China's rate cut and US jobs rebound get the week off to a positive start

Weekend news of the next rate cut in the China will add to the positive lead from US markets to deliver a rally when the stock market opens this morning.

Friday’s news of solid jobs growth in the US looks like putting the broad economic outlook back to where it was before Christmas. While the strong US Dollar is likely to have a negative impact at the margin on US economic growth, the April jobs growth cements the view that the US economy will rebound from the winter slow down to resume moderate growth levels.

The recovery in the US labour market puts the focus back on inflation as the main constraint on Fed monetary tightening. While wage growth remains subdued, the Fed remains comfortable that moderate economic growth will lead to some recovery in US inflation over time. It now seems likely that we will see two rate hikes in the US this year, with the Fed soon moving to change its wording on policy bias to further prepare markets for this.

China’s move to cut rates by 0.25% represents the latest in a series of stimulus moves that began in May last year. The latest move is likely to have a positive announcement effects for stock markets today as investors respond to the valuation impact for China’s stock market and welcome the move as a statement of intent by authorities to support the economy. However, authorities also noted that “China’s economy is still facing relatively big downward pressure” suggesting China continues to be a source of downside risk for both resource stocks and the wider Australian economy.

The ASX 200 index break below support last week, changes the technical picture from one of broad sideways drift to one where there is potential for a medium term bearish bias. At this stage the safest assumption is that rallies are likely to be corrections against the recent moves lower. It would take a break above last week’s high at 5901 to change this presumption

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