Anthony Moran: what’s driving Aussie equities this week?

Here are the main factors driving the ASX this week according to Pendal investment analyst ANTHONY MORAN. Reported by portfolio specialist Chris Adams

• Overall, the US economy looks “robust”
• Early earnings season shows expectations high but still being met
• Find out about Pendal Focus Australian Share fund

MARKETS have been positive, following a soft US Consumer Price Index (CPI) print and robust economic data in the US, China and Australia.

This would provide a positive setup for equity markets – except for the uncertainty surrounding the Trump administration, which takes office this week.

There is potential for unpredictability and market volatility on the back of announcements on tariffs, undocumented immigrants and government spending.

It is a broad range of outcomes, which supports having balanced portfolio positioning.

The S&P 500 rose 2.9% and the S&P/ASX 300 0.2% over the week.

From a portfolio perspective, the combination of (i) yields having peaked, (ii) global economic growth remaining robust and (iii) China turning a corner could see a reversal of some of the dominant investment themes from CY24.

US CPI

December’s CPI week print was dovish, with the Core measure up 0.2% month-on-month (MoM), the lowest rate since July, compared to consensus at 0.3%. The year-on-year (YoY) rate was 3.2%.

Global bond yields had been rising consistently into this report, so the outcome was contrary to market positioning and saw a fairly sharp reversal in yields.

Headline CPI rose 0.39%, as energy prices rose 2.6% and food prices rose 0.3%.

Digging into the details:

• Goods inflation eased back (up 0.1% MoM) and is trending at a low level. Used cars and trucks are a key driver, with core goods inflation ex autos down 0.1% MoM. With CPI auto price indices catching up to market-based indices, we may see a slowdown in growth. Some of the goods components that serve as source data for core Personal Consumption Expenditures (PCE) – the Fed’s preferred inflation measure – fell sharply this month (e.g. major appliances down 4.1%), possibly reflecting larger-than-usual holiday sales. We saw a similar pattern take place last year, which was reversed early in the new year.
• Services inflation ex-Owner’s Equivalent Rent (OER) was up 0.2%, the lowest level since June, with stronger airfares (up 3.9%) offset by a decline in hotel/motel pricing (down 1%). Medical care services inflation moderated, with prices rising 0.2% this month (versus 0.4% last month). Trend services inflation appears to be easing after an acceleration earlier in 2024. 
• OER/Rent bounced back to 0.3% MoM, which comes after a surprisingly weak November print. Zillow’s observed rent index is showing a rising MoM trend in recent months.

The CPI print followed a likewise benign US PPI print for December earlier in the week, up 0.2% MoM.

The Fed’s Governor Christopher Waller’s comments were dovish, noting that the CPI data was “good” and that “as long as the data comes in good on inflation or continues on that path, then I can certainly see rate cuts happening sooner than maybe markets are pricing in.” 

Waller went on to note that if the US makes “a lot of progress” then three or four more cuts could be delivered, but if the “data doesn’t cooperate, then you’re going back to two and going maybe even one.”

Overall, this print shows inflation that is generally stabilising at a level a little above the Fed’s target range. It is a bit of a goldilocks outcome for markets, as it averts the risk of too-hot inflation leading to higher-for-longer interest rates – but equally not seeing the deflation that might accompany a cooling economy.

President Trump’s tariffs may, however, muddy the waters on goods inflation.

Commodity prices

The global rally in commodity prices over the past month and a half is a fly in the ointment for the dovish inflationary view.

Oil price is a big driver, with brent crude up 8.9% year-to-date, while copper (up 10.6%) and agricultural prices have been rising strongly as well.

Resources was broadly a one-way trade to the downside in CY24; positioning almost certainly started the year quite short, accounting for some of the aggressiveness of the pricing move.

Risk/reward may be moving to the upside, with China positioned to stimulate in response to any tariff moves and a better-looking starting position.

Other US macro data suggesting a robust economy

US Retail sales were solid. Headline sales rose 0.4% MoM (below consensus) and control group sales (excludes gasoline, autos, food and building materials and feeds into GDP estimates) were up 0.7% MoM (above consensus).

Strength was broad-based across categories, though strong sales for Durables in the December quarter may reflect some buying by consumers ahead of potential tariffs.

The Philly Fed Survey was stronger than expected (+44 in January versus -12 in December), but the Empire Manufacturing Survey was weaker (dropping to -12.6 from +2.1 in November and +3 expected).

These surveys were attributed as being drivers of market behaviour on individual days during the week but are more likely to just be noise.

US Industrial Production rose 0.9% in December (well above consensus expectations of 0.3%), with manufacturing output up 0.6%. There was a degree of “catch-up” in these numbers with a Boeing strike ending.

