Brenton Saunders: What’s driving the ASX this week?

Here are the main factors driving Australian equities this week, according to portfolio manager BRENTON SAUNDERS. Reported by head investment specialist Chris Adams

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THE approval of President Trump’s Big Beautiful Bill and stronger-than-expected US labour data saw bond yields move higher, imputed US interest rate cuts push out, and inflation expectations increase last week.

US two-year bond yields rose 14 basis points (bps) to 3.88% while 10-year yields were up 6bps to 4.35%.

Equity markets closed the week up 1.8% in the US (S&P 500) and 1.0% in Australia (S&P/ASX 300). Calendar year-to-date, those markets are up 7.5% and 7.1%, respectively, on a total return basis. 

Many equity indices are making new all-time highs, with the S&P 500 having rebounded 26% from the April/Liberation Day low.

Commodities had a reasonable week, but in the wake of the ceasefire with Iran – and a possible Gaza ceasefire – the heat has come out of the oil/energy markets.

It’s by no means an “all clear” on the Middle Eastern geopolitical front, but there is significant spare OPEC capacity that can be used to keep a lid on prices.

This is important for inflation, especially within the context of the issues central banks are facing globally.

We are seeing a material rotation within equity markets, probably exacerbated on the local bourse by trading activity around the end of financial year.

This saw notable moves last week away from banks, insurers, growth stocks, gold miners and other FY25 winners towards value stocks, resources and FY25 losers.

US macro data and policy

Most of last week’s developments were supportive for markets, with approval of the tax bill and strong headline labour data being the biggest drivers.

Activities data was mixed – while reasonable at a headline level it was weaker in composition, with softer demand and employment components offset by expectations and manufacturing.

The Big Beautiful Tax Bill 

This was a big win for President Trump. After just getting approved in the Senate earlier last week, the bill – to the surprise of many and despite all Democrats voting against it – passed the House of Representatives on the first attempt.

It was signed into law on Independence Day.

This should be broadly supportive for markets, if not the US budget deficit and the US dollar.

US labour data

US June non-farm payrolls came in strong at 147k jobs, ahead of 110k expected by consensus.

However, compositionally, the government sector accounted for most all of the beat while private payrolls were weak.

The unemployment rate also dropped to 4.1%, driven by lower participation rate.

Despite strength in payrolls, wage growth moderated – with total private hourly earnings growing at 0.2% versus 0.4% prior and below consensus expectations of 0.3%. This suggests little sign of labour market tightening.

There has been some focus on the “neutral employment rate” – the payrolls growth required to keep the unemployment rate unchanged.

The primary inputs into this are population growth and labour force participation, both of which have had wild gyrations through the Covid and post-Covid era.

The US requires a rising immigration rate to offset a declining population of working age.

This highlights the importance of potential consequences from possible changes to immigration policy under the Trump administration for employment, labour market tightness and inflation.

Work by Deutsche Bank suggests that the near-term breakeven rate is around 100k new jobs per month.

However, this could fall to as low as 50k per month, based on potential scenarios around labour force participation and population growth rates.

This suggests that wage costs have a high likelihood of being inflationary under most moderate economic conditions.

Elsewhere, JOLTS job openings rose to 7,769k in May from 7,395K in April and was well above the 7,300K consensus.

The jump in total job postings is at odds with a broad range of other indicators suggesting a waning appetite among businesses to hire more workers.

This discrepancy may be due to some businesses advertising jobs in order to replace workers that have unauthorised immigrant status.

The private sector quits rate edged up to 2.3% in May, from 2.2% in April, but remains in line with last year’s average.

Other US data

The US ISM Services Index rose to 50.8 in June, up from 49.9 in May and just ahead of the 50.6 expected by consensus. 

The increase was mostly in the expectations component, with weakness in the services employment and prices components

This suggests services activity has stabilised but is not likely to make a large incremental contribution to inflation.

The US ISM Manufacturing Index printed 49.0 in June, rising from 48.5 in May and marginally ahead of the consensus at 48.8.

In the detail, it appears that manufacturing production and imports have recovered from the worst of the tariff disruption with some modest price inflation – but that demand was soft, with weaker new orders and employment.

US Consumer Spending fell 0.3% in May, which was weaker than expectations – as was personal income growth at -0.4% versus +0.3% consensus. Revisions were also lower.

That said, May’s spending fall was driven by a 7% decline in spending on autos following a binge of auto buying in April, so there is some noise in the numbers.

US Mortgage Applications rose by 2.7% for the week ending 27June, with gains in both refinancing (+7%) and new home applications (+0.1%) as 30-year fixed mortgage rates fell.

The US housing market remains weak in most quarters, which is something only lower interest rates and mortgage rates can rectify.

US interest rates

Expectations around rate cuts moderated during the week and bonds sold off modestly in the wake of the Trump tax package approval and stronger-than-expected labour data – both of which point towards increased likelihood of an inflation increase.

President Trump again ramped up rhetoric around replacing Fed Chair Powell for not cutting rates, calling for his resignation – with Treasury Secretary Bessent seemingly seen as a preferred option.

