Equities flat, bonds fall ahead of Thursday's rate decision

The US equities markets closed almost flat overnight with the S&P500 up 0.04% and the Dow Jones down 0.1%. Equities have been drifting slightly lower after reaching all-time highs on 1 March. The lack of price movement seems to be caution creeping in ahead of Thursday morning’s (AEDT) FOMC interest rate decision where rates are expected to be increased by 25 basis points. The economic recovery in the US is atypical given that certain economic data points are not improving as expected. Although recent payrolls data indicates strong creation of new jobs and a low unemployment rate, the participation rate is currently at levels not seen since the 1970’s. This implies that a large number of people have given up looking for work and are therefore not counted as unemployed. The other disappointing data point has been the GDP growth. The Atlanta Fed publishes an up to date estimate of GDP growth for the current quarter and this is currently sitting at 1.2%, low considering the economy is supposed to be recovering.

WTI oil stabilised overnight after sharp declines the prior days. Large build-up of inventories in the US is indicating that the OPEC production cuts are not having the desired effect. Interestingly, natural gas prices have been rising the past week, possibly as a result of forecast cold weather in the northern United States.

Bond prices fell overnight (yields rose), with the yield on the 10-year T-Note now back to levels not seen since mid-2014. Australian bond prices are also falling with the 10-year yield very close to 3%. Further rises in yield will be expected to feed through to other interest rates in the economy, particularly mortgage rates.

Today, Chinese industrial production, fixed asset investment and retail sales data will be released. As a major trading partner of Australia, continued growth in the Chinese economy is important for Australian exports. Later tonight, US CPI and PPI will be released for the month of February. The Fed uses this data as a proxy for inflation which it hopes to get back to 2%.  

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This article was written by William O'Loughlin - Local Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via william.oloughlin@rivkin.com.au or by phoning +612 8302 3633.

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