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.
For further comment from Ric Spooner please call 02 8221 2137.
Frequently Asked Questions about this Article…
Janet Yellen's testimony positively impacted stock markets by moving expectations for a rate hike further out in time. This extended the 'Goldilocks' scenario, where conditions are just right for stocks, leading to a positive market reaction.
The Federal Reserve's approach to interest rates, particularly its shift from a calendar-based to a data-driven policy, affects everyday investors by influencing market conditions. If rate hikes are delayed, it can prolong favorable conditions for stock investments.
Low wage increases in Australia, which are at their lowest since 1997, could lead to expectations of another rate cut. This might dampen consumer spending and affect economic growth, impacting everyday investors' portfolios.
Local Australian data, such as wage and construction figures, can influence the central bank's policy decisions by shaping expectations for interest rate changes. Poor data might lead to rate cuts, affecting investment strategies.
The copper market's recent bounce is significant because it reflects expectations of reduced mining production growth due to lower capital expenditure. This can influence the materials sector and investment opportunities within it.
China's manufacturing PMI is a key indicator of economic health and can significantly affect global markets. A positive PMI can boost investor confidence and influence sectors like materials, impacting investment decisions.
The 'Goldilocks' scenario is important for stock markets because it represents a balanced economic environment where conditions are favorable for growth without overheating. This can lead to sustained positive performance in stock investments.
The oil market plays a crucial role in investment strategies as it affects energy prices and economic conditions. Current dynamics, such as growing inventories and production cut expectations, can influence market sectors and investor decisions.
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