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

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GLOBAL equity markets took a breather last week, while bonds continued to sell off as they have so far throughout February.

Stronger-than-expected US inflation numbers weighed on both asset classes. Core CPI — and the services components in particular — stayed stubbornly high.

Other key US data releases were mixed.

Overall, these indicators increase the likelihood that the US Federal Reserve will want to accumulate more evidence of sustained disinflation before making its next change in rates.

Markets already had moved to a view of a first cut in May or maybe even June, rather than March as hoped earlier in the year.

In other international economic news, two G7 countries – Japan and the UK – dipped into technical recessions.

Commodities have been relatively resilient, with oil holding onto its previous gains, and copper and lithium enjoying some relief after a difficult 2024 so far.

In Australia, the unemployment rate edged up and Australian bonds followed US bond yields higher.

We saw reporting season moving up a gear with numerous important results coming out.

Early indicators suggest that in aggregate, companies are delivering revenue in line with expectations, but with upside on earnings due to better margin management.

The S&P/ASX 300 gained 0.23% while the S&P 500 fell 0.35%.

US macroeconomics

Last week, we saw two important US inflation indicators: the producer price index (PPI) and consumer price index (CPI).

The headline PPI advanced 0.3% in January, which was a stronger than the 0.1% expected.

The acceleration in core PPI was an even bigger surprise, increasing by 0.5% versus consensus of 0.1%.

Another concern is that some components of PPI, especially health care, were strong in January and these are aligned with those used in the Fed’s preferred measure of inflation – the personal consumption expenditures (PCE) core services ex-housing (CSEH) index.

Some economic forecasters increased their predicted PCE inflation as a result.

The CPI report was the most influential of the week’s economic indicators.

Headline CPI for January came in higher than expectations, up 0.3% month-on-month and 3.1% year-on-year versus consensus increases of 0.2% and 2.9%, respectively.

Core CPI advanced 0.4% and 3.9% year-on-year, which also was higher than consensus. 

Strength in housing-related Owners Equivalent Rent (OER) and Core Services ex-Housing drove this result.

This was the highest Core CPI reading in eight months, prompting a sell-off in the S&P 500 and an increase in bond yields.

While CPI is still decelerating, the concern is that the pace of this decline has stalled – requiring the Fed to keep rates up higher for longer.

The case for this is supported by the gap that has opened up between Core CPI and PCE Core Services ex-Housing measure.

There were some noteworthy trends in the CPI components:

• Services inflation remains consistently higher and stronger, though some forward-looking indicators suggest rent should have a moderating effect.
• Commodities and food effects have continued to reduce slowly over the last 12-18 months.
• Energy is having a deflationary effect, though this could easily reverse with base effects and changing prices.

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Following the release of the CPI numbers, the Fed’s Chair, Jerome Powell, held a closed-door meeting with US House members.

Here, he reportedly said words to the effect that the CPI numbers were consistent with the Fed’s expectations and that they would look at the upcoming PCE report to give them some more information.

Elsewhere, January retail sales were also disappointing, down 0.8% month-on-month.

Housing starts were soft, down 14.8% month-on-month in January, but poor weather has been blamed for depressing both indicators.

Initial Jobless Claims remained low at 212,000, indicating that US labour markets still appear resilient.

On Tuesday, we saw the release of the NFIB small business survey, which showed that US business sentiment remains at recessionary levels.

However, the survey also showed small businesses continue to moderate price rises.

In terms of consumer sentiment, the University of Michigan update showed consumers feeling significantly more optimistic than the low levels in 2023.

Historically, this has correlated with S&P 500 market performance.

Global macroeconomics

US goods imports data demonstrates the sharp decline in China’s share of the US market.

As a percentage of total US imports, China has fallen from a peak of more than 20% prior to Covid back to 13.7% in December 2023 – roughly the same level as 2004.

Mexico has overtaken China with 15.3% of US imports, which at least partly reflects the outcome of “near-shoring”.

Elsewhere, the EVRISI survey of company sales in China shows that sales have fallen back to near-record lows and are only just above the Covid trough.

Japan and the UK dipped into technical recessions with a second quarter of economic contraction in Q4 2023. Germany also contracted but had been flat in the previous quarter. 

Japan’s three-decade economic slide continues, with the country slipping from the third to fourth-largest economy in the world after the US, China and Germany.

Australian macroeconomics

The unemployment rate rose to 4.1% (consensus 4.0%), which is the first time above 4% since Jan 2022.

Employment was flat, the number of unemployed rose 22,000, and the number of hours worked dropped 2.5%, though there may be seasonal effects at play.

It’s only one month of data, but it is in line with other indications that the Australian economy is starting to show signs of slowing.

The trend in employment growth slowed considerably towards the end of 2023.

Also, the shift from full-time to part-time employment as the composition of hours worked indicates a degree of under-utilisation within the Australian labour force, which is important in helping slow inflation.

ASX earnings season

It’s still relatively early days, but it’s been a decent start to ASX half-year reporting season.

Australian companies seem to have navigated relatively subdued revenue growth by increasing margins and delivering decent EPS outcomes.

An analysis of management commentary indicates that companies are, if anything, a bit more optimistic (or at least less pessimistic) about current positioning and the outlook for the year ahead.

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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