• While some economic indicators disappointed, earnings results were generally positive in the US and expectations of interest rate cuts provided a boost in Europe and Australia. A return of capital to investors including via dividends was a major theme with Apple and Woodside announcing big plans on this front.
• The US earnings reporting season is now more than half way through. The good news has been that of the 270 S&P 500 companies to have reported so far 74% have exceeded expectations for profits. Against this though only 44% have exceeded revenue expectations and guidance has been soft.
• Preliminary business conditions PMIs for April for the US, Europe and China were all on the soft side, boosting fears of another mid year growth scare much as we have seen in each of the last three years but at this stage the indicators aren’t weak enough to be too concerned and could be just normal statistical noise. 
• Italian and Spanish bond yields fell sharply with Italian two year bond yields falling to a record low, at least for the past 20 years. This was helped by the re-election of the existing President in Italy who in turn designated Enrico Letta, a moderate from the Democratic Party, to form a new government. The further fall in yields came despite Spain being granted another two years by the European Commission to reduce its budget deficit to 3% of GDP, providing another sign that Europe is relaxing its obsession with austerity. But more broadly the settling of bond yields in Spain and Italy adds to confidence that the euro financial crisis is gradually fading.
• In Australia, softer than expected inflation coming on the back of a softer tone to recent global and Australian economic data along with weak commodity prices has strengthened the case for another rate cut, possibly as early as next month.

Major global economic events and implications

• Economic data released in the US continued to provide evidence of a bit of a soft patch in growth going into the June quarter. March quarter GDP growth of 2.5% annualised was less than expected but largely reflected another big fall in government spending, which could suggest that the sequester spending cuts have been brought forward. More importantly, the Markit business conditions PMI fell to 52 in April from 54.6 in March consistent with softer readings from various regional manufacturing surveys and durable goods orders were weaker than expected in March. Against this though: the level of the PMI is still consistent with okay growth; the durable goods report is not as bad as it looks given the sharp rise reported in January and given that core durable goods orders actually rose; the broad trend in housing indicators including home sales, prices and mortgage applications is up; weekly retail sales rose; and a solid fall in weekly jobless claims suggests the labour market is not slowing. Overall it seems that US growth may be slipping back to 2% or so, ie, not as good as it could be but not bad and at least it reduces talk of the Fed winding back its stimulus just yet.
• Eurozone flash business conditions PMIs for April were a little bit worse than expected, coming in up slightly for services compared to March but down slightly for manufacturing and unchanged at a composite level. They are at levels consistent with recession, although they remain up from last year’s lows. The main disappointment was in Germany which saw falls. The ECB’s bank lending survey showed an improved willingness to lend but weak demand for credit. Meanwhile, Spain’s unemployment rate rose to 27.2%, with youth unemployment now 57.2%, highlighting the need to do more to boost growth.
• In China the HSBC flash manufacturing conditions PMI for April disappointingly slipped. However, at 50.5 it is still well up from last year’s lows and remains at a level consistent with Chinese growth of around 7.5 to 8%.
• Good news in Asia was provided by Korea which saw its strongest pace of quarterly GDP growth in two years helped by investment and exports. Given low inflation and the strong Won a further interest rate cut is likely, but the improvement in growth is a positive sign.

Australian economic events and implications

• Lower than expected inflation in the March quarter, coming on the back of a softer tone in recent global and Australian economic data have left the door wide open for another RBA interest rate cut to help shore up the economy as the mining investment boom slows. While health and education costs saw their normal seasonal increase this was more than offset by falls in prices for a range of items including food, clothing, household equipment and cars. As a result, the RBA’s preferred measures of underlying inflation are running at an average 2.4% year on year and inflation excluding the effect of carbon pricing is probably close to 2%.
• To be sure the strong $A is clearly playing a dampening role with tradeables inflation running at -0.2% year on year but non-tradeables inflation at 4.2%. However, it should be noted that the strength in non-tradeables inflation is distorted upwards by strong rises in prices for things like health (up 6.1% year on year), education (up 5.8%), utilities (up 13.5%) and urban transport fares (up 4.5%) all of which are heavily influenced by government decisions as opposed to market forces.
• The bottom line is that inflation is not a problem and given the patchy and tentative nature of the response to interest rate cuts so far and the impending mining investment slowdown, the RBA should act on its easing bias and cut interest rates another 0.25%. This could occur as early as next month, but the June meeting may be more likely.

Major market moves

• Most share markets had solid gains over the past week with reasonable earnings results helping US shares, and talk of rate cuts helping European and Australian shares. US shares gained 1.7%, European shares gained 3.9%, Japanese shares rose 4.3% and the Australian share market rose 3.5%. Chinese shares fell.
• Commodity prices had a bounce after the sharp falls of the previous week. The bounce in the gold price could take it back to the $1500-$1550/ounce breakdown zone, before the downtrend likely resumes.
• The $A was little changed despite reinvigorated RBA interest rate cut expectations, but is still just bouncing around in the same $US1.02 to $US1.06 range it has been in since last July.

What to watch over the next week?

• In the US, the focus will be on the Fed’s monetary policy meeting on Wednesday. While there may be more debate about when to start slowing quantitative easing, it’s likely that the recent round of softer economic activity data and inflation in the US will have left the doves at the Fed in the ascendancy. So we don’t expect the Fed to foreshadow any impending changes in its $US85bn a month quantitative easing program. 
• On the data front the main focus will be on the ISM manufacturing conditions index (Wednesday) which may have drifted fractionally lower in April and payrolls (Friday) which are expected to show a 160,000 jobs gain for April after just 88,000 in March. Unemployment is expected to remain at 7.6%. In other data, expect a 1% gain in pending home sales, a 0.8% gain in house prices and a slight rise in consumer confidence (all Tuesday). Trade data and the non-manufacturing ISM index will also be released and March quarter earnings results will continue to flow.
• Thursday is likely to see the ECB cut its official interest rate from 0.75% to 0.5%. ECB officials have indicated a willingness to act and recent data has been worse than expected. Eurozone economic confidence measures for April (Monday) are likely to have remained subdued, but still in the context of a gradual rising trend.
• In China, the official manufacturing conditions PMI (Wednesday) and the final HSBC PMI (Thursday) are expected to confirm the slight lost of momentum in April already seen in the flash HSBC PMI.
• In Australia, expect growth in private credit (Tuesday) to have remained soft in March, a modest further rise in April house prices (Wednesday), a rebound in new home sales (Wednesday) after a set back in February and a 1.5% gain in building approvals (Thursday). Producer price inflation (Friday) is likely to be benign. 

Outlook for markets

• While shares remain at risk of a resumption of the correction as we come into the seasonally weak period around mid year, any set backs in shares are likely to remain mild and the broad trend is likely to remain up. Shares are still far from expensive, the gradually strengthening global growth outlook led by the US points to stronger profits ahead and investors are likely to increasingly switch from low yielding cash and bonds into shares as confidence continues to build ensuring solid “buy on the dips” demand. A pick up in mergers, buybacks and dividends from cashed up lowly geared companies is also likely to be a big positive for shares this year. So notwithstanding usual volatility, this all adds up to a positive backdrop for share markets.
• Sovereign bonds will be helped by Japanese monetary reflation and any further correction in shares. However, they remain fundamentally vulnerable as the improving global, and Australian, growth outlook will likely see bond yields move higher over the year ahead resulting in capital losses for investors in them.
• The renewed softness in commodity prices is acting as a strong offset to the impact of monetary printing in the US and Japan on the $A. As a result the $A looks like remaining stuck in the $US1.02 to $US1.06 range that has prevailed since July last year.

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