For Australia it’s a big, big week with the timing of the next interest rate move, the next Federal election and the future direction of the economy to be decided tomorrow while the health of the stockmarket, especially the important banking sector, will be tested from today on with some key profit reports.
But as vital as these will be for Australia, the most important global event this week will be the April jobs report in the US on Friday night, with all its meaning for the future direction of US interest rates and a host of currencies and other markets.
But before that we have the Westpac interim profit report this morning to assess, followed by the ANZ half year report tomorrow morning (and the NAB on Thursday). The trio will set the tone for the local market for some months to come.
Solid results from the three banks will go a long way to steadying investor nerves, while weak or unconvincing figures will see a new round of fears about dividends and debts.
A rate cut from the RBA tomorrow though could be a destabiliser. It will put pressure on bank profit margins, force them to pass on less than the cut to customers, earn them more bad publicity and raise fears about future earnings.
With housing slowing and foreign buyers now all but eliminated from the local market, the outlook for banks could be weaker than some investors think, regardless of whether the RBA cuts rates.
After Westpac and ANZ report, it will be the turn of the RBA board meeting to make the big decision of whether or not to cut interest rates.
The chances of a rate cut rose with last week’s surprise weakening in consumer price inflation in the March quarter, but as some more farsighted economists point out the drop was due to falling prices in areas that will reverse over time (oil and fruit prices, for example).
It is not deflation, because while our annual rate of inflation is low (1.3%), it’s still positive, unlike what Japan, Spain, Taiwan, Greece and some other economies are experiencing.
But economists say while there’s a higher chance of a rate cut tomorrow, many expect the bank will do nothing and wait to see what happens in the next month or so, starting this week with the usual start of month data for March retail sales and building approvals.
These could underline the need for a cut, or justify any decision to leave the cash rate unchanged at 2%.
On top of this, the RBA releases its second Statement of Monetary Policy review of the year on Friday which will contain new forecasts for inflation and growth, and commentary on the slide in inflation in the March quarter.
After the RBA Governor’s statement is issued at 2.30pm, market focus will shift to the 2016-17 Federal Budget on Tuesday night.
More than some past statements, this budget is more significant than usual.
First off, it will be the Government’s main economic statement ahead of the likely July 2 election and for that reason it will include some sweeteners, such as small tax cuts, encouragement of infrastructure spending and some fiddling at the margins with the promise of more significant changes after the poll.
But, as the AMP’s chief economist Dr Shane Oliver points out, the budget will be watched by credit ratings agencies who are increasingly worried about not only rising debt, but by the inability of governments to tackle the problem.
“Because it comes after several years that have seen the return to surplus pushed out further and further, the ratings agencies are losing patience with the threat of a downgrade to our sovereign AAA rating if they are not happy. And the ratings agencies have a point,” Dr Oliver wrote at the weekend.
"We are now looking at a 12-13 year run of budget deficits which swamps the 7 years seen in the 1990s and the 5 years in the 1980s. And this despite not even having had a recession.
“Rather we have done this thanks largely to a “dumb country” combination of politicians ramping up spending commitments on a whole range of things without facing up to how they will be paid for,“ Dr Oliver said.
Apart from the RBA and the budget, the usual start of month data releases will include the CoreLogic RP data home price index for April, out later today.
The AIG manufacturing conditions monthly survey and the NAB business conditions index will also be out today. Building approvals for March are out tomorrow, while Thursday sees the release of March retail sales and the March trade data.
Globally there’s the release of the start of month survey’s of manufacturing. The Government-sponsored survey for China was issued yesterday, the private sector survey is out tomorrow.
The surveys of service sector activity will be issued over the coming week as well, so that by Friday we should have a good idea of the pace of global economic activity.
But the big global data drop will be Friday night’s jobs report for April. Economists think the report will show another month with around 200,000 new jobs created, unemployment remaining at 5% and wages growth edging up slightly to an annual rate of 2.4% from 2.3%.
In other words, another solid report, not not so strong as to force the Fed to cut rates.
Friday’s weak US core inflation data confirms that cost pressures are not a concern in the US, despite some alarmists worrying about wage costs rising.
The US earnings reporting season starts winding down, but there will be a number of media companies releasing results this week.
The season is now nearly three quarters complete, but more than 120 companies on the S&P 500 are due to report results this week.
Time Warner, 21st Century Fox, News Corp, CBS, Shell, New York Times Co, Priceline, Halliburton, Pfizer, Whole Foods and Motorola are among the companies announcing results.
In China, the Caixin manufacturing survey is out tomorrow.
