1 00:00:08,220 --> 00:00:10,500 Sean Aylmer: Welcome to Fear and Greed, The Week Ahead, I'm Sean 2 00:00:10,710 --> 00:00:13,980 Sean Aylmer: Aylmer, and as always, I'm joined by economist, Stephen Koukoulas. 3 00:00:13,980 --> 00:00:16,500 Sean Aylmer: You'll find him at thekouk. com, T- H- E, K- O- U- 4 00:00:16,500 --> 00:00:19,739 Sean Aylmer: K, thekouk. com, and on Twitter using the handle thekouk. 5 00:00:19,739 --> 00:00:20,670 Sean Aylmer: Stephen, good morning. 6 00:00:21,210 --> 00:00:22,140 Stephen Koukoulas: Good morning, Sean. 7 00:00:22,860 --> 00:00:24,900 Sean Aylmer: Now, look, there wasn't a lot of economic news out 8 00:00:24,900 --> 00:00:27,630 Sean Aylmer: last week, apart from the Reserve Bank minutes, but wow, 9 00:00:27,630 --> 00:00:30,150 Sean Aylmer: what a week for markets, pretty much thanks to the Fed. 10 00:00:30,660 --> 00:00:32,760 Stephen Koukoulas: Fed and even the Bank of England and others were 11 00:00:32,760 --> 00:00:35,250 Stephen Koukoulas: hiking interest rates like crazy, I think it's fair to 12 00:00:35,250 --> 00:00:38,460 Stephen Koukoulas: say. We all saw the big moves and the very 13 00:00:38,460 --> 00:00:42,330 Stephen Koukoulas: hawkish commentary coming from Jerome Powell, from the US Fed, 14 00:00:42,330 --> 00:00:44,460 Stephen Koukoulas: and even from the Bank of England, where there was 15 00:00:44,460 --> 00:00:45,960 Stephen Koukoulas: a bit of a split in the vote of whether 16 00:00:45,960 --> 00:00:49,979 Stephen Koukoulas: they went 50 or 75. Now, they ended up going 50 only, 17 00:00:49,979 --> 00:00:53,001 Stephen Koukoulas: but there were three members of the voting panel that (inaudible) 18 00:00:53,001 --> 00:00:55,230 Stephen Koukoulas: to 75. So, a little bit of a dispute 19 00:00:55,230 --> 00:00:58,410 Stephen Koukoulas: there, but the bottom line is clearly these central banks 20 00:00:58,680 --> 00:01:03,060 Stephen Koukoulas: are absolutely adamant they're be fighting inflation. These rate hikes 21 00:01:03,060 --> 00:01:05,550 Stephen Koukoulas: are taking rates to I think what most analysts will 22 00:01:05,550 --> 00:01:09,630 Stephen Koukoulas: say are neutral, maybe even slightly restrictive. But given where 23 00:01:09,630 --> 00:01:12,179 Stephen Koukoulas: inflation is, they're still pricing in more come. 24 00:01:12,720 --> 00:01:16,140 Sean Aylmer: Yeah, I mean, as you mentioned then, the heads of 25 00:01:16,140 --> 00:01:21,179 Sean Aylmer: these central banks are jaw boning the need to absolutely 26 00:01:21,390 --> 00:01:23,250 Sean Aylmer: clamped down on inflation and price rises. 27 00:01:24,060 --> 00:01:26,550 Stephen Koukoulas: Indeed, I'm old enough to remember, back in the... Gosh, 28 00:01:26,550 --> 00:01:31,890 Stephen Koukoulas: I think it was the '80s or '90s, the debate was is it inflation or 29 00:01:31,920 --> 00:01:35,160 Stephen Koukoulas: growth? You can't have both in the current... As in 30 00:01:35,160 --> 00:01:37,920 Stephen Koukoulas: low inflation and strong growth. So, this is where it's, 31 00:01:38,610 --> 00:01:40,140 Stephen Koukoulas: again, dare I say it, the recession we have to 32 00:01:40,140 --> 00:01:43,080 Stephen Koukoulas: have that, the central bank, certainly in the US are saying, " 33 00:01:43,080 --> 00:01:46,230 Stephen Koukoulas: Look, we are happy to grind the economy into the 34 00:01:46,230 --> 00:01:49,320 Stephen Koukoulas: ground for the sake of getting inflation back under control." 