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What’s driving Aussie equities this week

Here are the main factors driving the ASX this week, according to investment analyst JACK GABB. Reported by portfolio specialist Chris Adams

THE biggest down day for the S&P 500 since May set the mood last week, triggered in part by credit rating agency Fitch downgrading the US to AA+.

Stronger-than-expected employment data, higher upcoming US debt issuance and further gains in Japanese yields added fuel to the flames.

Treasuries and equities sold off, with stock-bond correlation the highest it’s been since the 1990s. 

The US 10-year yield rose 8bps and the yield curve steepened. The S&P 500 ended the week down 2.26% despite 79% of companies beating consensus estimates in the first week of reporting season.

In Australia, the RBA held rates steady. This surprised most economists but was largely in line with the market, which was pricing in a 30 per cent chance of a hike.

In contrast, the Bank of England raised rates another 25bps to 5.25% and signalled rates were likely to stay higher for longer.

Australia equities fell (S&P/ASX 300 -1.17%), but less than most overseas markets.

Overall, data for the week was generally consistent with slowing inflation, despite continued earnings and jobs strength.

Central banks remain concerned around the stickiness of services inflation, but expectations for further hikes continue to fall.

Arguably, the key debate around central banks is how long rates stay elevated.

Oil is also worth watching. Brent crude is now up 15% and West Texas Intermediate (WTI) is ahead 17% for the quarter to date.

This is driven by a record drop in US stockpiles and a decision by Saudi Arabia and Russia to extend production cuts.

Gasoline is the sixth-biggest component of US CPI.   

US economics and policy

The data last week was generally consistent with slowing inflation and a soft landing. Two Fed members pointed to the labour market coming into better balance.

Despite uncertainty about a potential lagged impact of rate hikes and whether a recession can be avoided, expectations for further hikes continue to come down.

The market is pricing the probability of another Fed hike by November at just 18%, versus 32% in Australia.

Still, at least one Fed member still sees the need for further hikes. Governor Michelle Bowman said “additional rate increases will likely be needed to get inflation on a path down to the FOMC’s 2% target”.

Labour market data remains solid.

Non-farm payrolls came in at 187k new jobs, versus 200k expected, and the prior two months were revised down 49k. 

Employment data has shown increasing signs of cooling this year, though 200k jobs per month is still strong by historical standards.

On the other hand, wages rose more than expected with average earnings +4.4% year-on-year versus 4.2% expected.

Along with a low unemployment rate (3.5% vs 3.6% expected), this suggests the labour market remains tight and inconsistent with a 2% inflation target.

We will get two more inflation prints (the first this Thursday) before the next Fed meeting in September.

Pendal Horizon Fund

A concentrated Aussie equities portfolio aligned with the transition to a sustainable, future economy

Consensus is forecasting headline CPI at 3.3% versus 3% prior. Excluding food and energy, the forecast is 4.8%, unchanged from prior.

Assuming no surprise — and the CPI prints confirm the June trend, hike expectations likely remain low.

Soft landing odds rising, bears capitulating

The bears have continued to capitulate, with Bank of America the first of the major US banks to officially reverse its recession call.

Bears now forecast US GDP growth of 0.7% in 2024 — 0.7 percentage points higher than was previously assumed.

However, inflation expectations have been revised to 2.8% in 2024 (+0.4 points) and 2.2% in 2025 (+0.1 points).

Unemployment is seen peaking at 4.3% in Q1 2025 versus the prior expectation of a peak at 4.7% in Q4 2024.

Soft landings are uncommon, with only three in the eleven recessions since World War II.

Concern remains over the lagged impact of rate hikes. While the US yield curve has steepened materially (and Australia is now back in positive territory), it has now been inverted for 13 months.

Ultimately, interest rates are coming down — the important factor will be why.

If it’s in response to a recession, the precedent for equities is not positive based on historical patterns.

US earnings season

Some 422 S&P 500 companies had reported Q2 earnings by the end of last week — with 79% beating analyst expectations.

This is more a function of low expectations rather than stellar corporate performance.

Based on Goldman Sachs data:

  • 55% of companies have beaten consensus estimates by at least one standard deviation, versus historical average of 48%.
  • Only 12% of companies have missed consensus estimates by at least one standard deviation, versus historical average of 13%. 
  • EPS growth has been tracking at -6% versus -9% expected.

