What’s driving ASX stocks this week?

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

• Find out about Pendal Focus Australian Share fund
• Crispin Murray: Five key questions for 2024 (and how we’re going so far)

THE US market continues to hit all-time highs with the S&P 500 up another 2.38% last week. The S&P/ASX 300 gained 2.8%.

US macro data remains good, with solid fourth-quarter GDP growth and better consumer spending.

There was positive commentary on consumer resilience in US Q4 earnings season. But the ratio of companies beating expectations is running below the five-year average.

There were also concerns on electric vehicles as Tesla missed consensus expectations for both sales and margins. The lithium sector remains under pressure.

In Australia, the federal government proposed changes to the Stage 3 income tax cuts, providing extra relief to lower and middle-income earners.

This should help underpin consumer demand since these groups have a higher propensity to spend.

On Wednesday the Australian Bureau of Statistics will release the December-quarter CPI print, which may reset the tone for rates this year.

The market is now looking for two cuts this year, taking us back to 3.85%. There is some potential for a pivot, which would help markets.

Chinese authorities are looking to mobilise some US $278 billion to stabilise its slumping stock market. A recent cut to the reserve ratio requirement for banks may also boost credit.

Hopes of a China rebound from this stimulus supported oil prices (Brent crude +4.2%) which ended higher for a second straight week.

Crude also received support from a big inventory draw-down due to cold weather in the northern hemisphere as well as ongoing Middle East tensions and positive US GDP data.

US politics is pointing towards a Trump victory for Republican nomination, which the market seems comfortable with.

Treasury yields were a touch firmer last week, with yield curves slightly steeper as well.

US data and rates

Overall, US data is solid, though real-time, pulse-type information points to a slowdown.

The advance estimate for Q4 GDP growth was 3.3%, helped by surprising growth in inventories, which continued to build on a large gain in Q3.

However, Fed surveys on manufacturing, new orders, new shipment are all turning down. The Empire Fed, Philadelphia Fed, and Richmond Fed readings all imply a slowdown.

Employment data is on the weaker side with jobless claims ticking up, though that’s probably weather-dependent.

January non-farm payrolls came off the blocks strongly last year, with lots of jobs. A March rate cut from the Fed is less likely if that result is repeated.

Core PCE inflation has fallen to below 3% for the first time since March 2021.

The 6-month annualised change fell to 1.9%, matching last month for the lowest reading since September 2020, when the economy was wracked by the pandemic.

The market will keep a keen eye on any shifts in language or rhetoric from this week’s meeting of the Fed’s rate-setting Federal Open Market Committee.

The Fed’s latest summary of economic projections implied 75 bps of cuts in 2024 – a shallower cutting cycle than current market expectations. There have been big downward revisions to market expectations for central bank policy rates. This reflects faster-than-expected disinflation in major economies and a dovish pivot in central bank communication from several central banks, including the Fed.

China outlook

There was movement at the station last week when Beijing announced a US $278 billion package to support its stock market.

There was also some focus on Alibaba co-founder Jack Ma buying up the company’s stock.

The People’s Bank of China announced it would cut the required reserve ratio by 50bp from February 5. The cut was not a total surprise, but the market was expecting only 25bps.

Markets have been expecting some form of liquidity injection in the lead-up to the Chinese lunar new year, when seasonal cash demand tends to pick up. An injection of roughly CNY 1 trillion cash into China’s banking system is a positive surprise.

The market is now looking for additional stimulus packages for housing and the economy, which could be supportive for the Australian resource sector.

Changes to Stage 3 income tax cuts

The Albanese government proposed changes to the legislated Stage 3 tax cuts (to apply 1 July).

Low-and-middle-income earners (<$150k) would receive a bigger tax cut at the expense of higher-income earners (>$150k).

The rationale is that the post-Covid inflation crisis and cost-of-living pressures facing lower earners requires changes to the original package which was designed and legislated in 2019.

The changes are designed to be budget-neutral, but could be more stimulatory since lower-income earners may be more likely to spend additional disposable income. There is also focus on the political backlash, with the federal opposition continuing intense criticism of Albanese for breaking repeated promises that he would proceed with the original plan.

Australian inflation and policy

There is potential for a Reserve Bank pivot at its February 6 meeting. Recent communications indicate policy is already tight enough.

Past cycles suggest risks are skewed towards rate cuts earlier than the current market expectations. 

Q4 CPI data due out on Wednesday will be important.

If the trimmed mean CPI reading is well below RBA expectations of 1% quarter-on-quarter, the RBA could revise down its forecasts for inflation to be within the 2-3% target range by the end of this year (rather than late 2025).

Lower travel and accommodation charges and lower fuel prices could all help the inflation picture.

Historical revisions to RBA forecasts have been big at times, so this has the potential to surprise on the downside in February – though the revisions will depend partly on the Q4 CPI outcome.

Recent data provides clearer signs of a softening labour market. While the unemployment rate remains low, its increase in recent months is larger than at the start of most RBA rate-cutting cycles.

The market now expects the RBA to cut rates twice later in 2024, bringing the cash rate down from a 12-year high of 4.35% to 3.85%.

Headline inflation is expected to only touch the upper end of the RBA’s target 2-3% band in Q1 2025.  The RBA is likely to be the last central bank in the “dollar-bloc” countries to join the global easing cycle.

Australia’s property market has now fully recovered from the 2022 downturn, according to data from real estate website Domain.

Sydney, Brisbane, Adelaide and Perth have reaching new house price peaks, returning to pandemic-boom highs, Domain reports.

Demand is strong, but the country has a housing supply problem, with no near-term solution from rate changes.

That said, there are signs that student visa growth has peaked and is moderating. This may help ease population and housing pressures at the margin.

Markets

ASX 200 aggregate earnings are forecast to fall this year, largely due to softer resource and bank sectors.

Industrials are expected to be positive, providing some offset.

At this point the market seems quite happy to look through the earnings valley this year and seems prepared to pay higher valuations for banks (which are up 2.97% CYTD versus -0.53% for the S&P/ASX 300).

The S&P/ASX 300 Resources index gained 3.47% last week on improved sentiment around China, but remains down 4.6% so far this year.

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

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