ASX outlook: What’s driving Aussie equities this week

Here are the main factors driving the ASX this week, according to portfolio manager RAJINDER SINGH. Reported by portfolio specialist Chris Adams

• Markets trying to identify beneficiaries of the US election, unmoved by UK election
• RBA could diverge from global central bank rate cuts
• Find out about Crispin Murray’s Pendal Focus Australian Share Fund

GLOBAL equity markets made a solid start to the second half of 2024, supported by easing rate pressures in the US.

A short week in the US due to the Independence Day holiday didn’t stop both the S&P 500 and NASDAQ finishing the week at all-time highs – breaking through the 5,500 and 18,000 levels, respectively, for the first time.

US Treasuries rallied on weaker macroeconomic data prints, with the release of softer numbers for jobs, unemployment and purchasing managers’ indices (PMI).

Overall, these indicators incrementally point to a US economy that is slowing and so reducing any ongoing inflationary pressures.

While the Federal Reserve continues wanting to accumulate more evidence, further softer data in line with the data released this week could allow the committee to consider interest rate cuts as soon as the September meeting.

There was plenty to interest followers of international politics, with ongoing developments in the US presidential election, French National Assembly voting, and the UK general election, though the implications for markets are not entirely clear and straightforward.

In Australia, we saw further evidence of economic resilience following last week’s strong CPI print, with May retail sales and building approvals data surprising on the upside – accompanied by continued strong price growth across capital city housing markets.

Some commentators continue to push the view that – unlike other central banks – the RBA’s next interest rate move will be up.

Overall views are mixed, as reflected in the latest RBA minutes.

Australian bonds fell in response, with ten-year yields up 9 basis points (bps). This contrasts with the 9bps fall in US ten-year yields, indicating different positions in the interest rate cycle for the two economies.

The S&P/ASX 300 gained 0.71%, lagging the 1.98% gain in the S&P 500 and 3.51% rise in the NASDAQ.

Commodity prices supported resource sector returns for the week. However, most ASX companies are now in black-out until August’s reporting season, so there was little news on the stock front.

US macroeconomics

On Tuesday, we saw the release of the Institute for Supply Management’s Manufacturing PMI, which showed the latest reading declining to 48.5 from 48.7.

This indicator has now been in contraction (i.e. less than 50) for 19 out of the last 20 months going back to October 2022.

Various components of the index such as Production, New Orders and Employment indicate broad contraction, so the briefly positive March 24 reading now looks the outlier compared to recent trends.

Jerome Powell, Chairman for the Fed, spoke at a European Central Bank (ECB) conference in Portugal.

He argued that the latest data shows evidence of continued disinflation and said he expects inflation to fall to the “low to mid-twos” a year from now.

He also argued that progress has been made in balancing the labour market and suggested that the Fed would respond to an unexpected weakening of the labour market.

Initial jobless claims continued their grind higher, printing 238k (up from 234k).

Importantly, the four-week trend is now at the highest level since August 2023, showing the degree of softening the labour market has experienced during the calendar year to date.

The JOLTS Quit Rate further supported the case that wages growth is easing towards historically average levels.

On Thursday, we saw the release of the other key ISM measure – the June Services PMI – which, at 48.8, significantly surprised to the downside.

This was well below the consensus of 52.7 and May’s reading of 53.8, and is the lowest level since May 2020 in the depths of Covid shutdowns.

While this series has been volatile, similarly to the Manufacturing PMI, numerous components showed broad weakness.

Interestingly, the prices component of the ISM Services survey continues to remain subdued.

This is important because it has been a pretty good lead indicator of one the Fed’s preferred inflation indicators, core Personal Consumption Expenditure (PCE) services ex-housing, in the past few years.

It is now also back pre-Covid levels.

The last key economic release of the week was the June payrolls, which came in at 206k versus consensus of 190k. However, net revisions to previous months were a large 111k decline.

The unemployment rate edged up to 4.1% from 4.0%.

Interestingly, these numbers are getting close to triggering the Sahm rule – a measure to identify the start of a recession developed by former Fed economist Claudia Sahm.

It looks at the changes in the three-month average unemployment rate relative to recent lows and is triggered once it hits 0.5%. The latest unemployment figures reading takes this measure to 0.4%.

The Fed minutes also came out, highlighting that it is in no rush to ease but that it is open to changing quickly if inflation and employment moderates.

