Rajinder Singh: 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

• Gold rallies to all-time highs
• Inflationary pressures continue to ease
• Markets pricing a February cut at over 90% probability
• Find out about Crispin Murray’s Pendal Focus Australian Share Fund

GLOBAL equity markets have been mixed, with US shares uncharacteristically underperforming European and Asian markets.

Both the S&P 500 (-1.0%) and Nasdaq (-1.6%) were dragged down by the emergence of the low-cost China-based AI platform DeepSeek.

Treasuries benefited from increased equity market volatility and tariff announcements, as well as a benign FOMC meeting outcome. US ten-year government bond yields fell 7 basis points (bps).

Despite this uncertainty, indicators point to a solid US economy that is seeing steady growth without signs of any reacceleration in inflationary pressures.

Other central banks such as the European Central Bank (ECB) and the Bank of Canada continued cutting rates in response to slowing inflation and domestic weakness.

In commodities, safe-haven gold rallied to all-time highs while oil prices drifted lower. Other commodities were mostly flat for the week.

In Australia, the December quarter Consumer Price Index (CPI) surprised to the downside on both headline and underlying measures.

Despite some pockets of elevated inflation, it led the market to believe that the Reserve Bank of Australia may cut rates at its upcoming February meeting.

Australian equities followed other non-US markets higher, gaining 1.5% (S&P/ASX 300) and finishing January close to record highs.

Healthcare (+2.7%), Technology (+2.0%) (especially non-AI related) and Consumer Discretionary (+4.2%) had the strongest performance, while the weakest sectors were Utilities (-4.5%), REITS (-0.4%) and Energy (-0.1%).

Australia macro/economy

The latest CPI update clearly grabbed the most attention, but the week began with the publication of the NAB Business Confidence Survey for December.

It showed that conditions had improved from November but were still weak and tracking below the long-term average. It confirms the current cautious and pessimistic mood among many businesses.

December quarter CPI was highly anticipated by financial (and political) watchers due to its implications for the RBA’s next move. 

Overall, it was clear that inflationary pressures continue to ease – maybe a touch quicker than previously expected.

At a headline level, the CPI rose 0.2% quarter-on-quarter (QoQ) – versus expectations of 0.3% – and 2.4% year-on-year (YoY) versus the 2.5% expected.

Importantly, this is now lower than the RBA’s most recent December forecast in November’s Statement of Monetary policy of +2.6%.

Similarly, the Core (or trimmed-mean measure) CPI was up 0.5% QoQ versus expectations of 0.6% and up 3.2% YoY versus the 3.3% expected.

Notably, there continues to be a divergence in Goods versus Services inflation in the Australian economy.

The annual Goods inflation of +0.8% (driven by lower electricity, fuel and new dwelling prices) is now the lowest since 2016, while annual Services inflation remains elevated at +4.3%.

Services inflation was mainly driven by high rents, healthcare and insurance costs in the quarter – though some of these components are showing signs of slowing. As an example, rents continue to see annual inflation of +6.4%, however, the latest quarterly read was only +0.6%.

Government subsidies partially distorted numbers, but overall, they were interpreted as giving the RBA latitude to begin reducing the cash rate with the first cut even as soon as the February meeting.

Commentators noted that, due to the RBA board’s reduced schedule, the next meeting after February’s would be early April – potentially in the middle of a Federal election campaign.

Several economic forecasters moved their first rate cut expectations from mid-2025 to this month. This is now reflected in the market pricing a February cut at over 90% probability, with a total of at least two further cuts over the remainder of 2025.

We also note some recent work done by Macquarie Macro Strategy on the drivers of labour productivity in Australia. Headline productivity has slumped since 2021 and is running well below trend, prompting much handwringing in recent times.

However, Macquarie’s work suggests that the mining and public sectors are responsible for much of the decline:

• The mining sector has delivered a compound annual growth rate (CAGR) of -0.1% labour productivity since 2002, albeit in a highly cyclical pattern.
• The public sector (which includes health and social assistance, education and training, public administration and safety) has had 0.3% CAGR since 2002.
• However, the rest of the private sector (ex-mining) has had 1.1% CAGR since 2002 and, while having fallen from its highs, remains largely on its long-term trend growth trajectory.

