In what might be a sign of things to come, the stock market is inching higher. The market is being supported by the prospect of lower for longer interest rates but restrained by full valuations.
Janet Yellen’s remarks confirm the importance of data and future events for the timing of the next Fed move. Right now, early signs are that the US economy has wound back the pace of its April bounce. This makes one Fed rate hike look the likely maximum for this year, extending a Goldilocks scenario for stock markets.
The Fed outlook and falling Australian bond yields are providing some buying support for stock this morning. Firm commodity prices are also increasing confidence in resource and energy stocks.
This scenario could easily see the Australia 200 break through chart resistance at 5436 and into new high ground for the year before long. The S&P 500 also looks a decent chance of cracking above much watched resistance at 2135 pretty soon. However these moves won’t necessarily see a roaring new uptrend develop. Valuations are full and downside risk remains significant. Instead, stock markets may inch nervously through resistance and continue to hang around this general vicinity in a relatively volatile frame of mind.
While the RBA is not expected to move its cash rate today, what it has to say about inflation expectations and its take on international economic conditions could be important. The Aussie Dollar looks poised for volatility against the US Dollar. If the RBA looks guarded about rate cuts at the same time expectations for a Fed hike have been wound back, the outcome for the Aussie Dollar could be bullish. A clear RBA easing bias on the other hand would confirm and outlook for narrowing spreads between Australian and US interest rates. This could see recent Aussie Dollar strength reversed.