Jim Taylor: What’s driving ASX stocks this week?

Here are the main factors driving the ASX this week according to portfolio manager JIM TAYLOR. Reported by investment specialist Chris Adams

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TESTIMONY on Capitol Hill from Federal Reserve Chairman Jerome Powell emphasised that he is cognisant of the risk of keeping policy too restrictive for too long.

“Elevated inflation is not the only risk we face,” he said on Tuesday.

“We’ve seen that the labour market has cooled really significantly across so many measures.

“It’s not a source of broad inflationary pressures for the economy now.”

The market took this acknowledgement of both the up and downside risks of current policy settings positively, with the S&P 500 gaining 0.89%. The S&P/ASX 300 was up 1.75%.

A dovish Consumer Price Index (CPI) print in the US, following a string of weaker economic data over the last few weeks, increased expectations of a first rate cut in September.

This led to a sharp rotation in equities away from the mega-cap tech stocks, which have dominated year to date, to small and mid caps, cyclicals, value stocks and rate sensitives.

While the headline returns in the equity indices were modest, a broadening of market leadership is very healthy.

Bonds rallied, with US ten-year government yields dropping 10 basis points (bps) to 4.28%. Commodities were weaker across the board.

Aside from the market-moving US CPI data, there was very little news flow from an economic or company-specific perspective.

US reporting season has just kicked off, with about 5% of S&P 500 companies having reported, while Australian reporting season is still a few weeks away.

US macro and policy

The Fed

The doveish tilt seen in Powell’s semi-annual Monetary Policy Testimony reassured the market, laying the foundation for the move in response to softer CPI data on Thursday night.

His commentary was very much in line with the June FOMC statement and repeated some phrases from it.

He noted that the labour market is “strong” with the caveat that it was “not overheated.”

The economy was continuing to expand “at a solid pace” and recent monthly inflation readings have shown “modest further progress”.

He kept well away from using language that would allow him to be pinned down in terms of any indication of when easing may commence – repeatedly observing that “more good data” would boost the Committee’s confidence that inflation is moving sustainably toward 2%.

Interestingly, he observed that “elevated inflation is not the only risk we face”.

Reducing policy restraint too little or too late could unduly weaken economic activity and employment, and Powell said the Fed has “seen considerable softening.”

This indicates that the central bank is fretting a bit more about the potential costs of waiting too long to ease, though he did warn that reducing rates too soon could “stall or even reverse the progress we have seen on inflation”.

Eyes now turn to the Jackson Hole symposium, held between 22-24 August.

This could be an ideal opportunity for Powell to give customary notice of an impending policy change. He will have one more employment report and two CPI reports in hand by then.

The market-implied chance of a rate cut in September now sits at 92%.

June CPI

Headline CPI was down 0.06% month-on-month in June, versus consensus expectations of a 0.1% lift and the 0.01% increase in May. It now sits up 2.97% year-on-year, versus the 3.10% expected and the 3.25% seen in May.

The Core CI rose 0.06%, versus a 0.16% lift in May and the 0.2% increase expected. It is up 3.27% year-on-year, versus the 3.40% expected and seen in the previous month.

The Core-core Services Index – which excludes airline fares, auto repairs and insurance, health insurance, hospital services, and accommodation services components from the core services ex-rents measure – rose by just 0.2%.

Core Goods prices fell by 0.1%, driven by a hefty 1.5% drop in used car prices and a 0.2% decline in new motor vehicle prices, making it the fifth straight drop.

Core Goods ex-Auto prices rose by just 0.1%, driven by a 0.5% jump in prices for household furnishings, but the trend still looks flat.

Primary rent increased by only 0.26%, while Owners’ Equivalent Rent rose by 0.27%, both the smallest increases since April 2021.

These components have averaged 0.40% and 0.46%, respectively, for the first five months of 2024.

Zillow data for new rents have been signalling for some time that the run-rate of the whole-market CPI primary rent would slow – and it is finally starting to show up in the data.

Producer Price Index (PPI)

The 0.2% month-on-month increase in the headline PPI took a little shine off the earlier CPI data, given consensus expectations of 0.1%, though the market’s reaction was muted. Net revisions were 0.2%.

