Ben and Glenn, market buoys

It looks like Ben Bernanke and Glenn Stevens will be able to hold on to investors' love for a little bit longer.

Australian investors could be forgiven for sending Federal Reserve chairman Ben Bernanke and the nine members of the Federal Open Market Committee that sided with him in a meeting last month a dozen roses. The Fed's minutes for the meeting, released overnight, showed the central bank's bond-buying would continue, alleviating the worst of market fears. Investors may also want to start preparing a suitable bouquet of waratah for Reserve Bank of Australia Governor Glenn Stevens and his monetary policy committee if they decide next month to trim the cash rate further.

The two leaders of their respective country’s central banks are helping to underpin investor confidence in stocks. The S&P 500 Index has gained 17% this year. The S&P/ASX200 Index, after a volatile first six months where it barely made a gain, is now up 5.3% since its low this year on June 25.

Today’s Australian unemployment data may well clinch an August rate cut. Andrew Lilley, an interest rates strategist at UBS, thinks if the June jobless rate is at 5.7% there is a 75% chance the Reserve will cut next month. A 5.5% unemployment rate means the chance of a rate cut falls below 50%, says Lilley.

Stevens and his eight fellow monetary policy committee members will also have to weigh data that shows a slowing Chinese economy is demanding less foreign goods. Chinese imports contracted 0.7% in June from a year ago. Northern hemisphere manufacturing traditionally slows in the three months to September 30. China is not different. A slowing economy, iron ore, coal and steel stock piles make it less certain that China will demand more commodities as mining production increases following spending on Australian mines, roads, railways and ports.

The Reserve Bank has been at pains to try and ensure the non-mining sector can lift the burden a little from Australia’s reliance on commodity exports for economic growth. But it has perhaps been less successful than it has hoped. Despite rate cuts that now have the cash rate at an historic low, consumer confidence has risen just 3% in the last 12 months (see Adam Carr's Can Australia avoid a confidence death spiral?). There is evidence that families may cut their spending, concerned about their future. A rate cut may help the stock market but may do little immediately to alleviate feelings of uncertainty over the future among many.

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