For a more comprehensive round up of the week, listen to Stephen’s full report here.

Risk assets were stronger in May amid more evidence that the US economy was starting to rebound from its severe winter-weather setback in Q1 2014 and that economic growth in China was stabilising after the softer patch early in the year. While economic growth signs were patchier in Europe, market expectations intensified that the European Central Bank might ease monetary policy soon in order to limit the risk of deflation in Europe. In Australia, declining iron ore prices and a tough Federal Budget added to concerns that economic growth would face substantial headwinds over the next year or two. Major equity markets were stronger in April with gains mostly ranging from 1.0% for the British FTSE 100 to 3.5% for the German DAX. The US S&P 500 was up 2.1% and finished May at a record high. The Australian ASX 200 was an exception to the relatively strong gains in most major markets rising by only 0.1% in the month and weighed down by a relatively soft resources sector on weaker commodity prices.

Credit markets rallied strongly through May helped by favourable market conditions for risk assets in general. Low interest rates have been a major factor sustaining investors’ appetite for risk and major bond markets continued to strengthen through May, even though the US Federal Reserve continued to wind back its asset purchase programme or quantitative easing at its late April policy meeting by another $US10 billion to $US45billion and marking the fourth consecutive reduction in purchases. The Reserve Bank of Australia again left the cash rate on hold at 2.50% at its early May policy meeting and continues to advise an extended period of rate stability ahead. US 10 year and 30 year treasury yields finished May at respectively 2.48% and 3.33%, 18 basis points (bp) and 13bp lower respectively than at the end of April. The Australian 10 year bond yield rallied even more than its US counterpart falling by 28bp, finishing April at 3.65%.

On the economic data front, US indicators continued to show both the damage to past output from severe winter weather but also promising signs of a rebound. The first revision of Q1 GDP showed contraction, -1.0% annualized growth from an initial print of +0.1% and +2.6% in Q4 2013. Indications of US housing and manufacturing activity showed particularly strong gains in April, while PMI-style survey information for May is in strongly expansionary territory (the Chicago manufacturing reading pushing up to a very strong 65.5 in May, considerably above the 50 expansion/contraction boundary). Economic readings in China released through May stabilized while manufacturing PMI readings pushed up by more than expected to their highest readings in five months. European economic readings were mostly a touch softer than expected calling into question whether the modest economic recovery since mid-2013 was starting to falter. In Australia, economic readings were not as consistently strong (April retail sales rose by only 0.1%) although employment growth again surprised on the high side of expectations at +14,200 in April contributing to a positive surprise on the unemployment rate front holding the rate at 5.8%, against market expectations of an increase.

Looking ahead, economic growth still looks set to improve through the northern summer months in the US, China and Europe and assisted possibly by easier monetary policy in Europe. In Australia, the headwind to growth from the Federal Budget announced in May together with signs of better contained inflation imply that the RBA is very firmly on monetary policy hold, perhaps keeping the cash rate at 2.50% even longer than we had previously thought likely. We still see the next move in the cash rate being a hike, but probably not until early 2015.