US stock markets have been flirting again with record highs overnight, with US economic growth coming in at  3.2% compared to the expected much lower number of 2.5%. So it looks like the doomsday merchants and that damn bond market got it wrong!

Even though you can’t easily look at one quarter and say the rest of the year should follow, it should be remembered that the first quarter isn’t known for great growth because it’s so damn cold in the States and working days can be lost. What the numbers told economists is that underlying demand, especially business and government investment, is strong.

This comes as the US earnings season has so far come in better than expected. On an earnings per share basis, 77% of companies that have reported have beaten estimates, 6% met estimates, while only 17% missed. On revenue, 56% beat expectations, while 44% missed.

The S&P 500 has rallied around 17% year-to-date.

So the positivity picture gets down to an economy better than expected plus earnings better than expected plus a Fed not keen to raise rates. This equation is good for stocks! By the way, some US experts think the latest inflation number says a rate cut this year is possible.

And if a US investor was worried about anything, it might be that businesses exposed to the rest of the world via trade have had a few challenges but improving overseas signs at the edges might be saying to get ready for a sustained, better overall economic and earnings story going forward.

The only negative for the Yanks this week was the higher dollar but this will be a good development for our market, which should gain on a weaker Aussie dollar. Following the weak local inflation data, our dollar dropped below 70 US cents but this morning it was 70.37 US cents.

The US President and his economics team are worried about the low US inflation rate of 1.9% and have been raising questions about whether a rate cut is needed. I bet the Fed just holds rates where they are as long as growth beats 3%.

On the subject of interest rates, central banks are tending towards loosening monetary policy as global economic growth doesn’t look strong. They’ll be watching the growth that comes out of stimulus programs in the EU and China in particular, given the nice growth we’ve just seen out of the US.

On that subject, from a local point of view, the case for cutting after the election is gaining more support. “The interbank futures market is pricing two rate cuts by the RBA by the end of 2019,” said CBA senior currency strategist Joseph Capurso. “While financial markets are pricing an RBA rate cut cycle, we expect the Aussie to stay heavy and spend more time below US70¢ in the near term. An upward surprise in US Q1 GDP [on Thursday night] could push the Aussie below US70¢ again.” (AFR)

Australian shares closed higher for the week, as the S&P/ASX 200 index hit the best level since December 2007 on Friday, after rising 125.8 points (or 2%) to end at 6385.6. Higher oil prices and signs that the US reporting season was better than expected helped stocks power higher.

Two weeks ago, the experts were tipping a negative reporting season but it could turn out to be flat or even marginally positive and this is helping the local market tap into the momentum.

Locally, the inflation number where the annual rate fell from 1.8% to 1.3% took about 1.3 US cents off our dollar to 70.21 US cents but bank stocks reacted positively to the predictions that rate cuts from the RBA are on the cards.

CBA put on 2.8% to $75.45, Westpac rose 3.4% to $27.74, ANZ rose 2.3% to $27.40, while NAB added 1.6% to $25.67.

Infrastructure and REIT stocks keep rising and Bill Shorten’s hate session on retirees using franking credits and the expectation that the RBA will cut rates after the election have helped these shares. They are interest rate proxy stocks.

The so-called WAAAX stocks – Wisetech, Appen, Afterpay, Altium and Xero – all had a good week, with great tech stock earnings news in the USA helping these local tech companies. Go figure that one out!

My bottom line conclusion is that central banks won’t threaten growth and will be actively trying to stimulate it. Provided growth ensues, then stock prices over 2019 should react positively. If growth fails to show up, that’s when I’d turn negative on stocks and you’ll be the first I’ll inform.

What I liked

• The “final demand” component of producer prices (business inflation) rose by 0.4% in the March quarter to stand 1.9% higher than a year ago. Business inflation is more robust than consumer inflation but it could be better/higher.
• Based on today’s data we expect that the ratio of export prices to import prices (terms of trade) rose by around 5.1% in the March quarter (strongest lift in two years), after a 3.1% lift in the December quarter (CommSec forecast +3.5%). This augurs well for economic growth.
• The weekly ANZ-Roy Morgan consumer confidence rating rose by 3.6% – the biggest increase in 10½ months – to 119.5 points. Consumer sentiment is above both the average of 114.3 points held since 2014 and the longer-term average of 113.1 points since 1990.
• Consumer views on the economic outlook in the ANZ consumer survey over the next year rose by 2% to 114.4 points – the highest level in 19 weeks. And sentiment on economic conditions over the next five years rose by 7.7% to 122 points – the highest level since 2013.  
• The Federal Budget is in surplus for the first time in a decade. In the 12 months to March 2019, the Budget surplus stood at $1,544 million (less than 0.1% of GDP).
• US new home sales rose by 4.5% to a 692,000 annual rate in March (forecast 650,000).
• US durable goods orders rose by 2.7% in March (forecast +0.8%).

