1 00:00:07,920 --> 00:00:10,140 Sean Aylmer: Welcome to Fear and Greed: The Week Ahead. I'm Sean 2 00:00:10,140 --> 00:00:14,010 Sean Aylmer: Aylmer, and as always, I'm joined by economist Steven Koukoulas. 3 00:00:14,340 --> 00:00:16,590 Sean Aylmer: You'll find him at thekouk. com and on Twitter using 4 00:00:16,590 --> 00:00:18,599 Sean Aylmer: the handle TheKouk. Steven, good morning. 5 00:00:19,170 --> 00:00:20,400 Steven Koukoulas: A very good morning, Sean. 6 00:00:20,970 --> 00:00:23,760 Sean Aylmer: Well, what a week last week was, and probably this 7 00:00:23,760 --> 00:00:26,550 Sean Aylmer: week will be. The Reserve Bank, they did what we 8 00:00:26,550 --> 00:00:29,310 Sean Aylmer: thought they'd do, but I'll tell you what, that commentary 9 00:00:29,640 --> 00:00:30,990 Sean Aylmer: kind of came from left field. 10 00:00:31,860 --> 00:00:33,990 Steven Koukoulas: It was a classic case of... It's more what they 11 00:00:33,990 --> 00:00:36,809 Steven Koukoulas: said than what they did that spooked many of us in 12 00:00:36,930 --> 00:00:42,029 Steven Koukoulas: the market, myself included. And in summary, from where they 13 00:00:42,030 --> 00:00:44,580 Steven Koukoulas: were in December to where they were last week with 14 00:00:44,580 --> 00:00:49,440 Steven Koukoulas: the rate hike is a refocus on just how stubborn 15 00:00:49,500 --> 00:00:52,350 Steven Koukoulas: in their view inflation is going to be. So, in 16 00:00:52,350 --> 00:00:54,570 Steven Koukoulas: a sense, the CPI that we saw at the end 17 00:00:54,570 --> 00:00:58,560 Steven Koukoulas: of the December quarter, 7. 8% inflation, was broadly as 18 00:00:58,560 --> 00:01:00,810 Steven Koukoulas: they were expected. So, that really wasn't the thing that 19 00:01:00,810 --> 00:01:04,260 Steven Koukoulas: forced their hand. It was more from reading what was 20 00:01:04,260 --> 00:01:07,500 Steven Koukoulas: in the statement and in the statement on monetary policy. 21 00:01:07,590 --> 00:01:10,709 Steven Koukoulas: It was more that they're worried that inflation will be 22 00:01:10,709 --> 00:01:15,000 Steven Koukoulas: persistent, hence the move last week. But also, more importantly, 23 00:01:15,330 --> 00:01:18,720 Steven Koukoulas: the expectation from the bank that there will be several 24 00:01:18,720 --> 00:01:20,670 Steven Koukoulas: more interest rate hikes in the months ahead. 25 00:01:21,390 --> 00:01:23,399 Sean Aylmer: What I thought was interesting, and we spoke to Gareth 26 00:01:23,400 --> 00:01:26,339 Sean Aylmer: Aird, Head of Economics at the Commonwealth Bank, last week 27 00:01:26,340 --> 00:01:29,459 Sean Aylmer: about this, they kind of dropped their optionality a bit. 28 00:01:29,730 --> 00:01:32,370 Sean Aylmer: So, 12 months ago they got burnt because they said 29 00:01:32,370 --> 00:01:35,100 Sean Aylmer: they wouldn't lift interest rates till 2024. Of course, they 30 00:01:35,100 --> 00:01:38,729 Sean Aylmer: started lifting in May last year. This time around, they 31 00:01:38,730 --> 00:01:40,679 Sean Aylmer: just kind of made it very clear rates are still 32 00:01:40,680 --> 00:01:43,920 Sean Aylmer: going to rise without giving them so as much optionality 33 00:01:43,920 --> 00:01:45,030 Sean Aylmer: to change their mind. 34 00:01:45,780 --> 00:01:48,270 Steven Koukoulas: Yeah, I think that was a really good point. And, 35 00:01:49,020 --> 00:01:51,420 Steven Koukoulas: look, the economy's still slowing down. So, one thing that 36 00:01:51,450 --> 00:01:53,460 Steven Koukoulas: was consuming a lot of my time last week, and 37 00:01:53,460 --> 00:01:55,380 Steven Koukoulas: I'm sure it will for the next little while, is 38 00:01:55,380 --> 00:01:58,410 Steven Koukoulas: still analyzing what's actually happening in the economy. So, okay, 39 00:01:58,410 --> 00:02:00,660 Steven Koukoulas: we know what the RBA is thinking, but where is the 40 00:02:00,660 --> 00:02:03,090 Steven Koukoulas: economy right now? And I think the bottom line is 41 00:02:03,090 --> 00:02:05,820 Steven Koukoulas: it's still slowing. There's no question. We saw very soggy 42 00:02:05,820 --> 00:02:09,180 Steven Koukoulas: retail sales numbers recently. We know that consumer sentiments in 43 00:02:09,180 --> 00:02:11,520 Steven Koukoulas: the doldrums. We know house prices are still very weak. 44 00:02:11,520 --> 00:02:14,520 Steven Koukoulas: We know the global economy is slowing down. We know 45 00:02:14,520 --> 00:02:16,919 Steven Koukoulas: that even from the NAB Business Survey recently that there's 46 00:02:16,919 --> 00:02:19,770 Steven Koukoulas: a bit of a downturn in the optimism in the 47 00:02:19,770 --> 00:02:22,919 Steven Koukoulas: business sector. So, yeah, the slowdown's happening. We know that, 48 00:02:22,919 --> 00:02:25,860 Steven Koukoulas: globally, inflation rates are starting to tick a little bit 49 00:02:25,860 --> 00:02:28,770 Steven Koukoulas: lower. So, if we do find in, just say, the 50 00:02:28,770 --> 00:02:32,430 Steven Koukoulas: next two months that the economy is very weak, the 51 00:02:32,430 --> 00:02:35,100 Steven Koukoulas: proverbial rate hike that breaks the camel's back so to 52 00:02:35,100 --> 00:02:37,860 Steven Koukoulas: speak, comes through in the data, then the RBA sort 53 00:02:37,860 --> 00:02:40,770 Steven Koukoulas: of painted themselves into this position again when, " Gee, the 54 00:02:40,770 --> 00:02:43,200 Steven Koukoulas: economy's really weak and oh, we were signaling that we 55 00:02:43,200 --> 00:02:46,020 Steven Koukoulas: had more rate hikes to do." That'll be a dilemma 56 00:02:46,020 --> 00:02:47,970 Steven Koukoulas: that they might have to backtrack on. But, look, there's 57 00:02:47,970 --> 00:02:49,860 Steven Koukoulas: a lot of water to go under the bridge before we get there. 58 00:02:52,710 --> 00:02:54,600 Sean Aylmer: Okay. Now, talking about data and how the economy's going. This week, we've got the labor 59 00:02:54,600 --> 00:02:55,200 Sean Aylmer: force figures. 60 00:02:55,530 --> 00:02:59,669 Steven Koukoulas: Critical as always. Yeah, we've got the numbers for January, 61 00:02:59,970 --> 00:03:03,060 Steven Koukoulas: and just for context, month on month, they're often quite 62 00:03:03,060 --> 00:03:07,260 Steven Koukoulas: volatile. We saw actually a fall in employment in December. 63 00:03:07,260 --> 00:03:10,019 Steven Koukoulas: So, here we are in January, and that seasonally adjusting 64 00:03:10,020 --> 00:03:13,320 Steven Koukoulas: process between December and January because of holidays and all 65 00:03:13,320 --> 00:03:16,080 Steven Koukoulas: this other stuff, is very difficult for the RBA. That 66 00:03:16,080 --> 00:03:18,600 Steven Koukoulas: said, the mark is expecting something of a rebound in 67 00:03:18,600 --> 00:03:22,590 Steven Koukoulas: employment, so something like plus 25, 000 in employment, and the 68 00:03:22,590 --> 00:03:25,230 Steven Koukoulas: unemployment rate to hover around three and a half percent. 