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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 portfolio specialist Chris Adams

THE market was positioned for good news on the US inflation front – and took a hit when the CPI came in slightly stronger than expected.

A strong inflationary pulse across a broad range of categories ran contrary to a prevailing narrative of softer inflation.

In an environment where the Fed is driven by data – rather than by its own forecasts – sentiment on the monetary policy path shifted quickly.

The Fed funds rate is now expected to reach 4.2% in December 2022, up from 3.9%.

Equity markets took a hit. The NASDAQ fell 5.54% on the day of the data print – its worst fall since March 2020. The S&P 500 was off 4.3%, its worst since June 2020.

Poor sentiment was compounded by pre-released earnings from Fedex, which saw quarterly EPS at $3.44 versus $5.15 consensus expectations and an even bigger shortfall on next-quarter guidance.

Management cited softer demand, weakening further into the quarter’s end, both in the US and internationally. This exacerbated concerns around the economic backdrop.

The S&P 500 fell 4.7% for the week. The S&P/ASX 300 was down 2.2%.

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US inflation

Headline CPI rose 0.1% month-on-month in August, against an expected decline of 0.1%. On an annualised basis inflation is running at 8.3% versus 8.5% last month – again higher than the expected 8.1%.

Core CPI rose 0.3% to 0.6%, higher than 0.35% forecast. Annualised, it is running at 6.3% m/m, versus 6.1% expected – the highest print since March.

The key concern was the breadth of disappointing numbers across multiple buckets including shelter (34% component), new and used cars (8%), medical services (7%), food away from home (5%), apparel (2%), utility gas service (1%) and motor vehicle repair (1%).

Inflation is no longer driven by energy and food.

Housing inflation is a slow-moving part of the US CPI data. Landlord rent expectations have fallen recently but will take a while to flow through into the data.

The next biggest segment is new and used car prices. These have definitely turned down, which is helpful.

Wage pressure in healthcare is a global phenomenon and is likely to continue ticking up as wage demands are met.

More positively, airline fares fell by 4.6% in August – less than expected. This should continue to fall as airfares follow jet fuel prices quite closely, and they have reversed most of the spike triggered by the war in Ukraine.

Food inflation is finally moderating. The 0.7% increase in food-at-home prices was the smallest since December, after seven straight 1%-plus increases.

Lower global food commodity prices are starting to work through, with more to come.

Petrol pump prices are down to $3.69/gallon – 26% below an all-time high in June and the lowest level in six months.

The “peak inflation” narrative is probably still intact, but the core components remain stubbornly sticky.

Producer Price Index data (see below) suggests some relief is on the way. But it won’t matter this week.

Fed officials have made it very clear they will not slow the pace of rate hikes until they see convincing evidence that core inflation pressure is easing on a sequential basis.

The chance of a 50bp hike this week has gone.

The market has wavered between a 20%-30% chance of a 100bp hike.

The chance of a soft economic landing has fallen for two key reasons:

  1. Strength and stickiness in both goods and services inflation indicate meaningful reductions toward 2% are impossible without a recession and a big fall in employment
  2. The risk of a Fed overshoot has increased, meaning a recession gets induced almost regardless of what the data does from here.

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The Producer Price Index data was more reassuring than the CPI print.

Headline PPI fell 0.1%, in line with consensus, helped by falling energy prices. Annualised, it is 8.7%. This is down from 9.8% in July and 11.2% in June.

The key message here is that Core PPI inflation is now falling across both goods and services.

Core goods rose at a 6.1% annualised rate in the three months to August, exactly half the peak pace in the three months to May.

Core services rose 3.9% in the three months to August. This was an even bigger slowing from the 10.8% peak in the three months to March.

Consumer inflation expectations have plunged for both the three and five-year time horizons.

Other US data

The Atlanta Fed Wage Tracker grew to 6.7%.

Companies that have high turnover of low-paid workers are feeling the full force of wage pressures in the economy. Wage growth for job switchers far exceeds that for people staying with their current employer. 

Retail sales were slightly disappointing with core sales down 0.3% versus flat expectations. 

But they haven’t fallen off a cliff and may reflect higher petrol prices over the past few months, which have now reversed.


GDP data in the second quarter showed continued strength in consumer spending, driven by a rebound in services. This included a quarter-on-quarter rise of about 30 per cent in tourism-related spending.

It seems likely that the consumer hangs in there for another few months, before feeling the pinch in the December quarter as increased mortgage rates flow through to household cash flows.

Employment increased 33,000 in August. This was in line with consensus but only partially reversed the prior month’s 41,000 decline.

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At the same time, labour participation moved back close to its record highs (66.6%) and unemployment ticked up to 3.5% (consensus expected 3.4%).

Hours worked also recovered most of the prior month’s losses (0.8%) and the under-employment rate fell to 5.9%.

It’s notable that the number of workers affected by sickness remains nearly double its usual amount (about 750,000).

The data hasn’t moved expectations for another 100bps of tightening across Q4, taking rates to about 3.35%.


The EU has proposed a redistribution of excess profits from energy companies and non-gas-power generators (nuclear and renewables), totalling an estimated EUR 140 billion.

This would involve a price cap of 180 euros per megawatt hour, which would raise about EUR120 billion.

The balance would come from energy companies contributing a third of any profit more than 20% over the last three-year average.

The plan is complex and will take time to put into practice. Each member state would have jurisdiction over key aspects.

The plan includes a binding agreement to get winter peak electricity use down by 5% – and overall 10%.


Australia held up better than other markets last week due to index composition.

Large caps did better than small caps. Small resources and REITs bore the brunt of the sell-off. Interestingly, consumer staples did not prove to be defensive in the weak market and we saw a clean sweep of negative returns across all sectors.

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.

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

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