As I write this, the Australia 200 is weakening in advance of today's RBA decision. I thought it might be worth posting a few thoughts on the technical outlook for the index and how this might fit with today's rate decision plus the release of China's economic statistics over coming days.
Whether or not the RBA cuts rates today they are likely to maintain an easing bias. As things currently stand, if they don't cut today I think the market will expect them to do so in the near future (probably next month).
This expectation is against a background of:
- Moderate and declining inflation. Underlying measures of inflation like the trimmed mean are getting close to the lower end of the RBA's 2-3% target.
- Moderating international growth
- The strong Aussie Dollar
- Likely tax increases and government spending cuts
- Future reductions in spending on mining investment AND
- Pretty sluggish domestic growth despite the impact of rate cuts so far
One of the things I find helpful in forming a view on economies is to look at most of the major economic statistics together and also at their trend over recent months. This makes it easier to make sense of each new statistic on the day it's released.
The table of Australian statistics above suggests to me that the economy is not yet doing enough to satisfy the RBA that other areas can pick up the slack from lower mining investment and prevent an increase in unemployment.
On that basis it seems to me that the RBA will maintain an easing bias for the time being.
For stocks I think this means:
- While many of the "market darling" high dividend stock and defensive stocks are now at relatively high PE values, they may stay that way. It's quite possible they could get even higher if interest rates keep falling and the markets get don't get a real scare in terms of the risk outlook.
- As we have recently seen, corrections in the index may be relatively shallow while this easing bias remains. So unless we get a "risk scare" a worst case scenario may be to hang around current levels.
Australia 200 chart
Things have reached an interesting stage with this chart.
Taking out the recent high around 5165 looks as though we have embarked on the next leg higher in this rally.
But at this stage we are struggling to move convincingly into new ground. If we continue to hang around these levels a scenario where we have a "truncated" final swing higher or a flat correction could begin to come into play. This could make the whole thing look like a large double top.
For me at this stage an ongoing uptrend with a general strategic approach of buying dips might be the most likely outlook.
A move below the 50 day moving average and recent support at 5037 might make the flat correction scenario more likely.
The rally in some commodity prices and resource stocks brings China's upcoming releases into focus.
Resource stock charts look as though they could correct higher so good data could be a trigger for this and push the overall index higher
The flip side is that the rallies in recent days makes the market a bit more vulnerable to misses in China's statistics.
Some of the major figures to watch out for include:
- Export growth - expected to gain 9.1% and due for release on Wednesday
- CPI - expected to be 2.3% and due Thursday
- Industrial Production - expected 9.4% - due Monday
- Retail Sales - expected 12.8% - due Monday.