Busy week ahead as reporting season kicks off, RBA meets

Despite a mixed session on Wall Street on Friday and a distinctly soggy US GDP growth figure, the local market looks like enjoying a solid opening to a busy week.

Just days after the Federal Reserve delivered a more upbeat assessment of the US economy, GDP growth came in at a very disappointing annualised 1.2 per cent for the June quarter, increasing the likelihood of no rate rise until at least the end of the year.

Leading into the results season, the Australian market enjoyed a solid week — up 1.2 per cent — while the US market was pulled down a tad by softer oil prices and a few mixed results in its reporting season.

Reserve Bank meets as odds of rate cut slip

Last week's much anticipated inflation figures failed to deliver the expected decisive case for another Reserve Bank rate cut at Tuesday's meeting.

The underlying inflation rate — the RBA's preferred figure — came in at an annualised rate of 1.5 per cent, somewhat stronger than the market expected.

While inflation was still below the RBA's 2-3 per cent target band, it was in-line with RBA forecasts.

The initial response prompted a quick re-jigging of the odds with the market winding down the betting of a rate cut from 70/30 to 50/50.

By the weekend, betting for a 25-basis-point cut to 1.5 per cent firmed again and was rated as a 64 per cent chance by the ASX's cash rate future market.

According to Morgan Stanley's Chris Nichol and Daniel Blake, the case for cutting is: "While inflation is in line with RBA forecasts, we think slowing job growth and hours worked, falling retail sales momentum and mounting housing risks mean the economy lacks the inflationary momentum to see a return to target."

While according to Citi's Paul Brennan, the case for holding is: "As the underlying inflation result was in-line with the RBA's forecast, and with the economy performing well and house prices still rising, we pushed our forecast for a 25bp (basis point) cut out to the November RBA meeting. We believe the next move is still down reflecting disinflation pressures globally but there is not the urgency to cut at present."

RBA governor Glenn Stevens is keen to point out that inflation-targeting is "flexible" and inflation can slip below the target band as long as the bank's board believes it will get back into the sweet spot over the "medium-term".

This will be the second last time Mr Stevens chairs a rate-setting meeting before handing over the reins to his deputy Philip Lowe after the September get-together.

Despite overseeing the official cash rate down to an historic low of 1.75 per cent, Mr Stevens has always been regarded as a reluctant cutter — a reputation he may be keen to protect.

The RBA also publishes its quarterly Statement on Monetary Policy on Friday and, given the June quarter underlying inflation figures were in line with its previous thinking, no change in forecasts is expected this time around.

Mixed messages in local data

Locally there is a chunk of interesting data coming out, including international trade, retail sales, building approvals and house prices.

June's balance of trade (Tuesday) is forecast to deliver another sizeable deficit of about $2 billion, or near where it was in May.

Both import and export values are likely to moderate, but increased LNG exports and the value of volatile gold shipments make forecasting a number with any certainty difficult.

Retail sales for June (Thursday) should pick up as the cooler weather got shoppers out to buy some warmer clothes, although weaker prices — particularly in food retailing — are expected to keep any increase in value to a sluggish growth of 0.2 per cent over the month.

Building approvals (Tuesday) are expected to bounce back from a 5 per cent fall in May.

The approvals number bounces around, particularly in the apartment market, but is still rattling along strongly above 200,000 new permits a year.

Home prices as measured by CoreLogic-RP Data (Monday) are expected to rise by about 0.8 per cent over the month, which would continue the recent trend of a cooling market and deliver annualised growth of 6.2 per cent, the lowest figure in three years.

Reporting season gets underway

The big August reporting season, which focuses on companies reporting full-year results, gets underway against a backdrop of an ongoing decline in earnings growth, but a solid momentum in the market.

"The macro thematic of ongoing low interest rates backed by recent improved economic data have been driving up valuations, but there appears little margin for error in many stocks moving into reporting season," UBS strategist David Cassidy said.

"While reporting season should confirm a reasonably benign backdrop, we don't see reporting season as sufficiently strong to move the market higher on its own.

"Valuations are not allowing much margin for error."

In other words, a slight miss on expectations may come with some nasty repercussions for companies and investors alike.

Rio Tinto (Wednesday) is the big result of week with its interim profit forecast at $1.8 billion, which would be 40 per cent down on the previous corresponding period.

Mining-focused engineering firm Downer EDI (Thursday) is also expected to be hit by the resources downturn with its full-year profit tipped to be down around 25 per cent to $160 million.

Insurer Suncorp (Thursday) is forecast to deliver a flattish profit of $1.2 billion and no extra dividend largesse this time around.

BoE and US jobs the overseas focus

The Bank of England steps up to the plate on Thursday and is expected to not only cut its official rate in half to 0.25 per cent, but also step up its quantitative easing program by another 50 billion pounds ($90 billion).

Japan will again be a focus of attention with investors hoping Prime Minister Shinzo Abe's fiscal stimulus package will be more impressive than last week's fizzer from the Bank of Japan.

The BoJ pretty well signalled it did not have much firepower left by announcing a bit of a step up in buying equity-based funds, while hand-balling the responsibility to get the economy off the mat to the Government.

Mr Abe has said the package to be unveiled is valued at 28 trillion yen ($360 billion).

It is certainly a large number — about 6 per cent of Japan's GDP — but the real interest is how much is new spending as opposed to recycling old policies.

The key news out of the US will be non-farm payrolls on Friday.

Payrolls have been fairly volatile lately but are expected to come in near their underlying trend of about 175,000 new jobs created, which should ease unemployment down a notch or two.