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Markets get evidence based on inflation

The rally in long US bond yields has lost momentum. Last night bond yields fell. This flowed through to a positive session for equities that will be reflected in Asian markets when they open this morning.

US bond markets appear to have arrived at a point where evidence of improved wage growth and inflation will be required to push yields significantly higher. This has given licence to investors to push stock indices higher in response to good reporting seasons in the US and Australia plus the outlook for solid profit growth.

Markets have a watching brief on Jerome Powell’s testimony before Congress. However, the chances are, that like the markets, he will signal an evidence based strategy. This will involve plans to maintain a gradual approach to rate increases in the absence of further evidence that growth in wages and inflation is picking up steam

Australian stocks will be assisted by yesterday’s lift in iron ore prices. This was fuelled by reports that the Chinese city of Tangshan may extend steel production cuts through to November. This would be a positive development for high grade iron ore producers like Rio and BHP but also underscores the markets vulnerability to unpredictable Chinese policy changes.

Caltex has unveiled a solid result assisted by margin expansion. Its announcement that it will adopt a company-controlled model for its convenience stores will bring strategy execution more directly under the control of an effective management team and reduce exposure to risks encountered by some franchise operators in recent times.

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