Make or Break

This week is likely to be one of the busiest trading weeks for 2015 due to the sheer amount on data, company releases and central bank statements, both here and overseas.

RBA
Source: Bloomberg

Macro data for Australia this week:

- Inflation reads

- Building and construction data plus new home sales

- Job adds

- Trade balance

- Retail sales

And the big three for Australia:

- RBA rates decision (tomorrow)

- Employment data (Thursday)

- The quarterly Statement of Monetary Policy (SoMP) from the RBA (Friday)

There is plenty of debate about the RBA currently - the conclusions are basically the same (and I believe this too) and they are: we will get another rate cut, the outlook on inflation and growth is likely to be downgraded by the RBA on Friday in the SoMP and we are still seeing major issues in terms of trade and Australia’s general competitiveness.

The debate is more semantics than anything – down to when they will cut and how much they will downgrade.

The AUD has been gyrating around on these debates – until a very strongly worded piece in the Fairfax papers last Thursday the market was pricing in a 50/50 chance of a cut. Based on what had appeared to be solid March data with employment and retail sales excelling while inflation remained in the target band, the market had backed right off the idea of a certain cut.

However, the Fairfax piece like that of the News Corp piece in January, lays out very clear ideas as to why the RBA will cut on Tuesday. It does read as if there was some ‘background information’ provided and the market moved from 50/50 to 67% chance of a cut on Tuesday at the close of business on Friday – it’s looking increasingly likely this is going to be the most likely scenario.

The AUD has moved well away from 80 cents on the back of the article and it’s very likely that the SoMP on Friday will fill in the details as to why the RBA moved rates and if there could be more cuts to come - which is another semantic argument to be had. The AUD is going to moved very quickly this week

Australian company releases of note:

- Westpac first half number (today and on first glance disappointing)

- ANZ’s first half numbers (tomorrow)

- NAB’s first half numbers (Thursday)

- Macquarie’s first half numbers (Thursday)

The only one of the bank reports that really excited me this week is MQG. US investment banks have had a stellar quarter and I fully expect MQG to have experienced the same level of results; its advantage is the USD tailwinds. The retail banks however are likely to have had a tough time in the first half: credit growth has been slow and funding has become expensive, squeezing margins. The lower cash rates and the low rollovers of retail money products has made tier-1 ratios tricky business and return on equity tough – something to watch for.

Globally this week is just as big:

- Non-farm payrolls on Friday (last read before the June FOMC meeting, just)

- European manufacturing and service data

- Fed members are speaking all over the place

- US trade balance

- China service and manufacturing final data reads (should be the same as last week though)

- China trade balance

- The big one – the UK elections

The UK elections are going down to the wire, it looks like the Conservatives will win the most seats, but the Labour party is likely to form a minority government in a first-past-the-post scenario. The GBP is going to be very interesting to watch as the rainbow government takes shape – it is still anyone’s race.

Ahead of Australian open

Solid bounce in US equities on Friday night is likely to flow through to Asia this morning. There was no trade in Europe on Friday for May Day holiday and London is closed tonight for the same holiday.

We are currently calling the ASX up 37 points to  5851. However, as I stated last week, if the banks underperform and there isn’t a cut to interest rates tomorrow the local market will struggle to leg higher and break the hard resistance level at 6000 points – its make or break for the ASX this week.

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