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What’s driving the ASX this week

Here are the main factors driving the ASX this week according to portfolio manager Jim Taylor. Reported by portfolio specialist Chris Adams.

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THE US Fed continued to temper expectations around a pivot away from its hawkish stance last week — and US 10-year yields rose 14bps to 2.98% in response.

US economic data continued to paint a mixed picture, while there were some ugly inflationary prints in Europe.

Equity markets were generally quiet last week.

The S&P 500 shed 1.16%, driven by softness late in the week. The S&P/ASX 300 finished up 1.32%.

Commodities were generally weaker, encouraging the view that inflation pressures continue to diminish.

Fed policy

Various Fed spokespeople continued to pour cold water on the notion of an imminent shift to less hawkish policy.

St Louis Fed president James Bullard said the aim was to place “significant downward pressure on inflation” without dragging rate increases into next year. He was leaning to another 75bp hike and pushing the rate “higher and into restrictive territory”.

San Francisco Fed president Mary Daly noted that hiking 50 or 75bps next meeting would be a “reasonable” way to get rates above 3% by the end of 2023 — and a bit higher next year.

Both said the Fed would be unlikely to reverse course quickly, rejecting the notion of a “hump-shaped” path of rate hikes followed by aggressive cuts.

The Fed is grappling with the contradiction of soft headline GDP numbers, strong payroll growth, a weak housing market, uncertainty over the extent and impact of the improving supply-chain story, and still-elevated current inflation.

Hence the repeated focus on data dependency in the eight-week interval between the July and September meetings.

US economy

Retail sales data was solid. The preferred measure of core sales (excluding cars, petrol and food) rose 0.8% in July (and 9.3% annualised for the three months to July) compared to the previous three months.

Higher petrol prices did not have a noticeable effect. US consumers seem happy to run down the mountain of savings they accumulated in the early stages of the pandemic.

On the flip side, there was an unexpected plunge in the NY Empire State Manufacturing Index. This flags further weakness at a national level.

The NAHB housing market index fell to 49 in August, down from 55 in July. All the components — present sales, expected sales, and buyer traffic — fell in August, tracking the steep and sustained decline in mortgage demand, which is yet to find a bottom after a near 30% drop from December’s peak.

July existing home sales fell 5.9% m/m and 20% y/y to 4.81m units, the lowest since June 2020.

The US National Association of Realtors joined the National Association of Home Builders in describing the market as a “housing recession”.

Australian economy

Australia’s Wage Price Index (ex bonuses) increased +0.7% in the second quarter of 2022. This was a bit below the expected +0.8% q/q.

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Annual growth accelerated 20bp to +2.6% year-on-year but remained well below headline CPI inflation (+6.1%y-o-y).

Public sector wages grew 2.4% y-o-y. Annual private-sector wage growth including bonuses rose to 3.3% y-o-y (2.7% ex bonuses).

This is the fastest pace in 10 years.

Private-sector workers receiving wage adjustments in the quarter (most workers only receive adjustments in the September quarter) achieved an average pay increase of 3.8%.

Wage-setting in Australia remains much less responsive to labour market tightness than many countries. This helps reduce the risk of a wage price spiral.

Australia’s unemployment rate fell to a 48-year low of 3.4% in July. Measured employment fell 41k m/m (vs +25k expected).

There was divergence between the full-time component (-87k m/m) and part-time employment (+46k m/m).

Employment again rose solidly for 15-to-24-year-olds (+13.3k m/m) and the youth unemployment rate fell sharply to a new historical low.

China

The People’s Bank of China surprised the market with a 10bp cut in interest rates following weak July economic data and ongoing pressure in housing.

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Like many of Beijing’s recent moves, this seems aimed at stemming further weakness rather than to genuinely stimulate the economy.

China has also had to ration power and water to manufacturers as a result of drought.

ASX reporting season

Earnings per share (EPS) for FY22 continues to beat expectations, with more positive surprises from ASX 100 companies and financials.

Free cash flow has been better than expected, especially in the resources sector.

Capital returns have disappointed, with net dividend misses and fewer buy-backs than expected. Companies seem keen to keep some dry powder on the balance sheet in an uncertain environment. 

Inventories are still higher than expected in aggregate, which is a risk to earnings and may signal a slowing cycle.

The number of stocks with disappointing guidance is high. So far twice as many stocks have FY23 earnings and dividend downgrades (28%) relative to upgrades (14%).

Consensus expectations for market FY23 EPS growth have moderated as a result — but remain in the low single digits.


About Crispin Murray and Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.

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

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This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current at August 22, 2022. PFSL is the responsible entity and issuer of units in the Pendal Focus Australian Share Fund (Fund) ARSN: 113 232 812. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

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