A few noteworthy results:

  • Apple (-7.1%) — Now well below its historic $3 trillion market cap after reporting a third straight quarter of declining sales and guiding to a similar performance in Q4
  • Amazon (+5.6%) — Q2 beat and guidance across retail and AWS (cloud) was strong
  • Uber (-6.1%) — Reported its first-ever operating profit, but shares declined on slower growth
  • PayPal (-15.2%) — Declined on lower transaction take rates and margins
  • Caterpillar (+6.1%) — reported a big earnings beat, but noted Chinese demand was worse than was forecast only three months ago
  • Starbucks (-0.6%) — Better margins offset lower comparable sales
  • Expedia (-14.1%) — Q2 gross bookings missed expectations
  • Booking (+1.7%) — Revenue and profits beat. FY booking growth guidance raised to >20% from low-teens
  • Atlassian (+14.1%) Reported better guidance. Cloud revenue growth seen +25-27% YoY
UK and Europe

The BoE hiked 25bps, as expected.

Rates are now seen as “restrictive” — though not necessarily “sufficiently restrictive” with markets pricing in another 50bps before the year’s end.

Doing less than that would likely require a big negative surprise in wages, employment and services inflation.

Commentary was perceived as more realistic on inflation than past optimism.

The statement and the press conference both sent a strong signal that the monetary policy committee had a preference for rate smoothing, ie maintaining higher rates for longer rather than pushing for higher peaks. 

In Europe, the ECB reported that underlying inflation had probably peaked.

Recent easing has been driven by non-energy industrial goods, while a decline in services also appears to have started.


Incremental policy announcements continue in the wake of the recent Politburo meeting.

There is still scarce detail, but three announcements caught our eye:

  • China’s state planner released a policy document focused on removing government restrictions on consumption and improving infrastructure.
  • The People’s Bank of China announced it would “guide” commercial banks to adjust mortgages interest rates lower, step up its monetary support for the economy and help banks control liability costs.
  • Local governments are under pressure to use up this year’s quota of special-purchase bonds by the end of September. The question remains whether they will be allowed to pull forward 2024 issuance into this year, which could have a meaningful impact on spending.

Beijing has stopped short of providing major monetary or fiscal stimulus and uncertainty remains whether the measures will be enough.

The challenge was highlighted again last week with data showing continued weakness in manufacturing and property sectors.

  • Manufacturing PMI remained below 50 in July, though slightly better at 49.3 versus 49 in June.
  • New home sales among the 100 biggest real estate developers fell 33% year-on-year in July, down 33.5% month-on-month

Still, the Politburo has acknowledged the problem and Chinese stocks were the best performers last week.

Australia economics and policy

The RBA held rates at 4.1%, in-line with market expectations but contrary to most economists who had forecast a 25bp hike.

The commentary was on the dovish side, omitting a previous statement that “the path to deliver 2-3% target while the economy still grows is a narrow one”.

However growth expectations moderated.

GDP is now seen at a trough of 0.9% this year, down from 1.2% previously. GDP is expected to be 1.6% in 2024. 

CPI is forecast to decline to around 3.25% at the end of 2024, returning to the 2-3% target in late 2025, suggesting interest rates may remain elevated for longer.

Further easing in goods inflation is expected to drive the decline.

Key risks include services inflation, which remains strong amid rising labour costs. Rent inflation has also increased.

Energy prices are forecast to add significantly to inflationary pressures in coming years with electricity prices forecast to add 0.25% to headline inflation in FY24.

The RBA continues to see a “high degree of uncertainty around the speed and extent of the decline in inflation expected in the period ahead”. 

Four key domestic uncertainties were detailed:

  • The outlook for China remains uncertain
  • The outlook for household consumption is subject to competing forces
  • Inflation could be more persistent than expected
  • Goods prices could decline significantly

Consensus is pricing one more hike, then a steep drop-off in rates in 2024.

Australian Equities

Nearly all sectors ended in the red last week, led by utilities, real estate and financials.

This echoed similar moves in the US. Energy and consumer discretionary were the best sectors.

Energy was comfortably the strongest so far this quarter in Australia and the US on the oil price rebound.   

About Jack Gabb and Pendal Focus Australian Share Fund

Jack is an investment analyst with Pendal’s Australian equities team. He has more than 14 years of industry experience across European, Canadian and Australian markets.

Prior to joining Pendal, Jack worked at Bank of America Merrill Lynch where he co-led the firm’s research coverage of Australian mining companies.

Pendal’s Focus Australian Share Fund has an 18-year track record across varying market conditions. It features our highest conviction ideas and drives alpha from stock insight over style or thematic exposures.

The fund is led by Pendal’s head of equities, Crispin Murray. Crispin has more than 27 years of investment experience and leads one of the largest equities teams in Australia.

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

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands.

Find out more about Pendal Focus Australian Share Fund  

Contact a Pendal key account manager


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