What’s driving ASX stocks this week?

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

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THE final week of the financial year featured a bit of everything.

On the macro front, US data continued to point to a slowing – but still growing – economy, while inflation data also remained encouraging.

We also saw the first US presidential debate.

Australia was focused on the May Consumer Price Index (CPI), which came in hotter than expected.

Company-specific news drove individual stock volatility globally and domestically. Nvidia, for example, had a large drawdown on Monday, got it all back on Tuesday, but began losing steam again through the rest of the week.

However, equities in aggregate were flattish on the week. The S&P 500 returned -0.06% while the S&P/ASX 300 -0.25%.

The Aussie bond market saw some action, with yields up materially.

US macro

May’s Core Personal Consumption Expenditure (PCE) report showed that inflation rose 2.6% year-on-year – marking the lowest annual rate since March 2021, when inflation topped the Federal Reserve’s 2% target for the first time in this economic cycle.

The June flash S&P Global US composite Purchasing Managers’ Index (PMI) rose a touch to 54.6, ahead of the 53.5 consensus expectations.

This is viewed as bullish, suggesting solid growth alongside cooling inflation.

Sales of existing homes in the US fell for a third straight month in May, underscoring persistent affordability challenges that hobbled the important spring selling season.

Existing housing inventory is well below historical averages, as people are reluctant to refinance mortgages at a higher rate. This has helped drive existing home prices higher, up 5.7% year-on-year – a trend which may complicate the Fed’s thinking.

Personal spending for Q1 2024 was revised down from 2% growth to 1.55%, while separate releases showed a decline in business equipment orders and shipments – a widening trade deficit and job market weakness.

The Atlanta Fed’s GDPNow forecast shifted expectations of Q2 GDP growth down from 3.0% to 2.7%.

US consumer confidence eased in June on a more muted outlook for business conditions, jobs and incomes. The Conference Board’s sentiment gauge also slipped to 100.4 from May’s downwardly revised 101.3.

Notably, consumer expectations of better business conditions dropped to the lowest levels since 2011, yet expectations of higher equity prices remained close to all-time highs – a good reminder that the stock market is in fact not the economy.

The big banks aced the Fed’s annual stress test, pointing to a financial system that remains generally strong and well-capitalised.

There was little to come out of the first presidential debate in terms of policy that affects markets. The NFIB Small Business Uncertainty Index is surging, but that is normal for election years.

It is interesting to note that 2024 is the first election in 30 years where Baby Boomers will not form the majority voting bloc – now being outnumbered by the combination of Millennials and Gen Zs.

Fedspeak

James Bullard, former President of the St Louis Fed, said that he expects the pace of easing to be slow because there is no sense of urgency provided by the economy.

Fed Governor Lisa Cook noted that she expects inflation to improve gradually this year, then more quickly in 2025.

Elsewhere, Fed Governor Michelle Bowman sounded a cautionary note on potential upside risks to inflation, with Covid-era supply chain dislocations largely resolved and limited labour force participation growth recently.

Looser financial conditions and geopolitical issues could also add to inflation, she said.

She also sees the need to keep borrowing costs elevated for some time and that – while there are a number of potential outcomes for 2024 – she does not expect rate cuts before the year end.

Finally, Atlanta Fed President Raphael Bostic continues to expect one rate before the end of the year, with recent inflation prints signalling some evidence of movement towards the Fed’s goal, and risks between the labour market and inflation becoming more balanced.

He is anticipating four rate cuts in 2025.

Australia macro

The number of job vacancies in Australia fell 2.7% quarter-on-quarter in May, equal to roughly 9,800 vacancies.

Job openings (as a proportion of job opening plus employment) remains well above pre-Covid levels, unlike in the US.

The Melbourne Institute’s “nowcast” for quarterly GDP growth remains muted at 0.2%.

Insolvencies continue to rise in Australia and business payment defaults at a record high suggests there is further to go, though new business formation remains on an uptrend.

Some economists have shifted to a base case of a rate hike in August following the May CPI print, which came in at 4.0% year-on-year versus 3.6% in April.

This was the fastest monthly print since November 2023 and the concern was an acceleration in underlying inflation, with the trimmed-mean measure rising 4.4% year-on-year (from 4.1% in April).

Service rose 4.8% year-on-year, while disinflation in goods has halted.

Housing and transportation were firmer, while growth in food prices eased, and insurance and health costs remained persistently strong.

CPI and energy

Several of the strongest categories for CPI growth in May – such as electricity, transport and automotive fuel – are linked to the price of energy.

A recent research trip to Asia, which looked at energy and the energy transition, highlights the importance of energy and the CPI and some of the longer-term risks we need to be thinking about.

Net Zero and the energy transition may have inflationary consequences – for example:

• Replacing coal with ammonia in power generation is inherently more expensive.
• Building out transmission and other infrastructure puts additional pressure on commodity prices.
• Transition targets, intervention in markets and regulatory uncertainty create dislocations and ultimately higher commodity prices through under-investment e.g. East Coast gas prices.
• The Safeguard mechanism imposes an additional cost on large emitters, which will be passed on where possible.

In Japan, the government is now incentivising coal-fired generators to run on up to 20% ammonia and gas plants to run on hydrogen. The higher input prices for power generation are likely to be passed on to the consumer.

There is also a debate around mandates for sustainable aviation fuel (SAF), which are already in place in Europe. Again, SAF is much more expensive that tradition aviation fuel, which is likely to be inflationary for airfares.

Energy is the cornerstone of all economies, and the energy transition appears to support higher inflation – and not the kind of inflation that central banks can control with monetary policy.

In fact, we probably need rates as low as possible given the capital-intensive nature of the investment required.

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Crispin Murray’s Pendal Focus Australian Share Fund

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Markets

Most of the action was in the bond markets, with Australian two-year government bond yields rising 15 basis points (bps) to 4.17% as a result of the CPI print.

Equity markets, in aggregate, did not move that much into the end of the financial year.

On the global side, there were some updates which provided a snapshot on consumer demand:

• Carnival Corporation upgraded guidance off the back of record levels of demand for cruises, helped by the value of sailing versus land-based travel.
• Pool Corp, which distributes swimming pool supplies, cut its earnings forecast, citing cautious discretionary consumer spending on big ticket items such as swimming pools – with new pool construction activity estimated to be down 15-20% for the year.
• Fuel and convenience retailer Alimentation Couche-Tard missed Q4 estimates as same-store sales declined in the US, Europe and Canada, with management pointing to challenging economic conditions constraining discretionary spending. Levi Strauss and Nike also reported quarterly sales that fell short of expectations.
• General Mills disappointed the market with its sales outlook, noting that shoppers continue to reduce spending as prices rise.
• Walgreen Boots plunged after it cut guidance on a worsening retail environment and announced store closures.

About Crispin Murray and Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Find out more about Pendal Focus Australian Share Fund here.  

Contact a Pendal key account manager here.

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.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Contact a Pendal key account manager here