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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Frequently Asked Questions about this Article…
China's rate cut by 0.25% is expected to have a positive impact on the stock market as it signals the authorities' intent to support the economy. This move is likely to boost investor confidence and positively affect stock valuations.
The solid jobs growth in the US suggests that the economy is rebounding from the winter slowdown and is on track for moderate growth. This positive development helps restore the broad economic outlook to pre-Christmas levels.
Yes, it seems likely that the US Federal Reserve will implement two rate hikes this year. The Fed is preparing markets for this change by potentially altering its policy bias wording soon.
A strong US Dollar can have a negative impact on US economic growth at the margins. However, the overall economic outlook remains positive due to solid jobs growth and moderate economic recovery.
Inflation is a focus for the US Federal Reserve because it is a key factor in determining monetary policy. While wage growth remains subdued, the Fed is comfortable that moderate economic growth will eventually lead to a recovery in US inflation.
China's economy continues to face significant downward pressure, which poses downside risks for both resource stocks and the wider Australian economy. Investors should be cautious of these potential impacts.
The ASX 200 index recently broke below support, indicating a shift from a sideways drift to a potential medium-term bearish bias. Rallies are likely to be corrections against recent downward moves unless the index breaks above last week's high of 5901.
Investors seeking further commentary from CMC Markets can contact them at 02 8221 2137 for more detailed insights and analysis.
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