1 00:00:08,539 --> 00:00:11,330 Sean Aylmer: Welcome to Fear and Greed - The Week Ahead. We're back 2 00:00:11,630 --> 00:00:13,930 Sean Aylmer: for a new year and we are fortunate to have 3 00:00:14,050 --> 00:00:18,260 Sean Aylmer: economist Stephen Koukoulas joining us again this year. You'll find 4 00:00:18,260 --> 00:00:20,239 Sean Aylmer: him at thekouk. com and on Twitter using the handle 5 00:00:20,239 --> 00:00:21,690 Sean Aylmer: of Kouk. Stephen, how are you? Did you have a 6 00:00:21,690 --> 00:00:22,460 Sean Aylmer: good summer break? 7 00:00:23,280 --> 00:00:26,079 Stephen Koukoulas: Sean, it was terrific. It wasn't too hot. There was 8 00:00:26,079 --> 00:00:31,510 Stephen Koukoulas: plenty of fantastic cricket, horse racing, tennis, relaxing. It was 9 00:00:31,600 --> 00:00:32,510 Stephen Koukoulas: fantastic. I loved it. 10 00:00:32,830 --> 00:00:35,620 Sean Aylmer: Couldn't get better. Now, I know there's such a big 11 00:00:35,620 --> 00:00:38,020 Sean Aylmer: week coming up, but we can't jump into that just 12 00:00:38,210 --> 00:00:41,260 Sean Aylmer: without mentioning a few things that happened last week, namely 13 00:00:41,260 --> 00:00:44,690 Sean Aylmer: Fed Reserve Chair, Jerome Powell's comments about interest rates and 14 00:00:44,800 --> 00:00:46,610 Sean Aylmer: those inflation numbers. Incredible. 15 00:00:47,300 --> 00:00:49,000 Stephen Koukoulas: It was a stunning week last week. It was a 16 00:00:49,000 --> 00:00:52,129 Stephen Koukoulas: real, I hate the phrase game changer, so I'm going 17 00:00:52,130 --> 00:00:54,960 Stephen Koukoulas: to use it anyway because it did reveal that the 18 00:00:54,960 --> 00:00:59,170 Stephen Koukoulas: Fed has on its agenda a lot of rate hiking 19 00:00:59,170 --> 00:01:01,930 Stephen Koukoulas: to do in the US and the market's now pricing 20 00:01:01,930 --> 00:01:06,119 Stephen Koukoulas: in effectively four or 5 25 basis point interest rate 21 00:01:06,120 --> 00:01:08,580 Stephen Koukoulas: heights during the course of this year. And Powell actually 22 00:01:08,580 --> 00:01:10,899 Stephen Koukoulas: mentioned that they may hike at every meeting, so that would 23 00:01:10,990 --> 00:01:15,020 Stephen Koukoulas: be seven heights. Now, I don't think anybody's forecasting that just yet, but such is 24 00:01:15,020 --> 00:01:17,690 Stephen Koukoulas: the inflation pressure in the US right now with a 25 00:01:17,690 --> 00:01:20,930 Stephen Koukoulas: sub 4% unemployment rate in the US that the Fed 26 00:01:20,980 --> 00:01:24,130 Stephen Koukoulas: is on track to hike and to hike a lot. 27 00:01:24,680 --> 00:01:27,819 Stephen Koukoulas: Here in Australia, we had our inflation numbers and it 28 00:01:27,819 --> 00:01:31,699 Stephen Koukoulas: was a shock. It was frankly the headline figure at 29 00:01:31,700 --> 00:01:34,850 Stephen Koukoulas: three and a half percent for annual inflation was the 30 00:01:34,850 --> 00:01:37,289 Stephen Koukoulas: highest it's been in quite a while and the underlying 31 00:01:37,290 --> 00:01:40,280 Stephen Koukoulas: inflation rate, which had been very low for many years 32 00:01:40,680 --> 00:01:43,940 Stephen Koukoulas: is also spiking higher. If you annualize the second half 33 00:01:43,940 --> 00:01:47,220 Stephen Koukoulas: of 2021, the last two quarters of last year, you've 34 00:01:47,220 --> 00:01:50,320 Stephen Koukoulas: got annualized underlying inflation close to three and a half 35 00:01:50,320 --> 00:01:53,000 Stephen Koukoulas: as well. So the RBA has a real challenge on 36 00:01:53,000 --> 00:01:55,320 Stephen Koukoulas: its hands to see what it does with rates. 