The XJO is expected to edge higher on open this morning following a similar move from the U.S overnight. U.S futures have moved into the red however, and coupled with the local CPI reading today at 11:30am (AEST) our market is likely reluctant to do much in the morning session.

Yesterday we showed some positivity, managing to hold onto most the intraday gains into the close. We continue to grind along key support at roughly 7,280 to 7,300.

All eyes will be on the local CPI reading as it seems to be a particularly important and pivotal announcement. The U.S is flagging peak rates which has largely led to their market trending higher. A few months ago, our market believed it was in a similar position. However, strong inflation and economic data such as employment has kept our RBA on the tightening cycle war path. This has likely caused the disconnect between our market and the U.S with our market trending sidewards. Two CPI reading’s ago, we had stronger than expected CPI, thanks to a fuel excise change from last year. The last reading came in lower than expected, likely making up for the lack of the fuel excise change. Our latest employment reading came in stronger than expected, with more jobs being created, and our economy at full employment. Furthermore, housing seems to be bouncing back.

Ultimately, we are getting mixed signals, especially when considering these readings are lagging indicators. The RBA is obviously reluctant to keep raising rates and squeezing the middle and lower class, especially when most of the inflation has been proved to be caused by company profitization rather than demand from consumers – however without the government legislation to control the private sector, the RBA only has one lever to pull and they must get inflation down.

If they raise rates and remain Hawkish, expect our market to tumble. We are trading near the top of the range and there is plenty of room to the downside. 7,280 is roughly the first support, but expect a move quickly to roughly 7,200 where the to 50, 100, and 200 day MAs have roughly converged. If they hold or raise rates and are dovish in their future guidance, we could very well push through 7,380 and play some catch up to the U.S. Speaking of which, a large reason we have tracked sidewards and not fallen during the lamentation of our tightening cycle extending, is largely because the U.S has had an extraordinary run higher. However, they are looking overbought and are due for a pullback. In essence, their movements could either counterbalance or compound or directional movement depending on how our market takes the reading, and how their market trades during our digestion. Finally, if RBA hold rates but are hawkish with plenty of “we will wait and see” then this reading could be a non-event – however this does feel unlikely.

If you have a few trades that are looking precarious, consider either closing them before 11:30am (AEST), or at least watch the market’s reaction at the time and make an active decision to hold or not.

US Markets

US shares closed higher again overnight as they continue their monumental run. Prices moved higher with better than expected US consumer confidence, which convinced investors that the US economy is treading along nicely, and that a severe economic downturn may be avoided. After US markets closed, there was some major tech earnings reports, with Microsoft trading lower in aftermarket trading following its report, while Alphabet (Google) traded higher. Tonight will be the major test for US markets however, with the Federal Reserve interest rate decision for July. The ‘Fed’ is almost certainly going to raise interest rates so the market response will likely come down to whether they indicate if there will be more rate rises after this. Given that US shares have rallied substantially for the past four months, there is plenty of room to the downside, while valuations of prices relative to earnings might make it difficult for much more movement to the upside.

Five of the eleven sector groups of the SP500 closed higher overnight, with Materials the strongest performers, followed by Technology stocks. Financials and Real Estate stocks saw the most selling, with investors closing these positions ahead of tonight’s likely interest rate rise.

Technically the SP500 is continuing on its uptrend and now the next potential resistance level is some way away at the 4,600 level. This level hasn’t been reached in over a year, so its hard to say whether this will be the resistance level or not. Should the index fall from here, recent resistance at 4,450 may now act as support.

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