1 00:00:08,100 --> 00:00:11,010 Sean Aylmer: Welcome to Fear & Greed, The Week Ahead. I'm Sean Aylmer, and 2 00:00:11,010 --> 00:00:13,740 Sean Aylmer: as always, I'm joined at this time on a Monday 3 00:00:13,740 --> 00:00:17,279 Sean Aylmer: morning by economist Stephen Koukoulas. You'll find him at thekouk. 4 00:00:17,280 --> 00:00:20,610 Sean Aylmer: com and on Twitter using the handle @ TheKouk. Stephen, good morning. 5 00:00:21,150 --> 00:00:23,250 Stephen Koukoulas: Good morning, Sean, and what a week we've got. 6 00:00:24,000 --> 00:00:26,700 Sean Aylmer: Very, very exciting. What's going to happen tomorrow with the 7 00:00:26,700 --> 00:00:27,390 Sean Aylmer: Reserve Bank? 8 00:00:27,780 --> 00:00:30,810 Stephen Koukoulas: Look, I think on balance they're going to hike. I've 9 00:00:30,810 --> 00:00:33,419 Stephen Koukoulas: been wrong. I assumed that they're done enough by the 10 00:00:33,420 --> 00:00:36,810 Stephen Koukoulas: end of last year, that with the economy slowing down 11 00:00:36,810 --> 00:00:40,559 Stephen Koukoulas: both domestically and globally, that they could sit tight. However, 12 00:00:41,010 --> 00:00:44,669 Stephen Koukoulas: all the signals are after that December quarter CPI coming 13 00:00:44,670 --> 00:00:48,840 Stephen Koukoulas: in at a very elevated level and maybe just a 14 00:00:48,840 --> 00:00:51,540 Stephen Koukoulas: bit more resilience, I suppose in the labor market. It 15 00:00:51,540 --> 00:00:55,020 Stephen Koukoulas: hasn't really softened up much yet. And with rate hikes 16 00:00:55,020 --> 00:00:58,170 Stephen Koukoulas: from just about every other major central bank around the 17 00:00:58,170 --> 00:01:02,610 Stephen Koukoulas: world that the RBA at a 3. 1%, cash rate's pretty 18 00:01:02,610 --> 00:01:07,020 Stephen Koukoulas: low, they'd probably go 25, but will signal a whole 19 00:01:07,020 --> 00:01:09,090 Stephen Koukoulas: lot of caution when they make that announcement. 20 00:01:09,630 --> 00:01:13,319 Sean Aylmer: Okay. So in a sense, if they go 25, no 21 00:01:13,319 --> 00:01:15,540 Sean Aylmer: one is going to hurt. We all know that. But 22 00:01:15,540 --> 00:01:17,940 Sean Aylmer: really, just like we found out last week with the 23 00:01:17,940 --> 00:01:21,600 Sean Aylmer: US Fed, it's kind of about what they're signaling for 24 00:01:21,600 --> 00:01:22,650 Sean Aylmer: the future, isn't it? 25 00:01:23,130 --> 00:01:25,200 Stephen Koukoulas: Yes, we saw that. We did in fact see that 26 00:01:25,200 --> 00:01:27,300 Stephen Koukoulas: with the Fed, that they did hike 25, which was 27 00:01:27,360 --> 00:01:30,660 Stephen Koukoulas: as expected, but there were a few hints and words 28 00:01:30,660 --> 00:01:34,650 Stephen Koukoulas: from Jerome Powell, the chairperson of the Fed, that look, 29 00:01:34,650 --> 00:01:36,450 Stephen Koukoulas: there are mixed comments, but I think the market had 30 00:01:36,450 --> 00:01:38,550 Stephen Koukoulas: interpreted them that we are very close to the end 31 00:01:38,550 --> 00:01:41,790 Stephen Koukoulas: of the rate hiking cycle in the US. The economy 32 00:01:41,910 --> 00:01:46,620 Stephen Koukoulas: is slowing, inflation is falling, and the trade has put 33 00:01:46,620 --> 00:01:48,750 Stephen Koukoulas: a lot of emphasis on those things rather than the 34 00:01:48,750 --> 00:01:51,630 Stephen Koukoulas: more hawkish things. So while there's one more rate hike 35 00:01:51,630 --> 00:01:54,120 Stephen Koukoulas: priced into the US, they've actually got rate cuts, pretty 36 