Weekly employment claims were stable on a seasonally adjusted basis. Unadjusted numbers were quite weak – something to keep an eye on. The perma-bears believe lead indicators for the labour market are deteriorating.

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US housing construction

There was some positive news on US housing construction – an important lead indicator for the economy – last week, starting with the pullback in bond yields and mortgage rates from recent highs following the CPI release.

Sentiment has been very negative over the past couple of months for homebuilders, but December new housing starts weren’t as bad than feared. Single family starts were down 1.4% YoY in December after being down 10.5% in November, while multi-family starts were down 5% after being down 30% in November.

KB Home was the first listed homebuilder to report its quarterly last week.

After a super strong November quarter with orders up 40%, new orders were down 12% YoY in the first six weeks of the company’s February quarter. However, it guided for its February quarter new orders to be flat YoY as new communities came online, which is much better than feared.

Finally, the key sentiment survey for the homebuilders sector, the NAHB Housing Market Index, was up one point in the December quarter (versus the September quarter) to 47 points, despite the increase in bond yields. But within that, the Future Sales Index declined to 60 from 66 last month.

The outlook for Repair and Remodelling (R&R) is looking better after a weak couple of years.

The Remodelling Market Index jumped to 68 in the December quarter versus 63 in the September quarter. The improved R&R outlook appears to be supported by a return to YoY growth in existing and pending home sales.

Pulling this together, there is a fair bit of evidence that the outlook for US residential construction, while softer, is not as bad as feared, which supports a view of a still-robust US economic outlook.

Early US reporting season read

Overall, the US economy looks robust, which is supportive for earnings. Broadly speaking, expectations are high but are being met.

It was banks reporting in the US last week. There were strong results from the investment banks and money centres, with JP Morgan, Citi, Wells Fargo and Goldman Sacks beating on EPS and providing better-than-expected 2025 guidance.

The key Trading, FICC and Equities divisions are all doing well and the credit environment remains benign, with provisions coming lighter than expected.

Regional banks underperformed during the week, including PNC and US Bancorp, with less-bullish guidance looking soft compared to the investment bank outlooks.

There was a small hiccup for the Chip/Data centre stocks, with Nvidia declining after press reports that some of its biggest data centre customers were cutting back on purchases of Nvidia’s Blackwell racks after initial shipments of the product had some glitches.

Insurance stocks were weaker given estimated economic costs from the LA wildfires coming in at $150 billion, one of the costliest natural disasters ever.

Australia

The unemployment rate rose by 0.1% to 4.0% in December due to a higher participation rate, but jobs growth was very strong (up 56k versus consensus expectations of 15k). This was largely driven by part-time jobs.

Unemployment of 4% is below the RBA’s year-end forecasts for 4.3% and measures of labour market spare capacity, such as underemployment and hours worked, are showing tightening not loosening.

MYEFO estimates suggest government opex increasing 10% for FY25, suggesting continued strong support for employment.

Consequently, the prospects of rate cut prospects in February look slim despite several investment banks calling for one. It will require a surprisingly soft Q4 CPI print to be released on 29 January.

China – signs of life

The view on China remains wait-in-see ahead of Chinese New Year, major economic meetings in March, and the expected announcement of the Trump Administration’s tariff plans.

Having said that, the data from last week was generally more positive.

GDP growth rebounded to 5.4% YoY in the December quarter, with activity driven by better-than-expected retail sales (up 3.8% YoY in December) and exports (up 10% YoY), though strength in the latter may be linked to inventory building ahead of prospective tariffs.

Property sales and investment continue to cool, but manufacturing and infrastructure investment were robust.

Chinese credit growth picked up in December, with Total Social Financing up 47% YoY – taking the three-month trend to 8%, driven by government bond issuance. Private sector borrowing remains subdued.

More recently, credit growth has turned a corner after a very weak first half of the year.

In residential property, floor space sales were down 0.3% YoY and starts were down 23% YoY in December.

FY24 property starts were the lowest in nearly two decades. The stabilisation in sales over the past few months is a positive sign, but the lags to activity are long.

House prices are also showing signs of stabilisation.

About Anthony Moran

Anthony Moran is an analyst with over 15 years of experience covering a range of Australian and international sectors. His sector coverage has included Australian Industrials and Energy, Building Materials, Capital Goods, Engineering & Construction, Transport, Telcos, REITs, Utilities and Infrastructure.

He has previously worked as an equity analyst for AllianceBernstein and Macquarie Group, spending a further two years as a management consultant at Port Jackson Partners and two years as an institutional research sales executive with Deutsche Bank.

Anthony is a CFA Charterholder and holds bachelor’s degrees in Commerce and Law from the University of Sydney.

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