What’s driving Aussie equities this week

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

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EQUITIES continue to grind higher, with the S&P 500 up 1.7% last week and the S&P/ASX 300 up 1.3%.

Safe havens like gold, oil and the Swiss franc caught a bid on the back of rising geopolitical tensions, with outgoing US president Joe Biden giving a final push to resolve the Russia-Ukraine conflict before Donald Trump takes office.

Treasury yields were relatively stable as markets attempt to discern the likely policy mix under a Trump administration, made even more difficult by some interesting cabinet nominees. 

US Fed-speak was mixed but on balance more dovish.

Nvidia, the world’s largest company, reported Q3 results with guidance for Q4 sales only beating by $400 million versus the normal $1 billion. Management highlighted some delays and cost pressures around the next-generation AI chip. 

In Australia, Reserve Bank minutes noted that easing in the labour market might have begun to stall or modestly reverse. The RBA wants to see two quarters of declining inflation before cutting the cash rate.

US macro and policy

Howard Lutnick, CEO of bond broker Cantor Fitzgerald, was appointed US commerce secretary and hedge fund manager Scott Bessent was announced as Treasury secretary.

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Lutnick advocated for higher tariffs at a recent rally in New York, citing the prosperity of the early 1900s when there was no income tax and all the government had was tariffs. Though he did acknowledge they would raise prices, at least temporarily.

In an interview with the Financial Times, Richmond Fed president Tom Barkin noted the US was more vulnerable to inflationary shocks than in the past, with businesses more readily passing on costs to consumers.

The inflationary effects of potential tariffs and immigration plans under president-elect Donald Trump were a “concern” for businesses, but the Fed shouldn’t adjust monetary policy before possible changes in economic policy, he said.

Elsewhere, US home builder sentiment rose to a seven-month high. The results suggest optimism that high-income households will move forward with home-buying plans, given US personal tax cuts will persist.

While sentiment has been strong actual starts have been softer, with starts and permits declining 4% and 7.7% year-on-year. Mortgage rates have risen 80bp to 6.86% over the past two months.

Walmart reported sales +5.3% with the retailer benefiting from trading down.

Recent surveys suggest US consumers are set to spend 4% more on holiday shopping this year. While consumers may feel fearful of inflation, their balance sheets look good.

Initial jobless claims came in at 213k, better than consensus expectations (220k) with the data showing that the labour market is trending sideways at a healthy level.

The narrative that the US labour market is cooling appears inconsistent with the continued strength in data for above-trend GDP growth, strong retail sales, low jobless claims, and rising average hourly earnings.

In addition, credit spreads continue to be tight, corporate profits and forward profit margins are at all-time highs and US household balance sheets are in very good shape.

In short, the US economy remains very strong.

The market continues to pare back expectations of large Fed Fund rate cuts. Expectations for a December rate cut from the U.S. Federal Reserve have diminished, with the likelihood now at 53%, a sharp drop from 82.5% just a week earlier. 

Unsurprisingly the US dollar continues to be very strong.

US inflation and bond rates

The US 10-year bond yield has increased from 3.6% to 4.4% despite the Fed signalling significant rate cuts.

This has not been the case in previous rate cutting cycles where yields have either fallen or gone sideways.

The soft employment print in September prompted a 50 bp cut but was then met by a couple of sticky inflation prints.

Fed funds futures have shifted over the past two months, with the expectation for the end 2025 moving from 2.8% up to 3.8%.

While inflation has been trending down with the core measure at 3.3% year-on-year, it will remain a key concern for financial markets, as well as in the political sphere.

This was the 42nd consecutive month with Core CPI above 3%, the longest period of elevated inflation in the US since the early 1990s.

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Voter perceptions of inflation were important in the recent US elections. The economy was the top concern for Republican voters, and three quarters of US voters felt inflation created hardship for them this year.

Tariffs generally apply to lower frequency consumer durables, with consumers less aware of price changes unlike the hyper awareness of changes in prices at supermarket or petrol stations.

As such tariffs may end up raising inflation with less impact on the politically important perception of inflation.

Europe macro and policy

The European Central Bank’s index for negotiated wages rose to 5.4% year-on-year in Q3, up from 3.5% in Q2, a record lift since the euro area was formed.

A jump had been anticipated after large, negotiated wage rises in Germany for auto and engineering workers.

The ECB expects wage inflation to fall next year to a rate more consistent with the 2% inflation target.

The market’s reaction was limited, with the data playing to the view that the ECB is likely to cut by only 25bps next month.

China macro and policy

China announced some tax reductions for home buyers. This might indirectly support consumer spending, with new home buyers having more spare cash to spend on furniture, for example.

However it is not the degree of consumer support markets really wish to see.

A wide gap has opened between mortgage interest rates and mortgage borrowing, implying that potential homebuyers are unwilling to buy apartments at any level of mortgage rate.

With an estimated 90 million empty apartments and a population expected to fall by roughly 100 million in the next 20-to-30 years, the cyclical and structural headwinds make stimulating this important part of the economy extremely difficult.

Australia macro and policy

Minutes from the RBA’s November meeting noted that easing in the labour market might have begun to stall or modestly reverse.

A breakdown of Australian unemployment by duration shows that short-term unemployment appears to have stabilised below pre-pandemic levels. 

The board also highlighted that due to govt subsidy ’noise’ from government subsidies in the December 24 quarter, it wants to see two quarters of declining inflation before cutting the cash rate’.

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This means that the first rate cut (if any) is likely to occur from May 2025.

Australian housing prices have also hit a historical peak of unaffordability – with the average home now costing eight times the median household income.

The percentage of national median income needed to fund a mortgage on the national median dwelling value has hit 50.6%, according to CoreLogic, versus a 20 year average of 36.6%.

Rental costs are 33%, versus a 20 year average of 29%, by the same measurement.

The Australian Bureau of Statistics considers a household to be in housing stress if it pays more than 30% of income on housing costs.

While first home buyers have benefited from assistance from the Bank of Mum and Dad in recent years. There are warning signs of pressure here.

By one measure, the percentage of households in the 55-64 year age cohort owning a home with no mortgage has fallen from over 70% in 1995 to under 40% today.

Markets

There are some warning signals in US equities, such as historically high valuation levels, insider selling (although there are some seasonal effects here) and Berkshire Hathaway loading up on cash.

However, sentiment remains strong, and earnings growth continues to be supportive.

Market breadth is also improving and favouring small caps which are likely to benefit from US pro-growth policies.

The stock market is the second most expensive for any incoming President (after George W Bush in 2000). 

Given Trump’s pro-market tendencies, it is reasonable to expect that he is likely to double down on market friendly policies in the event of a big sell off.

Locally, the ASX unwound some of the recent weak performance in energy and resources with both sectors up strongly at the expense of IT, consumer discretionary stocks and AREITs.