00:01:54,120 --> 00:01:57,180 Stephen Koukoulas: aggressive ones priced in the second half of this year 37 00:01:57,180 --> 00:02:00,450 Stephen Koukoulas: and into 2024. If the RBA does a similar thing 38 00:02:00,450 --> 00:02:02,910 Stephen Koukoulas: and say, well, here's a rate hike, it's probably near 39 00:02:02,910 --> 00:02:05,820 Stephen Koukoulas: the end of the cycle for us because same reasons, 40 00:02:05,820 --> 00:02:10,139 Stephen Koukoulas: growth is slowing, inflation's coming back lower, we're arguing about 41 00:02:10,139 --> 00:02:13,200 Stephen Koukoulas: how quickly the rate of inflation will fall, then again, 42 00:02:13,380 --> 00:02:16,889 Stephen Koukoulas: the market might get really dovish and optimistic on that. 43 00:02:16,889 --> 00:02:19,019 Stephen Koukoulas: And while I don't think we're going to be aggressively 44 00:02:19,020 --> 00:02:21,450 Stephen Koukoulas: pricing and rate cuts here in Australia, the lead from 45 00:02:21,450 --> 00:02:23,040 Stephen Koukoulas: the US is quite illustrative in my view. 46 00:02:23,520 --> 00:02:25,919 Sean Aylmer: Yeah, okay. We also get the quarterly statement on monetary 47 00:02:25,919 --> 00:02:28,290 Sean Aylmer: policy. And one thing that that's the Reserve Bank's quarterly 48 00:02:28,320 --> 00:02:31,110 Sean Aylmer: statement on monetary policy, and that really adds meat to 49 00:02:31,110 --> 00:02:33,300 Sean Aylmer: the bone, doesn't it, about what the bank's thinking? 50 00:02:33,510 --> 00:02:37,200 Stephen Koukoulas: Oh yes. This Friday we get the, well, it's usually 51 00:02:37,200 --> 00:02:42,600 Stephen Koukoulas: about 70, 80 pages of fantastic charts, fantastic economic research and 52 00:02:42,600 --> 00:02:44,880 Stephen Koukoulas: analysis from the bank. Now whether you agree with it 53 00:02:44,880 --> 00:02:47,070 Stephen Koukoulas: or disagree with it, it's sort of high class, high 54 00:02:47,070 --> 00:02:51,120 Stephen Koukoulas: quality work that they put into it. So they'll put 55 00:02:51,120 --> 00:02:53,639 Stephen Koukoulas: in a lot of detail about why they made their 56 00:02:53,639 --> 00:02:57,030 Stephen Koukoulas: decision tomorrow, whatever that happens to be, and they'll put 57 00:02:57,030 --> 00:03:01,380 Stephen Koukoulas: a lot more analysis and detail on the economic conditions 58 00:03:01,380 --> 00:03:04,350 Stephen Koukoulas: that we are seeing right now. But importantly, really importantly, 59 00:03:04,590 --> 00:03:07,619 Stephen Koukoulas: the forecasts will be something that we all jump over. 60 00:03:07,950 --> 00:03:11,669 Stephen Koukoulas: What are they forecasting for inflation? What's their trajectory over 61 00:03:11,669 --> 00:03:15,030 Stephen Koukoulas: the next 12, 18, 24 months for inflation? Will it be 62 00:03:15,030 --> 00:03:18,240 Stephen Koukoulas: back within their two to three target range? And importantly, 63 00:03:18,540 --> 00:03:21,600 Stephen Koukoulas: what are they actually saying about GDP growth, the economy? 64 00:03:21,600 --> 00:03:25,350 Stephen Koukoulas: Are they forecasting a material slowdown? And does that spill 65 00:03:25,350 --> 00:03:29,160 Stephen Koukoulas: over into forecast for the unemployment rate heading towards 4. 66 00:03:29,160 --> 00:03:32,550 Stephen Koukoulas: 5% from the current 3. 