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

• Find out about Pendal Focus Australian Share fund

ROBUST employment and income growth in the US have been the lynchpin supporting markets at peak valuation levels – and the data didn’t disappoint last week.

Stronger-than-expected US payrolls on Friday saw US equities and bond yields both rising to close out the week.

The S&P 500 finished up 1.5%, the NASDAQ was up 2.2%, while the S&P/ASX 300 rose 1.0%.

Otherwise, there was little news on the macro and market front – with the media focused on President Trump and Elon Musk’s social media feud, which serves as an important reminder that a lot can change in six months.

The commodities picture was mixed, with cyclical exposures oil (Brent crude +4.0%) and copper (+3.8%) both rebounding, along with gold (+1.0%). Iron ore fell -3.5%.

US macro

May’s payroll data showed 139k new jobs, which was slightly ahead of the 126k expected by consensus and consistent with a slowing but still growing economy.

Average hourly earnings came in at +0.4% MoM, ahead of consensus at +0.3%.

This stronger hard data saw a spike in bond yields on Friday night, coming in as a bit of a surprise after softer economic survey data earlier in the week.

This softer data included the US Manufacturing Purchasing Manager’s Index (PMI) coming in at 48.5 versus 49.5 expected and the May ISM Services Index coming in at 49.9 versus 52.2 expected.

The Manufacturing PMI miss was primarily driven by de-stocking after the pre-tariff inventory build-up. This trend can also be seen in consumer data, with US auto sales down 9% month-on-month in May after a pull forward of purchases to beat tariffs earlier in the year.

The weakness in the ISM Services Index could provide a deflationary impulse to partly offset tariff impacts on goods inflation.

Elsewhere, the Fed’s “Beige Book” – a regular review of economic conditions – warned of a slight decline in economic activity.

Initial jobless claims also ticked up during the week, confirming a rising trend. However, seasonal adjustments made a big impact, so this is not yet a clear signal.

Commentary around inflation in many of the data releases was more hawkish – in the Services ISM, the price component spiked 3.6pts to 68.7 and the Beige Book noted: “There were widespread reports of contacts expecting costs and prices to rise at a faster rate going forward. A few Districts described these expected cost increases as strong, significant, or substantial.”

There was a partial offset to this from the Congressional Budget Office, which scored the current Budget Bill as a little less stimulatory than expected, which slightly eased longer term inflation fears.

The deficit-expanding impact of the Budget Bill is ostensibly the catalyst for Musk and Trump’s high-profile feud.

The takeaway is that data suggests the US economy is incrementally slowing – but this is not a big surprise and it suggests decelerating growth, not recession.

This incremental slowing is negative for stocks that are at the pointy end of economic weakness (e.g. US consumer-exposed stocks) but is unlikely to be enough to drag down the broader market materially.

The US economy is expected to reach trough growth in the December quarter.

Tariffs

There wasn’t a huge amount of news flow on tariffs last week, though anxiety is building as we get closer to the end of the tariff suspension period on 9 July.

Trump demanded the best offers from major economic partners by last Wednesday.

The biggest news was the phone call between Trump and China’s President Xi, but there were no real details apart from Trump being invited to Beijing.

The market still expects a Japan trade deal soon and the G7 Leader’s Summit from 15-17 June is seen as a possible confirmation point for deals.

Sentiment around tariffs looks set to remain volatile, with anxiety continuing to grow in the absence of news flow.

Australia macro

March quarter GDP was softer than expected at +0.2% quarter-on-quarter versus consensus at +0.4%. This is a marked slowdown versus the December quarter and a decline in per capita terms.

We have been expecting resilient economic growth in Australia on the back of rising real disposable incomes, an expansionary Federal Budget and interest rate cuts.

There were some unusual distortions in the March quarter from extreme weather events, which should reverse.

But we also saw a rare decline in public spending – driven by lower state government spending – and softer household consumption (+0.4% versus +0.7% in the December quarter).

Pendal Focus Australian Share Fund

Now rated at the highest level by Lonsec, Morningstar and Zenith

Read more

Notably, real household income growth was good at +1.7% quarter-on-quarter, but this was offset by a rise in the savings rate, which rose to 5.2% in the quarter and is normalising towards historical trends.