35 00:01:49,560 --> 00:01:52,620 Stephen Koukoulas: The best thing we can do is actually have inflation 36 00:01:52,680 --> 00:01:55,950 Stephen Koukoulas: low and stable around their 2% target, and if the 37 00:01:55,950 --> 00:01:58,920 Stephen Koukoulas: economy's still growing, it's very hard to achieve it. So, 38 00:01:59,220 --> 00:02:02,610 Stephen Koukoulas: basically, they've acknowledged, without using the exact words, that they're 39 00:02:02,940 --> 00:02:05,340 Stephen Koukoulas: happy, in inverted commas, to have a recession to get 40 00:02:05,340 --> 00:02:08,400 Stephen Koukoulas: this inflation rate back under control, and many other central 41 00:02:08,400 --> 00:02:10,260 Stephen Koukoulas: banks are in a very similar position. 42 00:02:10,530 --> 00:02:12,300 Sean Aylmer: So, just bringing that back to the Reserve Bank of 43 00:02:12,300 --> 00:02:15,330 Sean Aylmer: Australia, we were only a week or two ago talking 44 00:02:15,330 --> 00:02:19,049 Sean Aylmer: about 25 basis points, maybe 50 basis points. It seems 45 00:02:19,050 --> 00:02:22,619 Sean Aylmer: the action from other central banks have convinced some market 46 00:02:22,620 --> 00:02:25,200 Sean Aylmer: economists that it's more likely to be 50 basis points 47 00:02:25,200 --> 00:02:28,860 Sean Aylmer: from the Reserve Bank. How much influence does what the 48 00:02:28,860 --> 00:02:31,980 Sean Aylmer: other central banks do have on Martin Place here? 49 00:02:32,730 --> 00:02:36,150 Stephen Koukoulas: Look, it does have an influence, the broad thrust of 50 00:02:36,150 --> 00:02:39,240 Stephen Koukoulas: policy, certainly the direction, but even orders of magnitude of 51 00:02:39,240 --> 00:02:43,260 Stephen Koukoulas: rates are globally determinant. Australia has its own inflation problem, 52 00:02:43,260 --> 00:02:46,260 Stephen Koukoulas: too, we shouldn't forget that we've got inflation, according to 53 00:02:46,260 --> 00:02:49,980 Stephen Koukoulas: the RBAs own forecasts, heading towards 8% by the end 54 00:02:49,980 --> 00:02:52,560 Stephen Koukoulas: of the year. We've got the labor market still as 55 00:02:52,560 --> 00:02:56,070 Stephen Koukoulas: tight as a drum, and because of that, we only have 56 00:02:56,070 --> 00:02:58,410 Stephen Koukoulas: a cash rate at 2. 35%. So, this is where 57 00:02:58,410 --> 00:03:01,169 Stephen Koukoulas: the discussion is, well, how much higher the rates have 58 00:03:01,169 --> 00:03:03,450 Stephen Koukoulas: to go to for us to get our inflation back 59 00:03:03,450 --> 00:03:06,690 Stephen Koukoulas: under control. So, it does matter what happens overseas, and 60 00:03:06,720 --> 00:03:09,000 Stephen Koukoulas: again, the thing that happened last week, in particular, was 61 00:03:09,000 --> 00:03:11,460 Stephen Koukoulas: the free fall and the Aussie dollar. It fell below 62 00:03:11,460 --> 00:03:14,760 Stephen Koukoulas: 66 cents at one stage, because the Fed was hiking, 63 00:03:14,760 --> 00:03:19,350 Stephen Koukoulas: and maybe the RBA won't go as much, so the Aussie 64 00:03:19,590 --> 00:03:21,510 Stephen Koukoulas: was under a lot of pressure late last week. 65 00:03:22,080 --> 00:03:23,669 Sean Aylmer: Dreadful time to go on holiday, Stephen. 