SCOREBOARD: Equities up?

Even though the domestic dataflow is light this week, I don't think we can say that it's going to be boring. Look at last week – we didn't have a lot of data but the issue of bank funding costs was hot. Some commentators even argued that rising costs would compel the RBA to cut rates again.

I never thought that argument was at all persuasive, although the politics of the situation meant that such a move was possible. Nevertheless, by Thursday I reckon the RBA had put that issue to rest – there was nothing in the bulletin which suggested they thought bank funding costs were a major problem and certainly nothing that could be used to argue that the Bank would cut rates on that basis.

This week we don't have any RBA speeches or bulletins but I guess there is the Iranian issue in the background ready to flare up at any stage.

In any case, while the domestic dataflow is light we have a bit more abroad. In NZ we've got visitor arrivals and credit card spending today. Consumer confidence is Wednesday, with the major print being Q1 GDP on Friday. The median market forecast is for growth to fall 0.7 per cent after a 0.9 per cent fall in Q4. This would mark the fifth consecutive fall in NZ GDP. We know that retail spending is weak and the consents numbers are showing still subdued action on the housing construction front. So most of the partial indicators are painting a pretty weak picture. I've got a less weak forecast of -0.3 per cent, mainly because I'm not sure that some of those deflators will be so strong this time around. In the absence of very strong deflator growth in Q1, GDP would have been much stronger.

Turning to the US, new and existing home sales are expected to lift in May, potentially adding to those green shoots. If so, we might see equities bid up on those housing numbers. Of course the flipside is that softer economic data would heighten the pressure to pause. Concerns that the market has run too hard to fast has already seen US stocks down about 2 ½ per cent over the last week, so any negative surprises here will aid the offer tone. The good news is that leading indicators continue to point to a recovery.

That being the case, we could see bonds give back some of those gains from last week. There is a fair bit of supply this week which will add to that pressure– the US Treasury is auctioning off $104bn with $40bn of 2yrs, $37bn 5yrs and $27bn 7yrs.

Finally, core inflation is expected to remain elevated at 1.8 per cent, income and spending are forecast to rise and confidence is expected to remain buoyant. So all up the stars are aligned to see stronger equities, then weaker bonds and greenback. The big swing factor could prove to be the FOMC meeting (Thursday at 4.15an AEST). Debate will no doubt be robust in terms of whether the Fed should expand or contract its quantitative easing program – to me it's crystal clear that they should definitely not be expanding it, but we'll see.

Elsewhere the key data to watch out for includes the German Ifo survey tonight and the EC PMI indices on Tuesday night.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.