37 00:01:55,820 --> 00:01:58,350 Sean Aylmer: The RBA's meeting this week, tomorrow in fact. What do 38 00:01:58,350 --> 00:01:58,980 Sean Aylmer: you think they'll do? 39 00:01:59,620 --> 00:02:02,480 Stephen Koukoulas: Oh, look, a couple of things are relatively straightforward. The 40 00:02:02,530 --> 00:02:05,880 Stephen Koukoulas: bond buying program, the quantitative easing yield curve control, whatever 41 00:02:05,880 --> 00:02:08,519 Stephen Koukoulas: you want to call it, that'll come to an end. They don't need to 42 00:02:08,520 --> 00:02:12,440 Stephen Koukoulas: be pushing money market interest rates lower through their bond 43 00:02:12,440 --> 00:02:15,950 Stephen Koukoulas: purchases so they'll announce the ending of that program. And 44 00:02:16,010 --> 00:02:17,410 Stephen Koukoulas: fair enough too. There will be a little bit of 45 00:02:17,410 --> 00:02:19,690 Stephen Koukoulas: interest to see whether they just let those bonds roll 46 00:02:19,690 --> 00:02:21,290 Stephen Koukoulas: off or whether they actually sell them back into the 47 00:02:21,290 --> 00:02:23,049 Stephen Koukoulas: market in the months and the year ahead. But at 48 00:02:23,050 --> 00:02:25,000 Stephen Koukoulas: this stage it's just the end of the bond buying 49 00:02:25,010 --> 00:02:27,970 Stephen Koukoulas: that will happen. The other critical thing is that, well, 50 00:02:28,050 --> 00:02:31,200 Stephen Koukoulas: they're not going to hike rates tomorrow, but they do 51 00:02:31,590 --> 00:02:36,270 Stephen Koukoulas: need to signal to the market that their guidance on 52 00:02:36,270 --> 00:02:41,700 Stephen Koukoulas: rate hikes in 2024 or late 2023 is obsolete, and 53 00:02:41,700 --> 00:02:44,120 Stephen Koukoulas: that rate hikes will be on the agenda earlier than 54 00:02:44,360 --> 00:02:48,250 Stephen Koukoulas: that. So the decision for them is exactly what month or 55 00:02:48,250 --> 00:02:50,419 Stephen Koukoulas: what sort of guidance they'll give to the start of 56 00:02:50,419 --> 00:02:51,330 Stephen Koukoulas: a hiking cycle? 57 00:02:52,530 --> 00:02:54,320 Sean Aylmer: So this week we've got the board meeting tomorrow. We've 58 00:02:54,320 --> 00:02:56,480 Sean Aylmer: also got the Governor Philip Lowe talking at the National 59 00:02:56,480 --> 00:02:59,410 Sean Aylmer: Press Club. That won't be a friendly crowd. Often Phil 60 00:02:59,410 --> 00:03:02,200 Sean Aylmer: Lowe finds himself in front of a reasonably friendly crowd 61 00:03:02,500 --> 00:03:04,820 Sean Aylmer: of economists, but the Press Club won't be a friendly 62 00:03:04,820 --> 00:03:07,490 Sean Aylmer: crowd. There's also the quarterly statement on monetary policy at 63 00:03:07,490 --> 00:03:10,230 Sean Aylmer: the end of the week. You would think that if 64 00:03:10,280 --> 00:03:13,130 Sean Aylmer: ever there was a chance for them to change what 65 00:03:13,130 --> 00:03:14,840 Sean Aylmer: they're indicating, this is the week. 66 00:03:15,139 --> 00:03:17,210 Stephen Koukoulas: That's a classic week. Yes. The Press Club is a 67 00:03:17,520 --> 00:03:20,760 Stephen Koukoulas: great chance for the formal speech from Governor Lowe to 68 00:03:21,180 --> 00:03:24,760 Stephen Koukoulas: really outline well, in fact, there's good news. And while, 69 00:03:24,930 --> 00:03:27,660 Stephen Koukoulas: yeah, gosh, I'm loath to be critical of the RBA when 70 00:03:27,740 --> 00:03:30,730 Stephen Koukoulas: they get it right, but they've hit their target for 71 00:03:30,730 --> 00:03:34,280 Stephen Koukoulas: full employment basically