The firm opening on the Australian market today provides clear insight into the fact that trader thinking is currently dominated by the US Federal Reserve. More disappointing US economic data has been taken to reduce the chances of the Fed lifting its interest rate next week and this has translated into a reason to buy stocks.

Two months of soft retail sales data in the US have brought the trend back to tepid levels after a strong June quarter. This does not bode well for 3rd quarter GDP growth and tends to confirm other softer than expected data like the ISM non-manufacturing PMI.

It remains possible that the Fed will surprise markets by looking through short term data and lifting rates next week. However, if the Fed itself is somewhat undecided, then recent soft economic data seems likely to tilt the balance of their decision in favour of caution.

Assuming the Fed rate hike is deferred, this creates risk that events might conspire to mean that it does not happen in December either.  With bond markets consolidating last night, stock markets are reacting to the short term they have over shot to the downside. This has seen the Australia 200 index make an initial rejection of the 50% retracement level.  

After a good early start this morning, profit takers have prevented JB Hi-Fi getting past last week’s high at $31.20. While investors have applauded the pricing and strategic possibilities of the Good Guys acquisition, the strong rally in the run up to this week’s trading halt means that the good news has already been priced in.  

 

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