5%? So it'll be a 67 00:03:32,550 --> 00:03:34,920 Stephen Koukoulas: great document to read as it always is from our 68 00:03:34,920 --> 00:03:35,341 Stephen Koukoulas: friends at the bank. 69 00:03:35,341 --> 00:03:38,880 Sean Aylmer: Okay. Just on that last week, the IMF came out 70 00:03:38,880 --> 00:03:41,430 Sean Aylmer: and it said that the Australian economy will ... well, it expects 71 00:03:41,430 --> 00:03:44,670 Sean Aylmer: the Australian economy to expand at less than 2% this 72 00:03:44,670 --> 00:03:47,220 Sean Aylmer: year. It thinks the unemployment rate will head towards 4%. 73 00:03:48,060 --> 00:03:51,630 Sean Aylmer: With those international organizations like the IMF, I presume they 74 00:03:51,630 --> 00:03:54,240 Sean Aylmer: don't do it independently. I mean they must have Treasury 75 00:03:54,240 --> 00:03:56,970 Sean Aylmer: or someone at least run their eye over it before 76 00:03:56,970 --> 00:04:00,930 Sean Aylmer: they release it. I mean, it wasn't very upbeat about 77 00:04:00,930 --> 00:04:01,980 Sean Aylmer: the Australian economy though. 78 00:04:02,550 --> 00:04:05,250 Stephen Koukoulas: No, it wasn't. And here's a secret. Admittedly, this is 79 00:04:05,250 --> 00:04:07,080 Stephen Koukoulas: many years ago that I used to work in Treasury, 80 00:04:07,200 --> 00:04:10,200 Stephen Koukoulas: many years ago, I want to emphasize. But yes, the 81 00:04:10,200 --> 00:04:13,590 Stephen Koukoulas: IMF did liaise with the Treasury Department. They didn't want 82 00:04:13,590 --> 00:04:17,610 Stephen Koukoulas: to be putting out radically different views on the economic 83 00:04:17,610 --> 00:04:21,720 Stephen Koukoulas: outlook. So you're quite right that that IMF report forecasting 84 00:04:21,720 --> 00:04:25,260 Stephen Koukoulas: a slowdown is noteworthy because it's probably going to be 85 00:04:25,260 --> 00:04:28,380 Stephen Koukoulas: reflecting what Treasury and to some extent the RBA is 86 00:04:28,380 --> 00:04:31,140 Stephen Koukoulas: thinking. Now, the IMF's probably a month or two old 87 00:04:31,140 --> 00:04:34,800 Stephen Koukoulas: in terms of its forecasting profile, but nonetheless, that slowdowns 88 00:04:34,800 --> 00:04:37,350 Stephen Koukoulas: are happening. And one thing I would note that I'm 89 00:04:37,350 --> 00:04:40,500 Stephen Koukoulas: going to be looking for, you might recall a couple 90 00:04:40,500 --> 00:04:42,479 Stephen Koukoulas: of years ago there was this discussion about a per 91 00:04:42,480 --> 00:04:47,010 Stephen Koukoulas: capita GDP recession, which was sort of a cute way 92 00:04:47,010 --> 00:04:51,089 Stephen Koukoulas: of looking at GDP per person. And with immigration really 93 00:04:51,810 --> 00:04:54,870 Stephen Koukoulas: romping back now with the borders reopened and students coming 94 00:04:54,870 --> 00:04:58,290 Stephen Koukoulas: back and these sorts of things, it's likely that in 95 00:04:58,290 --> 00:05:02,070 Stephen Koukoulas: 2023, the population growth will increase by around about 1. 5% 96 00:05:02,940 --> 00:05:06,779 Stephen Koukoulas: here in Australia. So if GDP forecasts a 1. 5 97 00:05:06,870 --> 00:05:10,290 Stephen Koukoulas: or not much more, then we're basically having per capita 98 00:05:10,290 --> 00:05:13,289 Stephen Koukoulas: GDP going sideways. Yeah, no growth at all. And that's 99 00:05:13,290 --> 00:05:15,419 Stephen Koukoulas: why I suspect a lot of people are feeling a 100 00:05:15,420 --> 00:05:18,479 Stephen Koukoulas: bit miserable at the moment, why consumer sentiment's still pretty weak. 101 00:05:19,350 --> 00:05:21,000 Sean Aylmer: Just a couple of ones, which you probably don't spend 102 00:05:21,000 --> 00:05:22,529 Sean Aylmer: a lot of time on normally, but they are pretty 103 00:05:22,529 --> 00:05:24,900 Sean Aylmer: significant this week. The December quarter of retail sales, and 104 00:05:24,900 --> 00:05:27,479 Sean Aylmer: why I say that is significant is because we had 105 00:05:27,720 --> 00:05:32,580 Sean Aylmer: the December month retail sales, which went back, it was 3.9% 106 00:05:32,580 --> 00:05:35,970 Sean Aylmer: or something, minus 3. 