two years earlier than they were assuming 72 00:03:34,280 --> 00:03:37,140 Stephen Koukoulas: just in the middle of last year and they've reached 73 00:03:37,140 --> 00:03:40,140 Stephen Koukoulas: their inflation target earlier than they were assuming. So in a 74 00:03:40,140 --> 00:03:43,430 Stephen Koukoulas: sense, the RBA should be doing cartwheels. So Dr. Lowe's 75 00:03:43,430 --> 00:03:45,610 Stephen Koukoulas: got a chance to really celebrate the fact that he 76 00:03:45,610 --> 00:03:48,260 Stephen Koukoulas: achieved his goals earlier than expected and that's a good 77 00:03:48,260 --> 00:03:51,190 Stephen Koukoulas: thing. He also has the chance we were just touching 78 00:03:51,190 --> 00:03:53,420 Stephen Koukoulas: on a minute ago to say, well, hang on. The 0. 79 00:03:53,720 --> 00:03:56,770 Stephen Koukoulas: 1% cash rate, which has been in place for close to 18 80 00:03:56,770 --> 00:03:59,320 Stephen Koukoulas: months now was put in place because we feared unemployment 81 00:03:59,440 --> 00:04:03,110 Stephen Koukoulas: would go 10%. We thought that inflation would remain stubbornly 82 00:04:03,110 --> 00:04:05,610 Stephen Koukoulas: low for a couple of years. Now that's wrong. It 83 00:04:05,610 --> 00:04:07,970 Stephen Koukoulas: didn't happen and the fact that it didn't happen is 84 00:04:07,970 --> 00:04:11,060 Stephen Koukoulas: a good news story. And therefore we're in the process 85 00:04:11,060 --> 00:04:13,240 Stephen Koukoulas: of thinking about how we start to normalize interest rates 86 00:04:13,700 --> 00:04:14,400 Stephen Koukoulas: and of course that means rate hikes. 87 00:04:15,850 --> 00:04:17,849 Sean Aylmer: I suppose the word is normalize here. We're talking about 88 00:04:17,850 --> 00:04:21,050 Sean Aylmer: rate hikes, but apart from the last two years, normal 89 00:04:21,050 --> 00:04:23,130 Sean Aylmer: interest rates are closer to 2% probably for the official 90 00:04:23,130 --> 00:04:23,650 Sean Aylmer: cash rate. 91 00:04:24,120 --> 00:04:27,740 Stephen Koukoulas: I think that's right. And that's what the market's pricing in coincidentally, that when you 92 00:04:28,210 --> 00:04:30,810 Stephen Koukoulas: look at the futures market and the money market traders, 93 00:04:30,810 --> 00:04:33,050 Stephen Koukoulas: of course try to anticipate what the RBA will do. 94 00:04:33,120 --> 00:04:35,159 Stephen Koukoulas: They put their money where their mouth is each day 95 00:04:35,160 --> 00:04:37,589 Stephen Koukoulas: and each week. If we look at the futures strip, 96 00:04:37,830 --> 00:04:41,239 Stephen Koukoulas: they have something just under two percentage points of rate 97 00:04:41,520 --> 00:04:44,880 Stephen Koukoulas: hikes priced in to the latter part of 2023. So 98 00:04:44,880 --> 00:04:48,060 Stephen Koukoulas: over the next two years approximately, just under two percentage 99 00:04:48,060 --> 00:04:51,700 Stephen Koukoulas: points of rate hikes, which is to my mind about 100 00:04:51,700 --> 00:04:54,960 Stephen Koukoulas: right, that it's a sort of move that will have 101 00:04:54,960 --> 00:04:57,350 Stephen Koukoulas: an effect in sort of slowing the economy, obviously, which 102 00:04:57,350 --> 00:05:00,700 Stephen Koukoulas: is part of the objective of monetary policy tightenings. But 103 00:05:00,700 --> 00:05:03,610 Stephen Koukoulas: it wouldn't be the sort of draconian interest rate policy 104 00:05:03,610 --> 00:05:06,320 Stephen Koukoulas: pressure that would really cause the economy to weaken too 105 00:05:06,320 --> 00:05:10,790 Stephen Koukoulas: far. That normalizing as