66 00:03:24,570 --> 00:03:26,850 Stephen Koukoulas: To the US, it's a bad time. Look, the funny 67 00:03:26,850 --> 00:03:30,210 Stephen Koukoulas: thing is it's a US dollar story, we're actually holding up. If 68 00:03:30,210 --> 00:03:32,459 Stephen Koukoulas: you look at the cross rates, Aussie versus the euro, 69 00:03:32,460 --> 00:03:35,190 Stephen Koukoulas: the British pound, and the like, we're actually sort of 70 00:03:35,190 --> 00:03:37,980 Stephen Koukoulas: treading water. We're not really falling, so it's really just 71 00:03:37,980 --> 00:03:40,500 Stephen Koukoulas: everybody pumping money into the US dollar. 72 00:03:40,950 --> 00:03:42,960 Sean Aylmer: Now, come on, there's a story behind this, because you 73 00:03:42,960 --> 00:03:44,130 Sean Aylmer: are going to Europe shortly. 74 00:03:45,000 --> 00:03:47,820 Stephen Koukoulas: Well, I am, next week I'm off to a Greece 75 00:03:47,820 --> 00:03:50,940 Stephen Koukoulas: for a holiday, so this is my last Week Ahead 76 00:03:50,940 --> 00:03:51,750 Stephen Koukoulas: for quite a while. 77 00:03:51,750 --> 00:03:51,840 Sean Aylmer: I know. 78 00:03:51,840 --> 00:03:54,540 Stephen Koukoulas: So, I'm looking at (inaudible) the euro, and it's been okay, it's been 79 00:03:54,540 --> 00:03:58,800 Stephen Koukoulas: okay. So, don't feel sorry for me when I'm on the 80 00:03:58,800 --> 00:04:02,790 Stephen Koukoulas: beach in Mykonos, having a Campari and soda. 81 00:04:03,300 --> 00:04:06,090 Sean Aylmer: I probably won't, I probably won't. What about this week 82 00:04:06,090 --> 00:04:08,460 Sean Aylmer: coming up, just as you head off later in the 83 00:04:08,460 --> 00:04:10,800 Sean Aylmer: week, what I hope you're not going to miss though 84 00:04:11,310 --> 00:04:14,070 Sean Aylmer: is something you've been lobbying for a long time, monthly 85 00:04:14,070 --> 00:04:15,210 Sean Aylmer: CPI data. 86 00:04:15,510 --> 00:04:19,349 Stephen Koukoulas: Yes, I'm thrilled, just as a very quick background, 20 87 00:04:19,350 --> 00:04:21,450 Stephen Koukoulas: odd years ago, when I was working at TD Securities, 88 00:04:21,810 --> 00:04:25,170 Stephen Koukoulas: we funded with the Melbourne Institute of Applied Economic and 89 00:04:25,170 --> 00:04:30,720 Stephen Koukoulas: Social Research, an experimental monthly inflation indicator, and they replicated 90 00:04:30,720 --> 00:04:33,810 Stephen Koukoulas: the ABS methodology as near as they could and it's 91 00:04:33,810 --> 00:04:36,690 Stephen Koukoulas: a useful indicator. It's still coming out, but I fear 92 00:04:36,690 --> 00:04:39,360 Stephen Koukoulas: it's going to be superseded now, because the ABS themselves, 93 00:04:39,360 --> 00:04:43,260 Stephen Koukoulas: of course, in recent times, have had their own experimental 94 00:04:43,260 --> 00:04:46,440 Stephen Koukoulas: monthly inflation reading and now they're publishing it. This week 95 00:04:46,440 --> 00:04:49,350 Stephen Koukoulas: we're going to be seeing the month of July and 96 00:04:49,350 --> 00:04:52,200 Stephen Koukoulas: August, they're doing two months in the one release, to 97 00:04:52,200 --> 00:04:53,820 Stephen Koukoulas: sort of give us a bit more of an indicator 98 00:04:53,820 --> 00:04:57,330 Stephen Koukoulas: on how that momentum on inflation is going. So, three 99 00:04:57,330 --> 00:05:00,210 Stephen Koukoulas: cheers for the Bureau of Statistics, we're getting monthly inflation reading. 