Powell himself attributed the slower pace of rate cuts to uncertainty around the impact of tariffs.

The Fed’s June Summary of Economic Projections (SEP) for the year ending 2025 has a median estimate of rates at 3.9% versus 4.5% currently.

This is more or less in line with current market implied rates.

There have been moderations in the likelihood of July and September rate cuts, with close to no chance of a July rate cut given data flow and developments in the last week.

Tariff update

Tariff information is flowing thick and fast and in the days before the 9July deadline.

Several countries and regions are working towards framework agreements (e.g. EU, China, UK, India) before 9 July, with a view that extensions can continue until US Labour Day (1September) while the details are finalised.

Trump has threatened to impose full sanctions on any countries failing to meet the deadline.

Developments include:

• Canada scrapping its proposed digital tax, a sticking point in negotiations with the US.
• Indonesia announced it is set to sign a trade and investment pact with the US this week.
• The US announced an agreement with Vietnam, with the minimum tariff rate at 20%, down from 46% under the Liberation Day rates, and no tariff on US imports. There are higher tariff tiers for goods with Chinese-produced content. The US is specifically looking to counter moves by Chinese companies to reroute exports to the US via other countries to avoid maximum tariffs.
• The Administration seem to be suggesting that there is some “wriggle room” around the 9 July deadline and that although there is a relatively small number of deals signed, there are a number in the offing, notably with India. Japan continues to dig its heels in and is attracting the ire of Trump.   
• The process of applying Section 232 tariffs – linked to national security and being used as a means of circumventing legal challenges – is notionally well advanced and should be finalised by the end of US summer. This affects steel, lumber, copper, Al and semiconductors.

Australia macro data and policy

There is less ambiguity around the interest rate trajectory in Australia than in the US.

The domestic economy is in reasonable shape, though some segments are still weak as consumers are saving the additional disposable income flowing from interest rate cuts.

An expectation of two to three further rate cuts from the RBA in CY25 appears reasonable and should be supportive of both the economy and asset prices.

The market is pricing close to three 25bpts cuts by year’s end, though the probability of an August rate cut has decreased from 90% to 70% in the past week.

Housing

The Cotality Home Value Index rose 0.6% in June, with gains in every major mainland city.

Darwin led the list, rising 1.5%, with Canberra up 0.9%, Sydney 0.6%, and Melbourne 0.5%.

RBA Governor Bullock made it clear in May that rising house prices would not prevent rate cuts. That said, record-high house prices might stir discomfort in some quarters.

Residential building approvals rose 3.2% in May, softer than consensus expectations of 4.0%.

They are running at an annualised rate of 183k, which is a recovery from a rate of 177k in April, which was the lowest level since August 2024.

Retail sales

Retail sales rose 0.2% month-on-month in May, below an expected 0.5%.

The year-on-year rate slowed from 3.8% in April and is the slowest since November 2024.

Retail sales over recent months show momentum is still fading. This seems to confirm that consumers continue to save the proceeds from interest rate reductions to date.

China macro and policy

Beijing announced further population growth stimulus measures and a new programme to remove excess capacity from some manufacturing sectors, which the steel and iron ore markets interpreted favourably.

However, the economy remains challenged by low nominal GDP, PPI deflation, weak property prices and declining middle-income employment and wages growth.

Markets

Sector rotation

There was a significant rotation to value sectors and stocks that kicked off smartly with the start of July.

Trading associated with end-of-financial-year fund distributions has been elevated in the local market and contributed to a significant relative bounce in the FY25 losers across the June month-end.

In contrast, the big winners from that period were sold heavily post month-end.

While the drivers may have been different, we saw a similar trend in US equities, where the rotation from momentum to value was among the largest and sharpest in the last five years.

In Australia, this manifested in strong gains among the miners against a backdrop of modest improvements in iron ore, lithium and coal prices – some of which was driven by the Chinese government announcement to crack down on excess capacity in sectors like steel.

US equities

The breadth of the recent 25% recovery has been one of the narrowest on record.

While this still bodes well for markets, the next phase will likely be a broadening in the recovery and slowing in momentum which normally follows narrow rebounds.

The US quarterly reporting season begins on 15 July, with the S&P 500 trading at 22x price/earnings and expecting 4% year-on-year quarterly earnings growth, versus the 12% growth delivered in Q1 2025.

Weaker earnings growth expectations are being driven by commodity and cyclical sectors.

Tariff-driven margin compression for FY26 is the largest risk.

Most companies have been indicating that tariff increases will be largely absorbed through the supply chain with little evidence of tariff-driven price increases seen so far and many large US retailers vowing not to increase prices.

Australian equities

The S&P/ASX 300 eked out small successive gains most days to end up 1% for the week.

Midcaps were the biggest movers on a market cap basis (S&P/ASX Midcap 50 +2.2%).

At a sector level, resources (+2.3%) and REITS (+3.0%) were the biggest winners at the expense of banks (-1.6%), insurers and growth stocks.