9%, which no one really believes. 107 00:05:36,510 --> 00:05:40,350 Stephen Koukoulas: Correct. And there's a seasonal quirk in the November, December 108 00:05:40,350 --> 00:05:43,680 Stephen Koukoulas: monthly retail sales numbers near the Black Friday sales season, 109 00:05:43,680 --> 00:05:47,669 Stephen Koukoulas: November spike and then December it falls back down. So 110 00:05:47,910 --> 00:05:49,560 Stephen Koukoulas: in a sense, that can be explained, but this is 111 00:05:49,560 --> 00:05:52,710 Stephen Koukoulas: where the December quarterly numbers are so good because that 112 00:05:52,800 --> 00:05:58,260 Stephen Koukoulas: by definition overlaps both October, November, and December, and it 113 00:05:58,260 --> 00:06:00,900 Stephen Koukoulas: turns it into a volume like a real growth in 114 00:06:00,900 --> 00:06:03,870 Stephen Koukoulas: retail sales. So the retail sales numbers that we see 115 00:06:03,870 --> 00:06:05,490 Stephen Koukoulas: on a month- on- month basis are just the dollar 116 00:06:05,490 --> 00:06:08,430 Stephen Koukoulas: value that you and I and everybody spends in the 117 00:06:08,430 --> 00:06:12,239 Stephen Koukoulas: retail outlets. What actually matters for the economy more than 118 00:06:12,240 --> 00:06:16,409 Stephen Koukoulas: that arguably is in volume terms. So it's like the real 119 00:06:16,410 --> 00:06:18,539 Stephen Koukoulas: GDP number, and this is in fact one of the 120 00:06:18,540 --> 00:06:21,540 Stephen Koukoulas: building blocks into real GDP. And what we do know 121 00:06:22,110 --> 00:06:25,740 Stephen Koukoulas: that for the quarter, in nominal terms, dollar terms, retail 122 00:06:25,740 --> 00:06:29,130 Stephen Koukoulas: sales only rose by 0. 9%. We know from the 123 00:06:29,130 --> 00:06:33,630 Stephen Koukoulas: inflation numbers that the price deflator, the inflation rate for 124 00:06:33,630 --> 00:06:38,520 Stephen Koukoulas: retail goods and services was probably 1. 5% all thereabouts. And 125 00:06:38,520 --> 00:06:41,729 Stephen Koukoulas: that's why the market consensus is looking for a pretty 126 00:06:41,730 --> 00:06:46,049 Stephen Koukoulas: chunky fall in real retail sales in the December quarter, and that's 127 00:06:46,050 --> 00:06:48,419 Stephen Koukoulas: going to put a big hole in the building blocks 128 00:06:48,420 --> 00:06:49,260 Stephen Koukoulas: for GDP. 129 00:06:50,220 --> 00:06:52,140 Sean Aylmer: The other one which I'm just interested in is international 130 00:06:52,140 --> 00:06:54,480 Sean Aylmer: trade. Now most, I mean, again, we don't spend a 131 00:06:54,480 --> 00:06:57,120 Sean Aylmer: lot of time on that particular figure, but there have 132 00:06:57,120 --> 00:07:01,500 Sean Aylmer: been reports over the past seven days or so of 133 00:07:01,500 --> 00:07:06,330 Sean Aylmer: coal ships leaving docks and heading to China again. The 134 00:07:06,330 --> 00:07:10,110 Sean Aylmer: relationship between China and Australia certainly has improved. And there 135 00:07:10,110 --> 00:07:12,600 Sean Aylmer: was another report last week about the head of Treasury 136 00:07:12,600 --> 00:07:15,840 Sean Aylmer: wines, for example, which obviously were hammered by tariffs out 137 00:07:15,840 --> 00:07:19,080 Sean Aylmer: of Beijing, heading back to China to try and find customers again. 