The Core PPI rose 0.4%, versus consensus at 0.2%. Net revisions also were 0.2%.

The miss was driven, in part, by the notoriously volatile airfare and vehicle margins components of trade services, so the market was content to take this in its stride.

The Core ex-Trade Services measure was unchanged at 0.2%, below consensus expectations. 

Core Goods prices also were unchanged despite the recent increase in the cost of shipping for imports.

Last week’s CPI and PPI data suggests that the core PCE deflator – the Fed’s preferred inflation measure – rose by just 0.15% in June, helping to reduce the quarter-on-quarter annualised growth rate to 2.7% in Q2 from 3.7% in Q1.

Other data

• There were 222k initial jobless claims for the week ended 6 July, down from 239k the previous week.
• Continuing claims came in at 1,852k for the week ended 19 June, versus a forecast of 1,855k.
• The New York Fed Survey of Consumer Expectations showed one-year inflation expectations down 0.2% month-on-month to 3.0%, though three-year expectations rose 0.1% to 2.9%. Five-year inflation expectations fell 0.2% month-on-month to 2.8%.
• Finally, the NFIB survey suggests we are seeing increased pushback from consumers to higher prices, with 27% of small business raising prices, down from a peak of over 60%. However, the ability to raise prices still remains elevated versus pre-pandemic levels, where this measure was running at about 10%.

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Macro and policy in Australia and NZ

Westpac consumer sentiment suggests the prospect of further rate rises increasing mortgage rates has permeated the Australian populace.

The survey fell 1.1% month-on-month to 82.7% in July – driven by weaker perceptions of personal finances. The decline occurred alongside a sharp rise in expectations around the level of mortgage rates.

The RBNZ kept rates unchanged at 5.50% in July, in line with consensus expectations.

The meeting minutes noted the decision was “consensus” across the Committee and removed prior language around considered hiking rates.

The forward guidance was more dovish, noting “monetary policy will need to remain restrictive” but moving “…for a sustained period” and remarking that the “extent of this restraint will be tempered over time, consistent with the expected decline in inflation pressures”.

Markets

US Q2 earnings season

The market is currently looking for S&P 500 Q2 earnings growth of 8.8%, which would be strongest since the 9.4% print for Q1 2022.

The bottom-up EPS estimate declined by just 0.5% over the course of the quarter, much lower than the five, ten, fifteen and twenty-year average declines of 3.4%, 3.3%, 3.2% and 4.0%, respectively.

Eight of eleven S&P 500 sectors are expected to report year-over-year earnings growth for Q2.

However, big tech remains the key tailwind – with the six largest stocks in the index (Amazon, Apple, Google, Meta, Microsoft and Nvidia) expected to grow EPS by 30% year-on-year, with the other 494 stocks to grow by 5% on average.

It is interesting to note some comments from those companies that have reported so far:

• Pepsi: “There is a cohort of consumers that have become more price conscious. They’re looking for more deals to get more for their money.”
• Delta Airlines: “We see the industry already taking pretty significant corrective action by pulling capacity down. And we expect by the end of August, we’ll have that back in balance.”
• Finally, snack-maker Conagra reported lower sales for its latest quarter and issued a disappointing profit outlook for its current fiscal year.

US equities

There was interesting price action post Thursday’s CPI print, with a big rally in bonds and a huge rotation in equities.

At a headline level the S&P 500 fell 0.8%, the NASDAQ lost 2%, while the small-cap Russell 2000 Index gained 3.6%.

Breadth was extremely positive, with almost 80% of S&P 500 companies rallying. The Russell 2000 saw 95% of members up.

The Magnificent Seven fell 4.2% as a group, and the divergence in performance between the S&P 500 and Russell was the most extreme in over four years.

At a sector level within the S&P 500, the yield-sensitive sectors performed strongest – with REITs up 2.7% and Utilities up 1.8%, while Tech fell 2.7% and Communication Services was down 2.6%.

About Jim Taylor and Pendal Focus Australian Share Fund

Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.

Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 14 years of its 18-year history (after fees), across a range of market conditions. Find out more about Pendal Focus Australian Share Fund here.

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