100 00:05:01,410 --> 00:05:03,089 Sean Aylmer: When you get a new series like this, is it 101 00:05:03,089 --> 00:05:05,700 Sean Aylmer: something that you just have to watch for 12 months or so, just 102 00:05:05,700 --> 00:05:08,820 Sean Aylmer: to see how it performs, or can you kind of 103 00:05:08,820 --> 00:05:10,950 Sean Aylmer: trade off the number that comes out this week? 104 00:05:11,279 --> 00:05:13,320 Stephen Koukoulas: Yeah, look, a really good question, which is why the 105 00:05:13,320 --> 00:05:16,979 Stephen Koukoulas: ABS actually compile the numbers for a good year or 106 00:05:16,980 --> 00:05:18,989 Stephen Koukoulas: two before they actually release them. They do their own 107 00:05:18,990 --> 00:05:21,870 Stephen Koukoulas: testing, they don't just produce a monthly number and here 108 00:05:21,870 --> 00:05:23,730 Stephen Koukoulas: it is, market, you go and work out whether it's 109 00:05:23,730 --> 00:05:26,880 Stephen Koukoulas: good or a bad one. So, in fact, last quarter, 110 00:05:27,390 --> 00:05:31,589 Stephen Koukoulas: they released the monthly series with the quarterly data going 111 00:05:31,589 --> 00:05:33,810 Stephen Koukoulas: back around about two years. So, you can sort of 112 00:05:33,810 --> 00:05:37,589 Stephen Koukoulas: see the volatility within the quarter, obviously, three months within 113 00:05:37,589 --> 00:05:40,410 Stephen Koukoulas: a quarter, you can get big jumps up and down, 114 00:05:40,410 --> 00:05:43,260 Stephen Koukoulas: with the petrol prices and things like that having a 115 00:05:43,260 --> 00:05:46,110 Stephen Koukoulas: big impact. So, they tested already, but I dare say, 116 00:05:46,110 --> 00:05:49,529 Stephen Koukoulas: every market economist I'm aware of has been pouring over 117 00:05:49,529 --> 00:05:51,120 Stephen Koukoulas: and having a good look to see just what we 118 00:05:51,120 --> 00:05:52,980 Stephen Koukoulas: could make of the numbers when they come out. 119 00:05:53,700 --> 00:05:56,190 Sean Aylmer: A few other, I mean, bits and pieces really this 120 00:05:56,190 --> 00:05:58,650 Sean Aylmer: week, one that will be interesting is the final budget 121 00:05:58,650 --> 00:06:01,770 Sean Aylmer: outcome. We heard last week treasurer, Jim Chalmers, saying it'd 122 00:06:01,770 --> 00:06:03,960 Sean Aylmer: be about 50 billion better than expected. 123 00:06:04,589 --> 00:06:08,700 Stephen Koukoulas: Yes, so they have to release the final budget number 124 00:06:08,700 --> 00:06:12,450 Stephen Koukoulas: for financially year '21, '22, by the end of this week, 125 00:06:12,839 --> 00:06:14,760 Stephen Koukoulas: I'm not quite sure which day it's coming out. But we do 126 00:06:14,760 --> 00:06:16,950 Stephen Koukoulas: know that, as you said, Jim Chalmers said because of 127 00:06:16,950 --> 00:06:20,250 Stephen Koukoulas: the, well, what was a boom in commodity prices up 128 00:06:20,250 --> 00:06:24,150 Stephen Koukoulas: to 30 June, a very strong labor market that was 129 00:06:24,150 --> 00:06:26,100 Stephen Koukoulas: creating jobs. So, when you've got a job, you pay 130 00:06:26,100 --> 