Yellen extends the Goldilocks outlook for stocks

The two potential international risk events for markets had positive outcomes last night. Janet Yellen’s testimony moved expectations for a rate hike out in time while the boxes were ticked to cement a four month funding program for Greece.

Chair Yellen made it clear that the Fed will complete its transition from calendar to data based policy settings by dropping reference to its preparedness to be patient from future guidance. However, Yellen repeated that the Fed will need to be reasonably confident that inflation will move back up to its target level before beginning to lift rates. Given the Fed’s tendency to be optimistic in its forecasting, this means there is potential for rate increases to come later than expected. This will prolong the Goldilocks scenario for stock markets, which reacted positively to the testimony.

The Australian market has potential to be influenced by local data today that might influence thinking on the data driven policy of our own central bank. Wage increases have been running at the lowest level since 1997. Any deterioration in the 4th quarter data to be released today will increase expectations for another rate cut while dampening the outlook for resurgence in consumer spending. Fourth quarter construction data will also shape views on GDP growth.

While oil remains caught between growing inventories and expectations of future production cuts, the copper market had a solid bounce last night on expectations that reduced capital expenditure will cut growth in mining production. This, together with ongoing positive reaction to BHP’s profit result should see a solid start to the materials sector this morning. Whether this follows through this afternoon may depend on China’s flash manufacturing PMI due at 12.45pm.