, with the new structure 46 00:02:25,320 --> 00:02:27,480 Stephen Koukoulas: of the bank, we've got to remember that she'll be 47 00:02:27,480 --> 00:02:30,660 Stephen Koukoulas: managing a central bank that's going to be very different 48 00:02:30,660 --> 00:02:33,450 Stephen Koukoulas: to the one that Phil Lowe was managing, I think 49 00:02:33,450 --> 00:02:34,980 Stephen Koukoulas: it's going to be good, and I think it's going 50 00:02:34,980 --> 00:02:37,739 Stephen Koukoulas: to be good for public policy. The proof of the 51 00:02:37,740 --> 00:02:40,529 Stephen Koukoulas: pudding of course is will she meet her inflation target? 52 00:02:40,529 --> 00:02:43,169 Stephen Koukoulas: Will she keep the economy growing at near full employment? 53 00:02:43,169 --> 00:02:45,090 Stephen Koukoulas: Because that's the only benchmark you can really have for 54 00:02:45,090 --> 00:02:48,600 Stephen Koukoulas: a Central Bank governor. They can occasionally have a misstep, 55 00:02:48,600 --> 00:02:50,519 Stephen Koukoulas: but if they then correct that the following month or 56 00:02:50,520 --> 00:02:54,508 Stephen Koukoulas: the month after that, usually they can recoup any misstep 57 00:02:54,508 --> 00:02:56,880 Stephen Koukoulas: that they make. And again, Dr. Lowe did not appear 58 00:02:56,880 --> 00:03:00,779 Stephen Koukoulas: to do that, as well as Glen Stevens and Ian 59 00:03:00,779 --> 00:03:02,639 Stephen Koukoulas: MacFarlane, the former RBA governors. 60 00:03:03,090 --> 00:03:05,430 Sean Aylmer: Okay, so Michele Bullock takes over in a couple of 61 00:03:05,430 --> 00:03:08,219 Sean Aylmer: months. She'll be faced with an economy, I mean, I'm 62 00:03:08,220 --> 00:03:11,519 Sean Aylmer: sure she's part of the deliberations now anyway, but where 63 00:03:11,520 --> 00:03:16,288 Sean Aylmer: we're at today, particularly given last week's US CPI figures 64 00:03:16,288 --> 00:03:20,310 Sean Aylmer: and the comments from Phil Lowe about interest rates, it 65 00:03:20,310 --> 00:03:21,960 Sean Aylmer: looks like we're getting towards the peak of that rate 66 00:03:21,960 --> 00:03:23,610 Sean Aylmer: cycle. I mean, we've been saying it for months, but 67 00:03:23,790 --> 00:03:25,110 Sean Aylmer: now we really mean it, Stephen. 68 00:03:25,710 --> 00:03:28,499 Stephen Koukoulas: I think we're really that, yes, I think now, as 69 00:03:28,500 --> 00:03:30,899 Stephen Koukoulas: you mentioned, it wasn't just the US inflation numbers, which 70 00:03:30,900 --> 00:03:34,619 Stephen Koukoulas: came at 3. 0% year on year. So that's down 71 00:03:34,619 --> 00:03:38,490 Stephen Koukoulas: from 9% about a year ago. So inflation is certainly 72 00:03:38,490 --> 00:03:41,250 Stephen Koukoulas: going in the right direction. China's got inflation at zero, 73 00:03:41,340 --> 00:03:45,509 Stephen Koukoulas: annual inflation, 0%. So you've got the global inflation environment 74 00:03:45,719 --> 00:03:48,990 Stephen Koukoulas: tilting all the right way. So again, regardless of whether 75 00:03:48,990 --> 00:03:50,639 Stephen Koukoulas: it's for Lowe or Michele Bullock in a way, we 76 00:03:50,639 --> 00:03:53,430 Stephen Koukoulas: know that inflation in Australia is going to be falling 77 00:03:53,430 --> 00:03:55,950 Stephen Koukoulas: over the next six to 12 months, and that's really 78 00:03:55,950 --> 00:03:58,710 Stephen Koukoulas: important. There is a debate about how quickly it falls 79 00:03:58,710 --> 00:04:00,510 Stephen Koukoulas: of course, and that's still going to be there for 80 00:04:00,510 --> 00:04:04,230 Stephen Koukoulas: many months to come. But the new governor, she's going 81 00:04:04,230 --> 00:04:07,230 Stephen Koukoulas: to be presiding over a weaker economy. There's no doubt 82 00:04:07,230 --> 00:04:09,779 Stephen Koukoulas: about that. Unemployment will be creeping up. It's just a 83 00:04:09,780 --> 00:04:12,689 Stephen Koukoulas: matter of how quickly it's creeping up and inflation's falling. 