00:06:28,650 Stephen Koukoulas: tax, there was some evidence that wages were picking up, 131 00:06:28,650 --> 00:06:32,430 Stephen Koukoulas: so when you earn more, you pay more tax, and spending was strong, 132 00:06:32,430 --> 00:06:36,270 Stephen Koukoulas: so GST collections were also high. All that fed into 133 00:06:36,390 --> 00:06:40,770 Stephen Koukoulas: a $ 50 billion improvement in the annual budget bottom line. 134 00:06:40,770 --> 00:06:43,680 Stephen Koukoulas: So, we're looking for a deficit around about 30 billion, 135 00:06:43,680 --> 00:06:46,950 Stephen Koukoulas: rather than the 80 billion that, well, the previous treasurer, 136 00:06:46,950 --> 00:06:49,289 Stephen Koukoulas: Josh Frydenberg, was forecasting back in March. 137 00:06:51,240 --> 00:06:53,610 Sean Aylmer: Dr. Chalmers also warned that it's kind of a one 138 00:06:53,610 --> 00:06:56,190 Sean Aylmer: off, well, at least the commodity prices is a one off. 139 00:06:56,790 --> 00:07:00,000 Stephen Koukoulas: Yes, and since that windfall, I suppose we could call 140 00:07:00,000 --> 00:07:02,100 Stephen Koukoulas: it, we do know that commodity prices are falling. So, 141 00:07:02,100 --> 00:07:06,539 Stephen Koukoulas: the iron ore, which was hovering at 130 and 140 US dollars 142 00:07:06,540 --> 00:07:10,020 Stephen Koukoulas: a ton is now down around about a 100 dollars, US, 143 00:07:10,020 --> 00:07:11,520 Stephen Koukoulas: a ton. So, that's a bit of a loss of 144 00:07:11,850 --> 00:07:14,130 Stephen Koukoulas: revenue, not only for the mining companies, but also for 145 00:07:14,130 --> 00:07:16,920 Stephen Koukoulas: the government, and the economy appears to be slowing down 146 00:07:16,920 --> 00:07:19,140 Stephen Koukoulas: too, so that it does appear to be a one 147 00:07:19,140 --> 00:07:22,080 Stephen Koukoulas: off. Look, you take it, it's fantastic. 50 billion's not 148 00:07:22,080 --> 00:07:25,560 Stephen Koukoulas: the sort of money you behind the back of the couch, but I don't 149 00:07:25,560 --> 00:07:28,650 Stephen Koukoulas: think it's a structural improvement in the budget. More basically, 150 00:07:28,650 --> 00:07:31,350 Stephen Koukoulas: because the treasury got it's forecast wrong, and they underestimated 151 00:07:31,350 --> 00:07:34,710 Stephen Koukoulas: revenue and overestimated government spending, which didn't happen. 152 00:07:36,000 --> 00:07:37,650 Sean Aylmer: (inaudible) for August are also out, it's funny, during 153 00:07:37,650 --> 00:07:40,560 Sean Aylmer: the last earning season, some companies came out and said 154 00:07:40,560 --> 00:07:43,920 Sean Aylmer: things have gone really soft since the end of June 155 00:07:43,920 --> 00:07:46,350 Sean Aylmer: 30, the financial year, and other retailers I'm talking about, 156 00:07:46,350 --> 00:07:48,540 Sean Aylmer: and other retailers came out and said actually things are 157 00:07:48,540 --> 00:07:50,700 Sean Aylmer: pretty good, so what do we expect from the August 158 00:07:50,700 --> 00:07:51,540 Sean Aylmer: retail sales? 