69 00:03:25,800 --> 00:03:29,010 Steven Koukoulas: If there's any weakness in these numbers, don't forget that 70 00:03:29,010 --> 00:03:32,190 Steven Koukoulas: things like job advertisements, job vacancies have just been ticking 71 00:03:32,190 --> 00:03:35,250 Steven Koukoulas: down a little bit over the last couple of months. 72 00:03:35,370 --> 00:03:38,340 Steven Koukoulas: But if there's any sort of relative softness, then I 73 00:03:38,340 --> 00:03:41,610 Steven Koukoulas: think it'll cause just a bit of a reassessment on 74 00:03:41,610 --> 00:03:43,201 Steven Koukoulas: where we're at and where the RBA's at. 75 00:03:43,201 --> 00:03:48,300 Sean Aylmer: Okay. The Governor of the Reserve Bank, Philip Lowe, is 76 00:03:48,300 --> 00:03:51,180 Sean Aylmer: also talking quite, well, a number of times this week. 77 00:03:51,450 --> 00:03:55,680 Steven Koukoulas: He is. Yes. He's got the Senate Economics Legislation Committee, 78 00:03:55,980 --> 00:03:59,130 Steven Koukoulas: and then he's got the House of Representatives Standing Committee 79 00:03:59,130 --> 00:04:02,250 Steven Koukoulas: on Economics. I think it's the latter one that's going 80 00:04:02,250 --> 00:04:03,630 Steven Koukoulas: to grill him a bit more because that's sort of 81 00:04:03,630 --> 00:04:06,120 Steven Koukoulas: more a macro view on where's the economy, what are 82 00:04:06,120 --> 00:04:09,059 Steven Koukoulas: you doing with interest rates, where's inflation, and that myriad 83 00:04:09,060 --> 00:04:11,130 Steven Koukoulas: of questions. And I think the House of Reps Committee's 84 00:04:11,130 --> 00:04:14,190 Steven Koukoulas: actually full of pretty competent people, so he should be 85 00:04:14,190 --> 00:04:16,860 Steven Koukoulas: sort of putting on his suit of armor ready for 86 00:04:16,860 --> 00:04:19,109 Steven Koukoulas: a barrage of tough questions, and fair enough. Look, he's 87 00:04:19,110 --> 00:04:21,420 Steven Koukoulas: making some tough decisions so he deserves to have that 88 00:04:21,839 --> 00:04:25,170 Steven Koukoulas: degree of scrutiny. But, I guess, the questioning and where 89 00:04:25,170 --> 00:04:28,290 Steven Koukoulas: they'll be trying to tease out just what the bank 90 00:04:28,290 --> 00:04:31,740 Steven Koukoulas: is thinking is this issue on the stubbornness of inflation. 91 00:04:31,860 --> 00:04:34,560 Steven Koukoulas: We know from the statement on monetary policy last week 92 00:04:34,560 --> 00:04:38,010 Steven Koukoulas: that the RBA is still expecting the inflation rate to 93 00:04:38,010 --> 00:04:41,370 Steven Koukoulas: be 3%, so the top of their target range, in 94 00:04:41,370 --> 00:04:44,160 Steven Koukoulas: the middle of 2025, in another two and a half 95 00:04:44,160 --> 00:04:47,070 Steven Koukoulas: years. And while we know that the RBA has got 96 00:04:47,070 --> 00:04:51,270 Steven Koukoulas: a checkered record in sort of medium term forecasting, if 97 00:04:51,270 --> 00:04:53,669 Steven Koukoulas: that forecast is sort of broadly correct, then we've got 98 00:04:53,670 --> 00:04:56,279 Steven Koukoulas: another couple of years where inflation doesn't even get to 99 00:04:56,279 --> 00:04:59,339 Steven Koukoulas: the target range, which I noted a couple of people 100 00:04:59,339 --> 00:05:01,289 Steven Koukoulas: last week are saying, " Well, if that's their call on 101 00:05:01,290 --> 00:05:03,181 Steven Koukoulas: inflation, they should have gone 50 or more... 102 00:05:03,181 --> 00:05:03,182 