The US Federal Reserve kept interest rates on hold at the conclusion of its monthly meeting this morning. However changes in language in the accompanying announcement saw markets move to reflect a new easing cycle. The well-flagged change lifted shares modestly, weakened the US dollar, and pushed bond yields to new lows.

The Fed dropped the word “patient” from its intentions and lowered its inflation forecast. Bond traders are now pricing a 100% probability of a drop in cash rates in July. The forward curve indicates that a drop to 1.5% by November from the current 2.25% is the most favoured scenario.

The modest share market reaction show this decision was no surprise. It is a continuation of a shift first signalled in January by Fed Chair Jerome Powell. Markets were well prepared for this tilt. The virtual confirmation of a cut in July drove bond yields lower, but for stocks the signal is more ambiguous. Growth concerns are the reason the Fed is taking a more accommodative stance. While lower interest rates boost the investment case for shares, the growth concerns undermine the business case.

Futures are pointing to a positive start to Asia Pacific share trading. The expiry of the quarterly SPI contract in Australia will see much larger volumes change hands today. The price of rolling positions to the September contract has persisted above calculated fair values. This could mean there are unsatisfied buyers, and that the Australian index will outperform as those buyers move into cash equity positions.

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