138 00:07:19,410 --> 00:07:21,840 Sean Aylmer: That relationship's improving, which is probably good news for our 139 00:07:21,840 --> 00:07:23,010 Sean Aylmer: international trade figures. 140 00:07:23,430 --> 00:07:26,429 Stephen Koukoulas: And the fact that China's reopening its economy from the 141 00:07:26,430 --> 00:07:29,130 Stephen Koukoulas: COVID lockdowns is good news too. And one of the 142 00:07:29,130 --> 00:07:32,580 Stephen Koukoulas: bright spots, I suppose, for the global economy in 2023 143 00:07:32,850 --> 00:07:36,120 Stephen Koukoulas: will be China and its economic recovery, and we've seen 144 00:07:36,120 --> 00:07:38,490 Stephen Koukoulas: that in some other commodity prices. So it's not just 145 00:07:38,490 --> 00:07:40,440 Stephen Koukoulas: the stuff that we're exporting. You're quite right about the 146 00:07:40,440 --> 00:07:43,530 Stephen Koukoulas: coal and the wine and even things like lobsters and 147 00:07:43,530 --> 00:07:46,950 Stephen Koukoulas: Bali will eventually hopefully get back onto that trade flow, 148 00:07:47,490 --> 00:07:50,460 Stephen Koukoulas: that it's actually going to be feeding into what's already 149 00:07:50,460 --> 00:07:53,760 Stephen Koukoulas: a fantastic trade performance. Again, I'm old enough to remember 150 00:07:53,760 --> 00:07:57,360 Stephen Koukoulas: the ban Banana Republic days when we're running massive trade 151 00:07:57,420 --> 00:07:59,700 Stephen Koukoulas: and current account deficits. The number that we're going to 152 00:07:59,700 --> 00:08:02,790 Stephen Koukoulas: be seeing this week is a monthly trade surplus of 153 00:08:02,790 --> 00:08:07,200 Stephen Koukoulas: around about $ 13 or $ 14 billion. You annualize that, it's about $ 154 00:08:07,860 --> 00:08:11,370 Stephen Koukoulas: 150 billion a year, maybe a little bit more, that 155 00:08:11,370 --> 00:08:13,950 Stephen Koukoulas: we're actually running on an international trade surplus. And with 156 00:08:13,950 --> 00:08:17,730 Stephen Koukoulas: China improving, buying more of our stuff and still paying 157 00:08:17,730 --> 00:08:20,190 Stephen Koukoulas: us a really high price for it, the outlook for 158 00:08:20,190 --> 00:08:22,530 Stephen Koukoulas: the trade sector is actually really positive. Might be one 159 00:08:22,530 --> 00:08:24,870 Stephen Koukoulas: reason why the Aussie dollar's been spiking in recent times 160 00:08:24,870 --> 00:08:29,010 Stephen Koukoulas: too into this low 70, 71, 72 cent range, which we're in. 161 00:08:29,700 --> 00:08:30,990 Sean Aylmer: You're going to enjoy this week, aren't you? 162 00:08:31,200 --> 00:08:34,080 Stephen Koukoulas: Love it. The RBA is always fun. The quarterly statement's 163 00:08:34,080 --> 00:08:37,680 Stephen Koukoulas: fun. And the run of data is just adding to that fun. 164 00:08:38,400 --> 00:08:39,960 Sean Aylmer: Fantastic. Stephen, have a great week. 165 00:08:40,260 --> 00:08:41,220 Stephen Koukoulas: Thank you, mate. Thank you, Sean. 166 00:08:41,700 --> 00:08:44,130 Sean Aylmer: That was economist Stephen Koukoulas, better known as The Kouk. 167 00:08:44,130 --> 00:08:46,140 Sean Aylmer: You can find him at thekouk. com and follow him 168 00:08:46,140 --> 00:08:49,050 Sean Aylmer: on Twitter using the handle @ TheKouk. I'm Sean Aylmer and this 169 00:08:49,080 --> 00:08:50,610 Sean Aylmer: is Fear and Greed, The Week Ahead.