84 00:04:12,690 --> 00:04:14,730 Stephen Koukoulas: As you said, we might be at the peak of 85 00:04:14,730 --> 00:04:18,270 Stephen Koukoulas: the interest rate hiking cycle, which would be an interesting 86 00:04:18,270 --> 00:04:21,209 Stephen Koukoulas: phenomenon for her to preside over for the first few 87 00:04:21,210 --> 00:04:22,019 Stephen Koukoulas: months as governor. 88 00:04:23,010 --> 00:04:23,969 Sean Aylmer: So what's up this week? 89 00:04:24,540 --> 00:04:27,900 Stephen Koukoulas: Well, there's really only two things of material note from 90 00:04:27,900 --> 00:04:30,629 Stephen Koukoulas: the domestic economy. One, we actually get the RBA minutes 91 00:04:30,630 --> 00:04:34,680 Stephen Koukoulas: from the July board meeting when they surprised some in 92 00:04:34,680 --> 00:04:38,190 Stephen Koukoulas: the market by holding rates steady. So obviously Dr. Lowe 93 00:04:38,190 --> 00:04:40,950 Stephen Koukoulas: gave a speech just recently about what they were talking 94 00:04:40,950 --> 00:04:42,719 Stephen Koukoulas: about. So I'd imagine the minutes will just simply cover 95 00:04:42,719 --> 00:04:44,819 Stephen Koukoulas: that. There was a debate between do they hold or 96 00:04:44,820 --> 00:04:47,368 Stephen Koukoulas: do they go 25 points, and obviously they decided to 97 00:04:47,369 --> 00:04:50,610 Stephen Koukoulas: hold. A discussion about how quickly inflation's falling and the 98 00:04:50,610 --> 00:04:54,270 Stephen Koukoulas: like. So they're always a good read. But arguably more 99 00:04:54,270 --> 00:04:57,089 Stephen Koukoulas: important than that, and Dr. Lowe made this point, that 100 00:04:57,089 --> 00:04:59,069 Stephen Koukoulas: the labor market numbers will be something that they look 101 00:04:59,070 --> 00:05:01,500 Stephen Koukoulas: at, and I'm sure Michele Bullock will look at them 102 00:05:01,529 --> 00:05:04,949 Stephen Koukoulas: too. But on Thursday we've got the labor force numbers 103 00:05:04,949 --> 00:05:07,229 Stephen Koukoulas: and they've been choppy month- to- month. We had a 104 00:05:07,260 --> 00:05:09,120 Stephen Koukoulas: fall and rise and the fall and a rise, all this 105 00:05:09,990 --> 00:05:13,589 Stephen Koukoulas: sawtooth pattern on employment and the unemployment rate. But they're going 106 00:05:13,589 --> 00:05:17,250 Stephen Koukoulas: to be really important. If we get another strong employment 107 00:05:17,250 --> 00:05:21,539 Stephen Koukoulas: number, say a plus 30,000 employment, unemployment staying at 3.5 Or 3. 108 00:05:22,440 --> 00:05:25,860 Stephen Koukoulas: 6%, maybe that feeds into the rate hike scenario. But 109 00:05:25,860 --> 00:05:28,290 Stephen Koukoulas: of course, the obverse of that is if we get 110 00:05:28,290 --> 00:05:32,339 Stephen Koukoulas: confirmation that employment growth is slowing, the unemployment rate is 111 00:05:32,339 --> 00:05:34,888 Stephen Koukoulas: ticking up, then the reserve bank can comfortably put their 112 00:05:34,950 --> 00:05:37,079 Stephen Koukoulas: hand on their heart and say, look, we can pause 113 00:05:37,080 --> 00:05:39,089 Stephen Koukoulas: another month and let's see how the economy goes. So 114 00:05:39,360 --> 00:05:41,850 Stephen Koukoulas: they're a really important indicator, but of course, let's not 115 00:05:41,850 --> 00:05:44,880 Stephen Koukoulas: forget that next week we get the inflation data and 116 00:05:44,880 --> 00:05:46,500 Stephen Koukoulas: they're going to be important as well as these labor 117 00:05:46,500 --> 00:05:47,669 Stephen Koukoulas: force data this week. 118 00:05:48,270 --> 00:05:52,200 Sean Aylmer: Not often can you cheer on higher unemployment, but I 119 00:05:52,200 --> 00:05:54,570 Sean Aylmer: reckon this week we can. Actually, it was Michele Bullock wasn't 120 00:05:54,570 --> 00:05:56,940 Sean Aylmer: it, who a couple of weeks ago actually talked about 121 00:05:56,940 --> 00:05:59,340 Sean Aylmer: the need to lose jobs in the economy? 122 00:05:59,639 --> 00:06:03,238 Stephen Koukoulas: Well, yes, it wasn't her speech of approximately three weeks 123 00:06:03,240 --> 00:06:05,250 Stephen Koukoulas: ago, I'd just have to check the date, but she 124 00:06:05,250 --> 00:06:08,219 Stephen Koukoulas: actually was talking about how their assessment of NAIRU, heaven 125 00:06:08,220 --> 00:06:11,669 Stephen Koukoulas: forbid, the full employment rate of unemployment, was about 4. 5%. 126 00:06:12,689 --> 00:06:16,709 Stephen Koukoulas: That below 4.5% you get wage pressures, you get capacity constraints, 127 00:06:16,709 --> 00:06:19,979 Stephen Koukoulas: you get labor shortages, skill shortages, and you can have 128 00:06:19,980 --> 00:06:21,570 Stephen Koukoulas: too much of a good thing. Like good red wine, 129 00:06:21,570 --> 00:06:23,099 Stephen Koukoulas: you can have a little bit too much from time to time. 130 00:06:23,099 --> 00:06:23,100 Sean Aylmer: No, no, you can't. No you can't. 131 00:06:23,100 --> 00:06:28,049 Stephen Koukoulas: Like an unemployment rate, it can be too low. And when 132 00:06:28,050 --> 00:06:31,500 Stephen Koukoulas: you run out of workers, which Australia did have, you 133 00:06:31,500 --> 00:06:33,419 Stephen Koukoulas: need to just put the economy back on an even 134 00:06:33,420 --> 00:06:36,000 Stephen Koukoulas: keel. And so when she gave that speech a few 135 00:06:36,000 --> 00:06:40,950 Stephen Koukoulas: weeks ago, Ms. Bullock was talking about that, about 4, 4.5%. So 136 00:06:40,950 --> 00:06:43,409 Stephen Koukoulas: if we get the unemployment rate edging up towards that 137 00:06:43,410 --> 00:06:45,928 Stephen Koukoulas: sort of level in the months ahead, again, it'd be 138 00:06:45,928 --> 00:06:48,779 Stephen Koukoulas: just another indicator that, yep, we've done enough on interest 139 00:06:48,779 --> 00:06:51,540 Stephen Koukoulas: rates, hold steady, let's wait for this inflation rate to 140 00:06:51,540 --> 00:06:55,500 Stephen Koukoulas: fall, and then reassess things as more information comes to 141 00:06:55,500 --> 00:06:56,339 Stephen Koukoulas: hand as they say. 142 00:06:56,670 --> 00:06:58,800 Sean Aylmer: Plenty to look forward to Stephen. Enjoy your week. 143 00:06:59,070 --> 00:07:01,169 Stephen Koukoulas: Thank you, Sean. Lots to digest and lots to look 144 00:07:01,170 --> 00:07:02,250 Stephen Koukoulas: forward to. You're spot on. 145 00:07:02,400 --> 00:07:05,039 Sean Aylmer: That's economist Stephen Koukoulas. You can find him at thekouk. 146 00:07:05,040 --> 00:07:07,650 Sean Aylmer: com or on Twitter using the handle Thekouk. I'm Sean 147 00:07:07,799 --> 00:07:09,900 Sean Aylmer: Aylmer and this is Fear and Greed: The Week Ahead.