Markets, News, Views, Commentaries….. 

April was a good month for equity markets around the world, with latest data showing signs of improving growth and ongoing low inflation.   

Financial markets continue to expect central banks, especially the US Federal Reserve and the Reserve Bank of Australia, to cut interest rates in coming months.  We know now that on the first Tuesday in May the RBA resisted the urge to cut rates, holding the 1.5% official cash rate.  More on this later in the Newsletter.

After the very strong performance of equity markets in the first quarter of the year, investors have been grappling with the question of whether the rally can continue or has gone too far, for the time being at least. As a result, the April corporate earnings reports in the US were the focus of much attention. The markets had downgraded their expectations for earnings growth after the sharp slowdown in growth in recent months. However, as things turned out, earnings were better than the market had expected and the S&P500 price index closed April at a new record high.

Other economic data from the US also gave a more positive tone to the growth story. For example:

  • GDP growth in the first quarter turned out to be stronger than had been expected
  • The latest data on retail sales and construction spending also showed signs of improvement
  • And importantly, the US labour market remains very strong. Nearly 200,000 jobs were added in March and the unemployment rate at 3.8% was the lowest in nearly 50 years. Leading indicators of unemployment, particularly unemployment benefit claims, fell to their lowest levels in more than 50 years and suggest that further declines in the unemployment rate are possible in coming months.

The Australian labour market also performed well in March, with 48,300 new full-time jobs offsetting a decline of 22,600 part-time jobs. The participation rate rose slightly as more people were encouraged to enter the workforce, and the unemployment rate remained at 5%. Over the past year, 305,000 jobs have been created in Australia, of which 290,000 were full-time. Notwithstanding this, wages growth remains modest by historic standards. Inflation also remains low. The March quarter CPI figures showed headline inflation of 1.3% in the year to the Q1 and underlying inflation of 1.6% over the same period. Both figures were below the bottom of the Reserve Bank’s 2% – 3% target range.

Elsewhere in the world, both China and Europe saw some better news on manufacturing activity. First-quarter GDP growth in China was 6.4%, which was a bit better than expected, as were the latest figures on both retail sales and industrial production. However, the Chinese authorities have indicated they do not intend to be as aggressive with fiscal and monetary stimulus compared with their efforts in the past. The trade dispute between the US and China continues – it appeared to be going along in a controlled fashion by April’s end, but flared up in the early days of May when President Trump renewed hostilities via a threat to double tariffs within days.   Comments from Trump that the US may now turn its attention to imposing tariffs on Europe is a new source of potential concern for market volatility.

Sources:  Thomson Reuters, Quilla Consulting, RBA, MorningStar Research.