0:05

Welcome to the Fair and Greed Business Interview,

0:07

I'm Adam Lang. Last

0:09

week, the Reserve Bank Board removed its

0:12

bias towards increasing interest rates. Then

0:14

we had a shock low unemployment number

0:16

suggesting that, yes, rates will come down,

0:19

but maybe not as soon as everyone

0:21

thought. So yesterday's release of monthly inflation

0:23

data is a very important piece of

0:25

the puzzle, though I don't know if

0:27

it's made the Reserve Bank job any

0:30

easier. Deanna Messina is AMP's Deputy Chief

0:32

Economist. Deanna, welcome back to Fair and

0:34

Greed. Thank you, Adam. Nice

0:36

to chat. Headline CPI came in at

0:38

an annual rate of 3.4% in February. Was

0:43

this better than you expected? It

0:45

was, and I was pleasantly surprised. When

0:47

we did our bottom-up forecast, ours was

0:49

showing something more of 3.7%. Usually

0:53

you get a big increase in education

0:55

prices in February, and also fuel went

0:57

up over the month as well. So

1:00

that contributed to our higher forecasts. What

1:02

I thought was interesting about February is

1:04

that the ABS surveys, obviously, every single

1:06

month in the quarter, but as we

1:08

know, the monthly CPI data

1:11

is not completely as fulsome

1:13

as the quarterly data because not everything is

1:15

surveyed every month. But in the month of

1:17

February, which is the second month of that

1:20

quarter, you actually get the most number of

1:22

categories surveyed. In particular, there are a lot

1:24

of services that are surveyed, and services has

1:27

been one of the key areas that's been

1:29

of concern for the Reserve Bank. Of course,

1:31

they worry that services inflation is going to

1:33

remain sticky. The downside

1:35

surprise was pleasant, both from the point

1:37

of view that inflation is obviously still

1:39

trending lower and below the

1:42

RBA's forecast, but also from the point

1:44

of view that services inflation is continuing

1:46

to slow as well. Have

1:49

you been surprised by how goods inflation

1:51

has changed? Well, we have

1:53

a lot of forward-looking indicators of

1:56

goods inflation that we use for

1:58

our global inflation forecast. So

2:00

we look at global commodity prices,

2:02

semiconductor prices, shipping costs, container costs,

2:05

the Baltic Dry Index, Chinese Producer Price

2:07

Index. And we've been seeing this pattern

2:10

in the past few months where goods

2:12

prices haven't really been flowing much further.