What I didn’t like

• The Consumer Price Index was unchanged in the March quarter, below expectations. In seasonally adjusted terms, the CPI rose by 0.1%. The annual rate of headline inflation eased from 1.8% to 1.3%.
• In trend terms, the Internet Vacancy Index (IVI) fell by 1.5% to 83.1 points in March – the biggest fall in six years. The index is 3.8% lower than a year ago BUT is still 20.7% above the level recorded in March 2014.
• New claims for unemployment insurance in the US rose by 37,000 to 230,000 in the latest week (forecast 200,000) – the biggest gain in 19 months.
• Shares in Nokia fell by 9% after reporting a quarterly loss. The banking index lost 0.6% after Barclays reported a 10% fall in quarterly profit. Shares in Deutsche Bank lost 1.5%, with Commerzbank down 2.5% after the failure of merger talks between the two banks.
• Shares in 3M – a bellwether company for the economy – fell by 12.9%, weighing substantially on the Dow Jones index, after it cut its earnings outlook for 2019 and announced plans to lay off 2,000 workers.
• The Richmond Federal Reserve manufacturing index eased from +10 points to +3 points in April (forecast +10 points).
• The price of copper fell and this is never a plus for the outlook for global growth. The metal fell 1.3% on Thursday, closing at $US6,364 a tonne, its lowest price since March 28.

Look forward to seeing you

Over the next two weeks I get a chance to catch up with you at our Investor Strategy Days. Sydney is sold out with over a thousand attendees but we do have some seats available in Brisbane and Melbourne. We’ll have the smartest people in the room from the likes of Magellan, WCM, Contango, Perennial Value and many more. And I’ll be interviewing former Senator and Sky News host, Graham Richardson, to understand what a future Labor Government will mean for investors. And I want to know if he thinks Bill Shorten’s franking credits play will be stopped in the Senate. If anyone knows the workings of Bill’s brain, it would be Richo. For your complimentary tickets go to www.switzerevents.com.au and use the promo code SR2019.

Top Stocks – how they fared:

What moved the market?

• Mostly positive results have come out of the United States’ first quarter earnings season.
• The annual rate of inflation fell to 1.3% and was at 0% during the first quarter of the year, pressuring the Reserve Bank towards cutting interest rates.

The Week Ahead:

Australia
Monday April 29 – CommSec State of the States
Tuesday April 30 – Private sector credit (March)
Wednesday May 1 – AiGroup & CBA purchasing managers (April)
Wednesday May 1 – CoreLogic home prices (April)
Friday May 3 – Building approvals (March)
Friday May 3 – AiGroup & CBA purchasing managers (April)
Friday May 3 – New vehicle sales (April)

Overseas
Monday April 29 – US Personal income (March)
Tuesday April 30 – China purchasing managers (April)
Tuesday April 30 – US home prices (February)
Tuesday April 30 – US Pending home sales (March)
Tuesday April 30 – US Consumer confidence (April)
April 30-May 1 – US Federal Reserve interest rate decision
Wednesday May 1 – US ADP employment change (April)
Wednesday May 1 – US ISM manufacturing index (April)
Thursday May 2 – US Factory orders (March)
Friday May 3 – US Employment (April)
Friday May 3 – US ISM non-manufacturing index (April)

Food for thought:

 “Know what you own, and know why you own it.” – Peter Lynch

Stocks shorted:

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before.

Chart of the week:

As first-quarter earnings season approaches the halfway mark in the US, 77% of S&P 500 companies have reported higher earnings than expected. This chart from AMP Capital’s Chief Economist Shane Oliver looks at earnings growth as well as estimate beats over the past decade:

Source: Bloomberg, AMP Capital

Important: 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. Consider the appropriateness of the information in regards to your circumstances.