US macro/economic

As widely expected, the US Federal Reserve’s FOMC kept rates on hold, but both the statement and Chairman Powell’s press conference were scrutinised for any markers on the future trajectory of rate moves.

The January statement described the unemployment rate as having “stabilised at a low level in recent months”, where previously it had “moved up but remain[ed] low”.

Additionally, inflation was described as remaining “somewhat elevated” where previously it was said to have “made progress”.

These were interpreted as slightly hawkish, with a small increase in the two-year yield as a result.

However, Powell stated in his press conference that these changes were not intended to send a signal, but merely clean up the language of the statement.

He also added that he still thought policy rates were “meaningfully restrictive”.

So overall, following a slightly hawkish statement with a dovish press conference, there was little net news and the FOMC is seemingly willing to wait for more economic data and details of President Trump’s policies before deciding its next course of action.

The market is pricing in just under two cuts for the remainder of 2025.

In other data:

• Weekly initial jobless claims dropped to 207k, from 223k, and below the consensus of 225k.
• US Personal Income and Spending saw real consumption rise by 0.4%, which was above the consensus of 0.3%.
• The Employment Cost Index (ECI) – the Fed’s key measure of wages – rose by 0.9% in December quarter, in line with the consensus, and takes the annual rate to 3.8%.
• Q4 GDP was a respectable 2.3% annualised. The GDP deflator rose 2.2%, which was less than expected.
• US PCE inflation came in muted in December – as signalled by the CPI and PPI – for the second consecutive month.

In summary, the US economy registered a solid 2024 with decent growth in consumption and employment, while inflation continues to moderate. This reinforces Chairman Powell’s comments that policy rates are in a “good place”.

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Other macro/economic

The Trump administration followed up on prior threats and announced tariffs on its top three trade partners.

Canada and Mexico will face 25% tariffs (but only 10% on Canadian oil), with an additional 10% for China on top of existing tariffs.

It is unclear if there are any exceptions that will be carved out, though those countries are expected to respond with their own retaliatory tariffs.

In Europe, the ECB governing Council lowered borrowing costs for a fifth time since June to a rate of 2.75%.

The Council expressed confidence on declining inflation, while the major concern has now shifted to the anaemic growth in the Eurozone.

This was highlighted by the largest economy in Europe – Germany – announcing its GDP had contracted by 0.2% in the fourth quarter, which was more than expected.

The Bank of Canada reduced rates by 25bps but suspended all future guidance due to the uncertainty of trade tariffs imposed by the US.

Markets

Some high-level themes:

• The “January barometer.” January was a good month for equities, which has typically been a good indicator of S&P returns for at least the next six months. When January is positive, the average six-month return of the S&P 500 is 6.9%, versus only 0.6% otherwise.
• Gold. The threat of tariffs and global policy uncertainty has pushed gold to an all-time high again and is now threatening a technical “breakout” to the upside. The AUD gold price is over $4500/ounce.
• US reporting season. About 163 S&P 500 companies (40% by market cap) have reported 4Q results, with aggregate Sales growth up 4.9% and Earnings growth up 11.3% – surprising by 1.0% and 5.8%, respectively. Companies are beating on both the top and bottom lines, suggesting strong underlying fundamentals.
• DeepSeek and AI. The recent release of the Chinese-based supposedly low-cost, open-source large language models has challenged the leadership position of the US tech giants. While the accuracy of the claims is still being debated, it did lead to sharp moves in AI related stocks with Nvidia experiencing the largest single-day drop in market cap in share market history (-$US589 billion – just under $1 trillion AUD).
• The “Mag 7”. This handful of companies dominate US and international share markets, leading to global ramifications if any of them struggle to perform. From a technical standpoint, Nvidia has breached some key levels which may further dampen sentiment on the stock and sector in the near term.

Global equity indices with relatively smaller listed technology sectors, such as the UK FTSE100 (~1%), S&P/ASX 200 (~3%) and the EuroStoxx 600 (~6%), may be relative beneficiaries on any continued AI uncertainty.

In Australia, equities had a decent return for the week, capping off a solid start to 2025.

REITs, Utilities and Energy were the weakest sectors, with Tech (especially non-AI tech) and Consumer Discretionary continuing their strong 2024 returns.

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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