Local stocks set to rise

It was a return to normal transmission on Wall Street overnight where bad news is good.

After an uncharacteristically positive response on Tuesday to some welcome economic news, US traders last night breathed a collective sigh of relief and hit the buy buttons when US first quarter economic growth came in much lower than expectations.

Bond yields retreated for the first time in a fortnight and stocks jumped 149 points, more than 1%, on hopes that US Federal Reserve chairman Ben Bernanke will continue his long running and highly addictive stimulus program.

In short, traders appear to have woken up that the reaction of the past 6 weeks to Bernanke’s warnings that the stimulus would be tapered some time in the future has been an overreaction.

The US economy grew at an annualised 1.8% in the March quarter, well down from preliminary readings of 2.4%.

Household purchases at 2.6% were the best in two years but were well below the 3.4% estimates of last month as Americans cut back on everything from holidays to legal advice, most of which was blamed on a lift in payroll tax.

With nothing new on the China credit squeeze front, Wall Street’s lift should provide some fuel for a rise on the Australian market.

But China’s liquidity position is likely to continue to provide headwinds in the near future.

Short term interbank rates rose to as high as 25% last week as the People’s Bank of China restricted liquidity in an attempt to choke off a real estate bubble.

While it made some soothing noises on Tuesday about maintaining stability, the underlying problems remain.