Sean Aylmer: Yeah, yeah. 103 00:05:03,182 --> 00:05:05,790 Steven Koukoulas: ... like a lot of other central banks have done." So, 104 00:05:06,180 --> 00:05:08,550 Steven Koukoulas: I think that the questioning will be on that trajectory 105 00:05:08,550 --> 00:05:12,779 Steven Koukoulas: for inflation, and importantly, particularly with the way Jim Chalmers, the 106 00:05:12,779 --> 00:05:17,250 Steven Koukoulas: treasurer, is talking about a socially inclusive policy stance, what's 107 00:05:17,250 --> 00:05:18,900 Steven Koukoulas: it mean for unemployment? I note that a couple of 108 00:05:18,900 --> 00:05:22,440 Steven Koukoulas: people said that the 4. 5% unemployment rate forecast from the 109 00:05:22,440 --> 00:05:25,890 Steven Koukoulas: RBA assumes an extra hundred thousand people unemployed. Is that 110 00:05:25,890 --> 00:05:27,810 Steven Koukoulas: the price we need to pay to get inflation back 111 00:05:27,810 --> 00:05:28,470 Steven Koukoulas: to the target? 112 00:05:29,010 --> 00:05:32,430 Sean Aylmer: Yeah. So, the $ 64 question, what is going happen to 113 00:05:32,430 --> 00:05:34,289 Sean Aylmer: interest rates, Steven? Well, we're going to hold you to 114 00:05:34,290 --> 00:05:35,460 Sean Aylmer: this this time next year. 115 00:05:35,520 --> 00:05:37,920 Steven Koukoulas: Oh goodness me, Sean, that's a tough one. I've got 116 00:05:37,920 --> 00:05:42,510 Steven Koukoulas: my bag of frozen peas on my bruises from the decision. 117 00:05:43,320 --> 00:05:44,190 Sean Aylmer: You're not alone. You are not alone. 118 00:05:44,460 --> 00:05:47,490 Steven Koukoulas: Well, they said they're going to hike them. Look, without 119 00:05:47,490 --> 00:05:50,250 Steven Koukoulas: any degree of confidence, look, there's probably another rate hike 120 00:05:50,250 --> 00:05:52,470 Steven Koukoulas: to come, but I still think the economy's slowing down, 121 00:05:52,770 --> 00:05:54,930 Steven Koukoulas: and I still think the RBA is too pessimistic with 122 00:05:54,930 --> 00:05:58,500 Steven Koukoulas: its inflation forecast. I think inflation's falling a little more 123 00:05:58,589 --> 00:06:01,859 Steven Koukoulas: rapidly than the RBA was thinking. So, dare I say, 124 00:06:01,860 --> 00:06:04,049 Steven Koukoulas: the easier forecast is where we are going to be in a 125 00:06:04,050 --> 00:06:06,029 Steven Koukoulas: year's time. When I look at the money market futures, 126 00:06:06,029 --> 00:06:08,550 Steven Koukoulas: and they're actually pricing in after this next couple of 127 00:06:08,550 --> 00:06:13,680 Steven Koukoulas: rate hikes, rate cut's starting by the end of 2023 and into 2024. 128 00:06:14,040 --> 00:06:18,120 Steven Koukoulas: That seems a fairly reasonable proposition, particularly if the economy 129 00:06:18,120 --> 00:06:20,339 Steven Koukoulas: experiences something close to a hard landing. 130 00:06:21,180 --> 00:06:22,289 Sean Aylmer: Steven, have a good week. 131 00:06:22,650 --> 00:06:23,190 Steven Koukoulas: Thank you, Sean. 132 00:06:23,820 --> 00:06:26,430 Sean Aylmer: That was economist Steven Koukoulas, better known as The Kouk. 133 00:06:26,640 --> 00:06:29,339 Sean Aylmer: You can find him at thekouk. com, T- H- E- K- O- U- 134 00:06:29,339 --> 00:06:32,310 Sean Aylmer: K, thekouk. com, and follow him on Twitter using the 135 00:06:32,310 --> 00:06:34,770 Sean Aylmer: handle TheKouk. I'm Sean Aylmer, and this is Fear and 136 00:06:34,770 --> 00:06:35,580 Sean Aylmer: Greed: The Week Ahead.