Posted April 29, 2018 12:48:58

Photo: Despite booming earnings growth Wall Street has been going nowhere for weeks. (Reuters: Shannon Stapleton)

It should have been a champagne-cork popping finish to the week on Wall Street, but the party never started.

The biggest week of the US results season saw overall earnings on the S&P500 up more than 20 per cent on last year, blowing away already bullish expectations of a 17 per cent rise.

The made-for-TV detente between North and South on the Korean Peninsula should have helped lift spirits. It didn't.

Even the expected slowdown in first quarter US GDP growth wasn't as bad as had been priced in.

Wall Street's response was insipid, tracking sideways on Friday.

It has gone pretty well nowhere since the start of the results season two weeks ago.

That is despite more than 80 per cent of companies beating earnings forecasts and some seriously impressive profits from the likes of Facebook, Amazon and Microsoft.

Inflation is bubbling up

So why has Wall Street gone flat?

A variety of factors seem to be in play, but a fear of resurgent US inflation and rising interest rates are most likely at the heart of it.

A common theme among the companies reporting so far has a been grizzling about rising costs.

The release of stronger US consumer and wage inflation figures on Friday support those claims.

Core personal consumption expenditure — an inflation measure favoured by the Federal Reserve — jumped from annualised growth of 1.9 per cent in the December quarter to 2.5 per cent.

The Employment Cost Index grew by a higher than expected 2.7 per cent over the year.

There's still no way of knowing whether the current Wall Street correction could become a "bear market" or a crash.

Both now are back at levels last seen before the GFC.

At least it didn't prompt the mad, inflation-inspired scramble to the exits seen on global markets back in February, but it is nudging up interest rates, particularly shorter dated bonds.

JP Morgan's John Normand told clients over the weekend the tepid response from equities markets to higher earnings was "worrisome".

Mr Normand said the current movement of short-term rates against the Federal Reserve's projection for its official rate would typically mark the end of "accommodation".

That is usually followed more restrictive monetary policy and rising interest rates.

"Most investors associate that setting with high recession risks, which is why 2019 could be the true late-cycle year when almost every asset underperforms cash.," Mr Normand warned.

"It's true that the S&P500 has tended to peak about five months before the start of a recession, with a range of one to 12 months. But for February 2018 to have marked the high, a recession would need to begin in late 2018 or early 2019."

The Australian market had a much better week ignoring Wall Street's doldrums, gaining 1.4 per cent despite far from stellar efforts from the banks and miners.

That may not last too long. Futures trading on the ASX point to a flat start to the week.

Bank reporting season

The big bosses of the big banks have kept an understandably low profile during the merciless royal commission being conducted by Kenneth Hayne and his grand inquisitor Rowena Orr QC.

They have preferred to send underlings to the rack.

This week they will be forced to break cover as the banks' mini-reporting season splutters into life.

Unfortunately, the top brass will only have to front bank analysts, fund managers and the media.

While bruising, it is unlikely to be as grimly entertaining as Ms Orr slowly dismembering their "trust us" credibility.

The industrial-scale malfeasance that has been operating out of sight for years will be a focus of the questioning, so too will be garnering insights into a post-commission world.

The CEOs will probably play it down, but there must be a degree of dread that some very profitable cogs in their money-making machines will be either slowed down or removed.

The broad theme out of the results is expected to be a balancing act between slightly higher revenues helped by more expensive investor loans and higher costs flowing from more stringent regulation and the royal commission.

The analysts are sharpening their pencils in anticipation of earnings downgrades, hit by tighter margins and higher costs.

The old trick of lowering bad debt provisions is unlikely to come to the rescue this time as they are already near historically low levels.

ANZ chief executive Shayne Elliott opens the batting on Tuesday and is forecast to unveil a cash profit of about $3.6 billion for the six months, 6 per cent up on last year's first half.

ANZ has not suffered the greatest humiliation at the commission so far, but expect questions on some dodgy lending practices and dodgier financial planners.

NAB's Andrew Thorburn follows on Thursday and is likely to report a cash profit of $2.8 billion, down more than 10 per cent on last year as a new IT spending program takes a bite out of the bottom line.

NAB has made a number of embarrassing visits to the commission's witness box for such things as the apparently corrupt and bribe-ridden Introducer Loan scheme and, of course, financial planning.

Macquarie, which much to its relief, did not get an invite to the commission, should trot out a fairly flat $1.2 billion profit on Friday.

RBA to hold rates, shift forecasts

It is a big week for Reserve Bank watchers with a rates decision (Tuesday), a speech from the governor (Tuesday night) and the quarterly Statement on Monetary Policy (Friday).

If you haven't got a bet on the rates decision, don't worry — the odds haven't changed for months. There is zero chance of a change, just as it has been for the past 19 meetings.

The SoMP is likely to be a bit more interesting with the RBA looking like having to edge down its forecast for economic growth.

Weaker than expected jobs data has prompted several economists to suggest the RBA will dial down its GDP forecast for 2018 a notch from 3 per cent to 2.75 per cent.

It is likely to stick to its current inflation forecast of 2 per cent next year despite on-going softness.

The strength, or otherwise, of the housing sector will be studied from several angles.

Private sector credit (Monday) should keep tracking along at its steady 5 per cent annualised growth with weaker investor and personal lending offset by stronger sales to owner occupiers and business.

There is nothing to suggest CoreLogic's house price index will change direction in the short term. It fell 0.2 per cent in March — the fifth straight month of declines.

Building approval figures (Thursday) are always a lottery, but given they fell sharply last time they will probably rebound.

The trade balance (Thursday) is also tricky to pick, but the surplus is expected to widened thanks to a pick-up in coal shipments in March and LNG exports continuing to gain momentum.

The Fed on hold too

The Fed should keep rates on hold (Thursday), but the interest will largely be in the accompanying statement to see if there is a hint that rekindled inflation leads to a more aggressive raising cycle.

US unemployment may tick down to 4 per cent and wages growth up to 2.7 per cent (Friday).

The pulse of global manufacturing will be taken with April's purchasing managers' index (PMI) for the US, Europe, Australia and China (both official and unofficial) being released over the week.

Europe's strong expansion in activity has rolled over of late, the US continues to track steadily upwards while China bounces around.

The interesting figure out of China will be export orders given the heightened trade tensions with the US.

The chilled trade winds are being felt on the Shanghai stock market which has fallen 3 per cent so far this month.

A far more worrying development, particularly for Australian commodity exporters, would be the impact showing up in China's industrial heartland.

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