159 00:07:51,810 --> 00:07:55,410 Stephen Koukoulas: The internal bank data on credit card transactions are pointing 160 00:07:55,410 --> 00:07:58,050 Stephen Koukoulas: to a slower number, I think we have had the 161 00:07:58,050 --> 00:08:01,920 Stephen Koukoulas: reaction of consumers to rate hikes and just the slower 162 00:08:01,920 --> 00:08:04,380 Stephen Koukoulas: economy, more generally. So, the market's looking for about a 163 00:08:04,380 --> 00:08:07,830 Stephen Koukoulas: flat outcome for August, but it just depends on how 164 00:08:07,830 --> 00:08:10,350 Stephen Koukoulas: much coffee we've all been buying in that month. Whether 165 00:08:10,350 --> 00:08:12,239 Stephen Koukoulas: it's sort of just a temporary blip, or whether it's 166 00:08:12,240 --> 00:08:14,940 Stephen Koukoulas: the start of a trend lower in household spending. The 167 00:08:14,940 --> 00:08:17,850 Stephen Koukoulas: RBA certainly think that, in broader terms, that the trend 168 00:08:17,850 --> 00:08:19,140 Stephen Koukoulas: is lower for consumer spending. 169 00:08:19,770 --> 00:08:22,770 Sean Aylmer: Another couple of partial indicators, job vacancies will be interesting, 170 00:08:22,770 --> 00:08:23,790 Sean Aylmer: and private sector credit. 171 00:08:24,270 --> 00:08:26,880 Stephen Koukoulas: Yeah, two little ones also of some importance. Job vacancies, 172 00:08:26,880 --> 00:08:29,730 Stephen Koukoulas: which have been strong, a good forward indicator of how 173 00:08:29,910 --> 00:08:33,179 Stephen Koukoulas: employment's going. Some evidence that these are topping out, I 174 00:08:33,179 --> 00:08:34,980 Stephen Koukoulas: wouldn't say a slowing, but a topping out in demand 175 00:08:34,980 --> 00:08:38,730 Stephen Koukoulas: for labor, so we'll watch those. Private sector credit housing slowing 176 00:08:38,730 --> 00:08:41,610 Stephen Koukoulas: down, so credit for housing will be weaker. Business credit 177 00:08:41,610 --> 00:08:45,480 Stephen Koukoulas: still seems pretty strong though, businesses are investing, so it'll 178 00:08:45,480 --> 00:08:46,500 Stephen Koukoulas: be mixed views on that one. 179 00:08:47,160 --> 00:08:48,960 Sean Aylmer: So, Stephen, we won't be speaking to you again for 180 00:08:48,960 --> 00:08:50,189 Sean Aylmer: a few more weeks, is that right? 181 00:08:50,790 --> 00:08:53,730 Stephen Koukoulas: That's right, I'm going to be sunning myself in glorious 182 00:08:53,730 --> 00:08:55,650 Stephen Koukoulas: Greece, but I'll certainly talk to you when I get 183 00:08:55,650 --> 00:08:57,000 Stephen Koukoulas: back towards the end of October. 184 00:08:57,360 --> 00:09:00,059 Sean Aylmer: Yeah, we've got the wonderful Cheryl Murphy stepping in for 185 00:09:00,059 --> 00:09:03,211 Sean Aylmer: you, Cheryl's at EY, another regular here. 186 00:09:03,211 --> 00:09:07,800 Stephen Koukoulas: I'm scared she's going to outdo me, Cheryl's a brilliant economist, so I'm sure she'll do a great job. 187 00:09:08,280 --> 00:09:10,620 Sean Aylmer: Stephen, enjoy the week, but have a great break, you 188 00:09:10,620 --> 00:09:11,100 Sean Aylmer: deserve it. 189 00:09:11,670 --> 00:09:12,480 Stephen Koukoulas: Thank you, Sean. 190 00:09:13,200 --> 00:09:16,140 Sean Aylmer: That was economist, Stephen Koukoulas, better known as The Kouk, you can 191 00:09:16,140 --> 00:09:18,720 Sean Aylmer: find him at thekouk. com, and follow him on Twitter 192 00:09:18,720 --> 00:09:21,689 Sean Aylmer: using the handle thekouk. I'm Sean Aylmer, and this is 193 00:09:21,690 --> 00:09:22,950 Sean Aylmer: Fear and Greed, The Week Ahead.