2:14

They've kind of bottomed and

2:16

they've obviously slowed from their highs in 2021

2:19

and 2022, but they're not really coming

2:23

down too much further. And I

2:25

think that the pace of growth in

2:27

goods inflation is still relatively in line

2:29

with inflation targets, but only if you

2:31

get services declining as well. Okay,

2:34

so if you can look forward and

2:37

I guess what you're seeing in that

2:39

data and what you anticipate might happen

2:41

across goods inflation and services inflation, what

2:43

should we be looking out for? Well, from

2:46

a services point of view for Australia,

2:48

there are a few things that are

2:50

key. So one is what happens to

2:52

rents. Rents have the highest share of

2:55

services inflation from the services basket point of

2:57

view. I think in the near term, rents

2:59

are still going to remain quite high. We

3:01

still have a lot of permanent

3:04

migration and long-term migration into

3:06

Australia, despite the fact that the

3:08

government has been saying that they're tightening on

3:10

visa conditions and restrictions. Early numbers

3:12

from this year still say that immigration

3:15

is running at about 550,000

3:17

people over the year. So in the short term,

3:19

rents are still probably going to remain quite

3:21

elevated. The good news though is

3:24

that we're seeing quite significant weakening

3:26

in prices for accommodation and travel

3:28

and holidays. And that was actually

3:31

the biggest services area that increased

3:33

inflation for services price in the

3:35

past two years and one that the Reserve Bank's

3:37

been talking about. That's good news. And also I'm

3:40

watching wages growth. Wages growth is really the

3:43

key component of what happens to services price. When

3:45

you think about what really drives services inflation, a

3:47

lot of it comes down to the cost of

3:49

labour. So we do need to see the pace

3:51

of wages growth slow. It probably needs to

3:53

be somewhere at 3% to 3.5% on

3:55

an annual basis for the

3:57

Reserve Bank to be comfortable that inflation. going

4:00

to be within its target band. Stay

4:03

with me Deanna, we'll be back in a minute. I'm

4:12

speaking to AMP Deputy Chief Economist

4:14

Deanna Messina. If we

4:16

turn our attention to unemployment, how much

4:18

is last week's unemployment number thrown a

4:20

spanner in the works? If

4:23

you believe it, I mean I'm not sure

4:25

that I do really. I think that the

4:27

seasonal factors going on at

4:29

the ABS, I don't

4:32

know what's going on with the seasonal

4:34

factors. Also, with the questions around how

4:37

the ABS is asking questions at people that are

4:39

unemployed, I just find it hard to believe that if

4:41

people have a job to go to, that they would

4:43

be technically classified as being unemployed. I'm not

4:46

really sure I understand what's

4:48

actually going on behind some of these questions

4:50

that are being asked. I

4:52

don't really know where the unemployment rate

4:54

is at the moment. When I look

4:56

at all the forward-looking indicators of employment

4:58

growth, they're all showing much weaker employment

5:00

conditions to me than the official ABS

5:02

data is. I have to

5:04

look at both of those things. The labor

5:06

market is still clearly holding up better than

5:08

expected, but I do think we will start

5:11

to see some of that weakening come through

5:13

and maybe that one-off decline in the unemployment

5:15

rate will be reversed in the coming months. Speaking

5:18

of those employment numbers, the seek job ads

5:20

numbers that came out showing a reduction in

5:22

the number of job ads. How are you

5:24

saying that? Well, seek

5:26

is not the only provider that

5:28

gives indications of job vacancies and

5:30

job ads. There are a

5:33

whole raft of them and they're all

5:35

pointing to a weakening in job openings,

5:37

job vacancies, and hiring intentions that businesses

5:39

have. Seek even have an index about

5:41

the number of job applicants per job

5:44

and the number of job applicants per

5:46

job has gone down which normally tends

5:48

to indicate some rise in the unemployment

5:50

rate. Those are the types of forward-looking

5:52

indicators that I look at when I'm

5:54

thinking about the prospect for employment growth in the

5:57

next few months. this

6:00

data and even some of the things that perhaps we

6:02

haven't spoken about today, what are you feeling and what

6:04

does this mean for interest rates? Well,

6:06

our base case has been that we would

6:08

see the start of a rate cutting cycle

6:11

in June. And while I

6:13

think that we are going to be right

6:15

on our view about inflation, so that inflation

6:17

is coming down in line with our medium

6:20

term forecast, slower than the RBA's expectations, so

6:22

I think the inflation environment will provide the

6:24

Reserve Bank room to cut interest rates if

6:27

they want to or feel the need to.

6:29

But I'm not convinced that the growth outlook

6:31

is going to slow enough by June

6:33

to warrant a rate cut. And

6:36

what we really need to see for a

6:38

rate cut to occur is a weakening in

6:40

the labour market, I think. If the unemployment

6:42

rate stays 3.7% or 3.8% like

6:45

it did in the February data, I think

6:47

that that's probably too low for the Reserve

6:49

Bank to consider cutting interest rates, even if

6:51

inflation warrants them to do so.

6:54

So our base case is still for June

6:57

start to rate cuts, but I have to say that

7:00

the risk of that is probably around August or September,

7:02

which is more in line with market pricing at the

7:04

moment. That is a great

7:06

perspective. Retail sales are due

7:08

out today. What are you expecting to see?

7:11

I think we will get a strong bounce

7:13

in retail spending. The

7:15

banks publish their credit card data

7:18

on a monthly basis, and that actually increased quite

7:20

a lot for the month of February.

7:22

I think that Taylor Swift probably did have

7:24

some impact on that, although I was interested

7:27

to see that in the monthly CPI data,

7:29

the ABS actually mentioned that despite the fact

7:31

that hotel prices went up in Sydney and

7:33

Melbourne over February, due to Taylor Swift, there

7:36

were offsets from other capital cities. So maybe

7:38

the impact won't be as strong as we're

7:40

expecting, but the bank credit card data

7:42

was certainly strong for February. But even if we

7:44

get a bounce over the month of February,

7:46

I think we need to look at things on a

7:49

three-month basis because we, again, we've had a lot of

7:51

seasonal factors going on with the retail spending data, and

7:53

that should still show that monthly retail sales

7:56

is averaging at 0.2 or 0.3% of the month. That's

7:59

not really that high. and in annual

8:01

terms retail volumes are still negative and

8:03

per person retail spending is negative as

8:05

well. So I still said that the

8:08

retail sector is in a pretty weak

8:10

spot and consumers have cut right back

8:12

on retail consumption focusing more on that

8:14

essential spending. That is terrific. Deanna

8:16

thank you so much for talking to Fear and

8:18

Greed. Thanks so much. That was

8:21

Deanna Messina, Deputy Chief Economist at

8:23

AMP. This is the Fear and

8:25

Greed Business Interview. Join us every morning for

8:27

the full episode of Fear and Greed, daily

8:29

business news for people who make their own

8:31

decisions. I'm Adam Lane. Enjoy your day.