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ASX: Supportive macro background to set positive early tone

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Fuseworks Media
Fuseworks Media

By Ric Spooner (Chief Market Analyst, CMC Markets)

A set of Goldilocks, not too warm not too hot, US economic data combined with BHP’s strong production report will set a positive early tone to today’s trading.

The core CPI read of 0.1% for June in the US leaves it averaging 2%pa over the past six months and bang on the Fed’s target. On that basis, inflation will not stop the Fed beginning to tighten policy when it deems the labour market to be improving sufficiently. Importantly though, from the market point of view, inflation does not at this stage require the Fed to act pre-emptively, beginning to tighten rates sooner than it may otherwise have done. While this may change in coming months, at this stage, it means the best of both worlds for stock markets - better than expected earnings growth occurring against a background of ongoing low interest rates.

Australia’s June quarter inflation rate will be a key focus for investors this morning. Significantly higher than expected readings on the underlying measures could see annual rates around the top end of the RBA’s 2-3% target range. However, with wage growth low and the unemployment rate growing, the RBA is likely to tolerate this in the short term given that its target applies on average throughout the economic cycle.

BHP’s strong production report will be supportive for the materials sector. At this stage, the big miners are beating market expectations on production and cost control, vindicating the strategy of increasing production despite weakening prices.

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