Trump rattles nerves, but all eyes on the Fed

Stocks decline of Trump and the Fed

Asian stocks climbed, but European and North American stocks slid yesterday, as global trade tensions and positioning for tomorrow’s US Fed meeting came to the fore. US President Trump rattled investors nerves in overnight trade, after the US President lashed-out publicly at the Chinese once again, stating the Middle Kingdom continues to “rip-off” the US. President Trump also stated his frustration with the slow progress of trade-talks, and China’s commitment to making them work. “That is the problem with China, they just don’t come through”. The commentary appeared enough to sap any bullishness from the market in US trade, with the S&P 500 finishing its session down 0.3%.

Markets preparing for a Fed cut

While the US President’s comments certainly don’t help market sentiment, really, market action today is fundamentally about the US Fed. The Fed meets tonight, and are all but certain to cut interest rates by 25-basis-points. Markets have effectively discounted this reality, so the core concern for markets out of tonight’s meeting is the guidance. Global equity markets have sustained their strength on the basis that the Fed will begin a cycle of four rate cuts in the next 12 months. The risk to sentiment here is the Fed is much more reserved in their rate-outlook than what’s baked-in to the market – a phenomenon that would likely trip stock markets.

A record-run for records sake

The ASX 200 registered a record closing high yesterday, finishing trade up 0.3% at 6845. It too managed to exceed its previous record intraday high – but ultimately lacked the lustre to close beyond that level. Irrespective, it was a milestone day for a market that seemed to will itself higher for the sake of simply clearing that historic level. Fundamentally, though a respectable day’s trade, the fundamentals were so-so. It’s been a momentum driven trading dynamic for several days on the ASX 200, as this landmark event was chased. Interest now whether the gains can last long ahead of some major event risks – including commencement of local earnings season.

Australian earnings season approaching

Australian earnings season is all but upon us now. Rio Tinto is the big-one in the next 24-48 hours. Although we are trading within a market knocking-off, at least nominally, record levels, corporate profits this reporting season are forecast to come-in a trifle soft. After a series of recent downgrades, earnings-per-share growth is expected to be around 1.6% this half – down from around 9% last half. As always, the most important variable this reporting period will be forward guidance. Valuations are becoming stretched, with investors searching for more than just RBA rate cuts to keep this bull market running.

Bank of Japan follow a familiar formula

The Bank of Japan met yet yesterday, and as broadly expected, kept its monetary policy settings on hold. It looked to be a clear case of “wait-and-see” from the BOJ, in two respects. The first: to get a continued feel of economic fundamentals within the Japanese economy before enacting any policy changes. The second: to judge how the Fed approaches its policy settings at its meeting this week. The message from the BOJ was ultimately a familiar one. Growth and inflation forecasts were downgraded to reflect softening global economic conditions. While assurances were given that if the country’s economic outlook diminished significantly enough, monetary policy support would be forthcoming.

Australian inflation data today

Attention turns today to the release of Australia’s quarterly CPI numbers. Economists are forecasting a slight pick-up in consumer inflation last quarter from 1.3% to 1.5%. Despite surely a slight relief to policymakers (provided it materializes), an on expectation result in today’s inflation figures will do little to shift the narrative around the likely path of Australian interest rates. Disinflation, it would seem, is still the overarching fear. And in fact, according to market participants, still to be expected. Australian 5 Year Breakeven Rates – a barometer of inflation expectations in financial markets – are currently at a measly 1.19% – and falling.

Markets still expect October rate cut

Today’s CPI will hold considerable sway over the outlook for RBA policymaking. But it would appear that for now, market participants have little faith that the RBA will be able to stimulate the Australian economy out of its current funk. Economic growth is still expected to be below trend moving forward, meaning nominally fully employment, and the wage growth and price-pressures that’s supposed to bring, will remain missing. Another interest rate cut, therefore, is approaching, according to financial market pricing. As it stands, the interest rate curve is suggesting the next RBA cut will come in October, before another one comes after that in early 2020.