The minutes mentioned that modest progress towards reducing inflation in recent months though labour markets are normalising, with a watch on unemployment in response to weakening demand.

After this week’s macro data, the market is now pricing an 80% chance of a Fed rate cute by the September 2024 meeting, up from approximately 70% before this week.

A total of two rate cuts are expected by the end of 2024, and almost five full cuts for the next year to June 2025.

Global macroeconomics

Europe

Eurostat published June inflation for the Euro area of 2.5% headline and 2.9% core (year-on-year).

This, along with comments from speakers including ECB President Lagarde at the Sintra conference, indicate that it currently remains on track for a September rate cut.

China

We saw the release of various PMIs.

The Caixin Composite and Services PMI were 52.8 and 51.2, respectively, indicating modest expansion.

However, the widely watched Manufacturing PMI component surprised at 51.8 (versus 51.5 consensus). This is the highest level since May 2021 and the eighth consecutive month of expansion.

This helped support the 6.1% gain in iron ore prices last week.

New Zealand

New Zealand’s central bank meets on 10 July, with rates forecast to stay on hold. Expectations are for a first cut in August, given ongoing softness in recent data.

Australia

May’s retail sales surprised to the upside, up 0.6% month-on-month versus consensus at 0.3%.

Building approvals rose 5.5% in May versus expectations of 3.0%.

While both series can be quite volatile, these data points are notable as recent trends in both have been on the softer side.

House prices continued their recent strength, with the latest CoreLogic data showing the rate of growth of 0.6% month-on-month country-wide and 0.5% month-on-month among state capitals.

Brisbane and Perth remain strong while Melbourne looks lacklustre, which is in line with our anecdotal feedback on their respective economies.

The RBA released minutes from the June meeting and there were no major surprises, with forward guidance consistent with Governor Bullock’s post-meeting press conference i.e. “not ruling anything in or out”.

In particular, the discussion focused on the case for hiking rates or keeping them steady, rather than any reduction.

This reinforced the view of some forecasters that next direction or rate moves is up rather than the downward trajectory forecast for most other central banks around the world.

Markets

There are a few observations to make at the halfway point of the calendar year:

• Historically (since 1928), when the S&P 500 is positive in the first half of the year, it follows with a positive second half 74% of the time, with an average 5.70% return. After a first half with gains of 10-20% (remembering that it delivered 14.5% in 1H 2024), the second half has had positive returns 88% of the time with an even stronger 8.58% average return.
• The second half in presidential election years has delivered a positive return in 83% of years.
• In data going back to 1950, July has seasonally been a strong month, followed by weakness in August and September.
• Strong EPS growth estimates continue to support US equities and the 9% consensus EPS growth for 2Q 2024 is the highest since Q4 2021.
• There are no signs of any stress in credit markets, with US corporate BB spreads remaining subdued and at recent low levels.

On the political side, President Biden’s re-election odds have plummeted.

Markets are trying to identify beneficiaries of a Trump victory, and if history is a guide, the Financials sector was a clear winner in 2016/17.

There were no surprises in the result or market reaction to the UK election, with moves in equities, bonds and the currency all muted on Friday.

Australian equities

Australian equities gained last week but lagged global markets.

All the positive returns were driven by Resources, with Industrials generally flat to down.

Tech and Utilities were weakest, but this follows very strong 1H returns for both sectors.

Within Resources, Anglo American suspended production of its Grosvenor metallurgical coal mine in Queensland following an underground fire.

The mine was due to produce 3.5 million tonnes this year, which is 1% of the seaborne market but 20% of Anglo’s volumes – throwing a spanner into its plans to divest the business following the failed approach from BHP a few months ago.

The suspension, along with a fire at Allegheny in the US and against a backdrop of multiple production downgrades by BHP this year, had the effect of tightening the met coal market and pushing prices higher.

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About Rajinder Singh and Pendal’s responsible investing strategies

Rajinder is a portfolio manager with Pendal’s Australian equities team and has more than 18 years of experience in Australian equities. Rajinder manages Pendal sustainable and ethical funds, including Pendal Sustainable Australian Share Fund.

Pendal offers a range of other responsible investing strategies, including:

• Pendal Sustainable Australian Share Fund
• Crispin Murray’s Pendal Horizon Fund
• Pendal Sustainable Australian Fixed Interest Fund
• Pendal Sustainable Balanced Fund
• Regnan Credit Impact Trust
• Regnan Global Equity Impact Solutions Fund

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