The Fair Work Commission announced a 3.5% increase in the minimum wage, which equates to growth in real wages with CPI running in the high-2% range. It comes on top of the 0.5% superannuation increase.

However, the growth in real wages won’t be a support to GDP growth if the savings rate keeps rising.

Of more concern for the longer-term economic outlook, productivity growth was flat during the quarter and unit labour costs were +0.9% (or +5.1% year-on-year).

This suggests there is little downside from here for the inflation rate – so while the RBA still intends to cut rates on the basis that monetary policy is tight, this may reduce the number of cuts.

We still expect a base case of resilient Australian GDP growth to play out, with some of the drivers in the March quarter softness to be temporary.

But the savings rate – potentially driven by global macro uncertainty and weather events (i.e. relief payments) – is worth watching as a risk.

We also need to wary of a labour cost-driven bounce back in the CPI that limits rate cuts.

Rest-of-the world macro

Eurozone preliminary CPI was softer at +1.9% year-on-year versus 2.0% expected, being helped by a stronger euro and lower energy costs. 

This was below the ECB’s target and saw the central bank cut interest rates by a further 25bps on Thursday night.

Rates are now back to 2% and the ECB has signalled that it is nearing the end of the cutting cycle, albeit with downside risks and uncertainty ahead.

Tariffs are hitting the Chinese economy, with the Caixin Manufacturing PMI surprisingly down 2.1 points to 48.3 versus 50.7 expected. This is the lowest reading since October 2022.

China still needs to step up its stimulus, particularly in support of the consumer, to offset these impacts.

Markets

It was a good week for the Mag7 (ex-Tesla), with the AI narrative regaining some momentum, as:

• Taiwan’s TSMC spoke favourably about AI-linked demand.
• Meta struck a 20-year deal with Constellation Energy for nuclear power to support AI operations.
• The Wall Street Journal reported that Meta aims to have AI tools in place by the end of 2026 that would allow complete automation of the entire advertising process (including creating ads) – technology that could significantly disrupt traditional ad agencies.
• A report from private investment firm Bond Capital talked about the AI market growing to $244bn by 2025 and to $1.01 trillion by 2031.

In recent weeks, we’ve talked about how markets – despite trading at full valuations – seem well supported by technical drivers such as liquidity and slowing, but relatively resilient, economic growth.

This remains the case, but by some measures markets look like they have the potential to be more volatile.

Both long and short leverage is at a very elevated level historically. This leaves the net position balanced, but suggests the potential for outsized moves if there is a momentum shift as one side’s leverage is unwound.

There is a parallel of this in Merrill Lynch’s Bull & Bear Indicator, which is reading neutral, but under-the-hood components are sharply polarised with hedge fund and long-only positioning very bearish and credit market technical and equity market breadth very bullish.

So there is some potential for a pick-up in volatility, with tariff deadlines and deals a potential catalyst.

Another concern is that markets will underperform as hard data continues to slow in coming months. This risk is highlighted by the index of US Cyclicals versus Defensives pricing in economic growth well above current economic consensus.

This is clearly going to be a risk, but Goldman Sachs notes that in past recessions the market has rallied with the recovery in soft economic data, which leads the hard data.

We have already seen the weakness in the soft data and there are some signs of a rebound (e.g. consumer confidence recently rebounded 12.3pts to 98).

Also, the Cyclical versus Defensive reading may be exaggerated by the Healthcare sector – which is being challenged by government policy concerns – and tariffs hitting some normally defensive Consumer Staples.

More sector-neutral measures of economic sensitivity, like the High Operating Leverage versus Low Operating Leverage stocks index from Goldman Sachs, show High Operating Leverage stocks operating at a level more consistent with a recession.

The upshot is it seems more likely that trade policy, rather than the economic data, will be the main driver of potential volatility in coming weeks.

Australian market and stocks

The Australian market rose during the week, following the offshore lead – with banks and REITs leading the charge and defensives and resources underperforming, with iron ore declining and dragging down the latter.

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.

Find out more about Pendal Focus Australian Share Fund  

Contact a Pendal key account manager