US stocks register new milestone: The S&P500 registered fresh all-time highs, and touched the 3000-mark for the first time in its history, after Fed Chair Jerome Powell, during his testimony before US Congress overnight, provided implicit assurances that the Fed is open to cutting interest rates at the end of this month. Chair Powell cited weakness in the global economy and trade-conflicts as being the primary reasons for this shift in his view – though he did stress that the fundamental outlook for the US economy is strong. Chair Powell’s testimony plays firmly into the “insurance-cut narrative” prevailing in markets currently, with a Fed-cut at the end of this month all-but-certain.

A Fed cut all but assured: Importantly, FOMC Minutes, which were also released during last night’s trade, backed-up what Powell said during his testimony. So as far as market participants are concerned, the risks that last night’s trade clearly posed have proven positive for market sentiment. The VIX has receded as financial markets price-out marginally the risk that Friday’s solid US jobs data may have brought-about a change in Fed rhetoric. As-a-result, interest rate sensitive US 2-Year Treasury yields have plunged, shedding 8 basis-points in last night’s trade, sending the Greenback lower across the board, and sparking another rally in gold prices, which climbed 1-and-a-half per cent overnight.

The central question remains: With the US stock market at all-time highs, and an interest rate cut from the Fed this month considered a foregone conclusion, the markets’ thinking probably becomes slightly longer-term in its framing. And for market purists, this is probably welcomed, and means a greater emphasis on market fundamentals. And the core question hasn’t changed. Yes, cheap money needs a home, so boosts in liquidity brought about lower rates will flow into equity-markets. But if the economic outlook is as dim as is being suggested, and if US earnings growth does indeed contract as expected this earning’s season, how long can new stock-market records really be sustained?

ASX200 sustains uptrend: The bulls reclaimed control over the ASX200 yesterday, pushing the benchmark index temporarily back above the 6700-mark. Reassuringly, it was a day of high activity, too, with volumes above average, following a couple of days slackened market action. It’s a telling dynamic: despite no shortage of local and global risks, the Australian stock market continues to enjoy a well-supported uptrend. And though some valuation metrics, such as the price-to-sales ratio, are looking a little stretched, forecasts for solid enough earnings growth, plus the chase for attractive yields, is seemingly proving good enough reason for investors to keep putting money to work in Australian stocks.

Chinese economic data sapped confidence: It must be said: the ASX200’s rally was faded throughout intra-day trade yesterday. There were a few reasons behind this, but the most significant was the considerable miss in Chinese PPI numbers, which revealed producer price inflation in China has flatlined in the last 12 months. The news raised fresh concerns for the state of the Middle Kingdom’s economy – and in particular, the country’s business sector, which is apparently suffering from a sub-par demand environment and likely margin-compression. Of course, the weaker than expected inflation data rippled through Australian markets: the ASX200 retraced half-a-per cent in the hours after the data’s release.

Australian consumers still nervy: Market participants were delivered some sobering news about the domestic economy yesterday, too. Westpac’s Consumer Sentiment report was released, and conveyed a marked deterioration in consumer confidence within the Australian economy. It didn’t rock the stock market at all, nor did it change the market’s outlook for future RBA monetary policy. However, it was a stark reminder of the malaise plaguing Aussie households at the moment. Even in light of interest rate cuts, tax-cuts, the relaxation of mortgage lending standard, and a stock market reaching decade-long highs, consumers are on the whole uneasy, and remain wary about the future.

(Source: Westpac Banking Corporation)

Powell and US CPI to capture limelight: The second leg of Powell’s speech will dominate market action tonight, along with the release of equally significant US CPI data. Fundamentally, the rationale the Fed has been able to adopt to justify shifting to a dovish policy bias recently is that disinflation in the US economy is no longer “transitory”. It’s an argument that the market is buying – even if it is being exploited by policymakers to slightly obscure the complex interplay of factors driving the Fed’s thinking at-the-moment. Nevertheless, market participants will be looking for another sluggish inflation number tonight, to keep US CPI at the roughly 2.00 per cent rate at which it currently presides.

Written by Kyle Rodda-IG Australia