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Today’s inflation number is critical
by Peter Switzer
The question I’m asked often is what will sustain the rally in stocks? I have answered this question with a range of factors from a continued US recovery, ditto for China, bond yields remaining low for European governments and no left-field events that could rock this rolling snowball of confidence that is building.
Mario Draghi — the European Central Bank (ECB) boss — tells us he expects a positive contagion to dominate in 2013 after we have dealt with a negative contagion since the GFC started.
Local stocks will get impetus from what Wall Street and the global economy end up doing because stocks such as BHP Billiton and Rio Tinto are linked to world demand. That said, for a solid boost to stocks we need to see local businesses produce healthier bottom lines and so today’s inflation number might be critical.
Consumer disappointed by rate cuts
To be more correct, the Reserve Bank (RBA) is critical but this policymaking body is largely driven by inflation. So, if the number screams more interest rate cuts are not a problem, then it will not only open the door for at least two cuts this year, it might stem the rise of the $A which is acting as a brake on many companies’ profits as well as their stock price.
Business confidence is still negative while consumer confidence is picking up. The likes of Bill Evans — the chief economist at Westpac — says the consumer reaction to the 125 basis points worth of cuts has been surprisingly disappointing.
That has to change and the RBA has a big role to play. I don’t think four cuts equal to one per cent, taking the cash rate to two per cent, is necessary but one or two would tip confidence to a stronger upside.
Helping our stocks should be China and the Shanghai Composite, which renowned chartist Daryl Guppy says looks set to keep on rising. Dismissing a recent correction as a “consolidation”, he dismisses the idea of a “trend correction”.
US data watch
Over in the USA home sales fell one per cent in December but that is less of a concern than the rapid rise in house prices! Yes, after worrying about massive price falls for real estate and experts arguing house prices have to comeback to underpin a sustainable economic recovery, now the experts fears a price bubble!
Prices rising because of new jobs and higher incomes are OK, but if house prices spike because there is a gross undersupply, which they say prevails now, then the ensuing price rise becomes a problem.
I think this story is overdone and shows the media needs something to create worrying headlines.
Right now there are no big reasons for the market to break out to either the high side — the recent rally has been strong — nor is there a reason to sell off.
Overnight the Dow ended 62.43 points or 0.46 per cent higher to 13,712.13. Meanwhile the S&P 500 gained 6.58 points or 0.44 per cent to 1492.56.
In the absence of anything big from overseas, the focus has to be on today’s inflation number and we could really do with a break for confidence’s sake.
Inflation expecations
For those who like benchmarks, the underlying inflation number is expected to be 0.7 per cent, which is on the high side, taking the annual rate to 2.6 per cent and so it would be good if it were less than 0.7 per cent. This would make further rate cuts possible. If it’s on the high side, then the role of the Gillard Government’s carbon tax will be thrown into the media spotlight — you can bet on that.
Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
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Published on: Wednesday, January 23, 2013
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