you quite rightly put in inverted 106 00:05:10,790 --> 00:05:13,619 Stephen Koukoulas: commas verbally there is really just a question of, do 107 00:05:13,620 --> 00:05:16,159 Stephen Koukoulas: we get rates back up to a level that's consistent 108 00:05:16,160 --> 00:05:19,010 Stephen Koukoulas: with full employment, consistent with inflation in the target band. 109 00:05:19,330 --> 00:05:21,290 Sean Aylmer: In a week like this week when there's so much 110 00:05:21,290 --> 00:05:24,260 Sean Aylmer: going on, some of the other data almost seemed secondary, 111 00:05:24,260 --> 00:05:28,360 Sean Aylmer: but important. Credit house prices, retail sales, international trade, all 112 00:05:28,360 --> 00:05:29,870 Sean Aylmer: interesting partial indicators. 113 00:05:30,380 --> 00:05:32,279 Stephen Koukoulas: They are. They'll just round out what's going to be 114 00:05:32,279 --> 00:05:34,530 Stephen Koukoulas: an absolute corker of a week for us economists that 115 00:05:35,089 --> 00:05:38,620 Stephen Koukoulas: the house price story we know from CoreLogic that we're going to get about 116 00:05:38,850 --> 00:05:42,099 Stephen Koukoulas: another 1% month on month increase in house prices. It's 117 00:05:42,100 --> 00:05:45,669 Stephen Koukoulas: slowing. But if you think about 1% per month, that's still actually 118 00:05:45,800 --> 00:05:48,620 Stephen Koukoulas: double digit annual growth so the slow down in house 119 00:05:48,620 --> 00:05:52,479 Stephen Koukoulas: prices isn't yet all that material. The other really interesting 120 00:05:52,480 --> 00:05:54,909 Stephen Koukoulas: number for me will be the retail sales numbers for 121 00:05:54,910 --> 00:05:59,349 Stephen Koukoulas: December. They'll have a little bit of Omicron cautious spending 122 00:05:59,350 --> 00:06:01,790 Stephen Koukoulas: at the end of December, but we know from the 123 00:06:01,790 --> 00:06:06,039 Stephen Koukoulas: October, November numbers that the December quarter retail sales were 124 00:06:06,370 --> 00:06:08,900 Stephen Koukoulas: very buoy. They're going to make a really hefty contribution 125 00:06:08,900 --> 00:06:11,969 Stephen Koukoulas: to the December quarter GDP results. They're probably going to 126 00:06:11,970 --> 00:06:15,370 Stephen Koukoulas: be watched to see whether there's just any fading of 127 00:06:15,370 --> 00:06:17,719 Stephen Koukoulas: that growth and consumer spending that was very strong in 128 00:06:17,720 --> 00:06:19,860 Stephen Koukoulas: the latter part of last year. And of course, credit 129 00:06:19,860 --> 00:06:22,779 Stephen Koukoulas: growth. Are we still borrowing lots of money for housing? 130 00:06:22,850 --> 00:06:25,500 Stephen Koukoulas: The short answer's, yes. That'll be reflected in these numbers, but I think 131 00:06:26,710 --> 00:06:28,969 Stephen Koukoulas: the pace of credit growth will also start to top 132 00:06:28,970 --> 00:06:29,870 Stephen Koukoulas: out in coming months. 133 00:06:30,040 --> 00:06:31,530 Sean Aylmer: Fantastic Stephen. Enjoy the week. 134 00:06:31,920 --> 00:06:33,210 Stephen Koukoulas: Thank you, Sean. It'll be a beauty. 135 00:06:33,529 --> 00:06:36,150 Sean Aylmer: That was economist Stephen Koukoulas, better known as the Kouk. 136 00:06:36,150 --> 00:06:38,339 Sean Aylmer: You can find him at thekouk. com, T H E 137 00:06:38,339 --> 00:06:40,719 Sean Aylmer: K O U K dot com and follow him on 138 00:06:40,720 --> 00:06:43,550 Sean Aylmer: Twitter using the handle, the Kouk, I'm Sean Aylmer and 139 00:06:43,550 --> 00:06:45,740 Sean Aylmer: this is Fear and Greed - The Week Ahead.