Crispin Murray: What’s driving markets this week?

Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by investment specialist Chris Adams

• Momentum remains strong across most equity markets
• A period of consolidation is still likely, however
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INFLATION concerns prompted consolidation in most equity markets last week, following unconvincing US CPI and PPI data.

This inflation data means that the market is now expecting fewer rate cuts this year.

The S&P 500 finished down 0.09%, while bond yields continued to rise. US 10-year yields are now 53 basis points higher than their lows in December.

Generally, higher commodity prices added to the angst as they may act as a further headwind for the “last mile” reduction in inflation to 2%.

This early sign of potential market consolidation following a strong run was concentrated in previously high-momentum sectors.

In Australia, this saw banks underperform (-4.4% for the week), though they still have a total return of 9.06% for the calendar year-to-date.

Resources continued to underperform (-2.93% for the week) as iron ore fell further (-5.2%).

That said, there were signs of a sentiment shift in oil (+4.1%) and copper (+3.9%).

With both banks and resources down, the S&P/ASX 300 lagged global markets, falling -2.14%.

Inflation watch

US February Headline CPI rose 0.44% month-on-month to 3.2% year-on-year.

It is running at 3.4% on a six-month and 3.4% on a three-month annualised basis, respectively.

Meanwhile, the Core CPI measure was up 0.36% month-on-month and 3.8% year-on-year.

It is running at 4.3% on a six-month and 3.4% on a three-month annualised basis, respectively.

While the Headline index was broadly in line with expectations, Core was hotter than the expected 0.32% month-on-month.

The three-month annualised rates are picking up, increasing the risk that inflation proves stickier than expected.

Breaking down the Headline year-on-year increase:

• Core goods (-0.3%) are back towards the previous four-year mean levels of 0.1% year-on-year growth, as is Food & Beverages which grew 2.3% year-on-year and at a mean of 2.4% over four years.
• Energy (-1.7% year-on-year) is well below the four-year mean of 5.2%.
• Core Services (5.2% year-on-year) remains elevated, given a 2.9% four-year mean.

Within the Core basket, services are still not showing any sign of breaking lower.

At the same time, the deflation in goods is coming to an end and may no longer provide a tailwind for a lower CPI.

Other measures of “sticky” inflation, such as the Atlanta Fed Sticky Core CPI and Cleveland Fed Median CPI, confirm the risk that inflation remains stuck in the range of 3.0%-3.5%.

February’s PPI data was also stronger than expected, rising 0.6% month-on-month – versus consensus expectations of 0.3% – to 1.6% year-on-year. 

This was driven by sharp jumps in both food and energy prices.

Core PPI was up 0.3% month-on-month (with a consensus of 0.2%) to 2.0% year-on-year, due to both services and goods.

The combination of this data allows the market to predict the February Core Personal Consumption Expenditures (PCE) inflation data, which the Fed uses as its preferred inflation measures.

This is implied to come in around 0.3% month-on-month, with an upward revision to January leading to a 2.8% year-on-year gain.

The three and six-month annualised rates are expected to be higher, shifting expectations around the first rate cuts as a result.

Other leading inflation indicators are mixed.

There is a lot of focus on rising US gasoline prices, which reflects both oil prices creeping higher and increased refinery crack spreads.

There is some offset from freight rates declining, though they remain at historically elevated levels.

Interest rates

Given recent inflation data, the market is now only pricing in a 2% chance of a rate cut at the FOMC meeting this week, while May is priced at 6% and 60% for June.

Median expectations have now shifted to only two-and-a-half cuts in 2024.

The market will be looking at whether the Fed shift its median dot plot expectations from three to two rate cuts.

Chair Powell’s tone will also be scrutinised, though the general view is that he will not want to be too hawkish given:

• there is still three months’ worth of inflation data to come through before the June meeting
• there are some signs that consumer demand is cooling
• he will be as wary of extrapolating two months of hotter data as he was when extrapolating the cooler data late last year
• the perception that the Fed will not want to wait until July or September for the first cut as it becomes politicised by the Presidential election.

Economic growth outlook

US February Headline retail sales grew 0.6% month-on-month – a smaller-than-expected bounce back from a weak January figure.

The discretionary component of Core retail sales is negative year-on-year, though other categories are holding the overall number in the 2-3% range.

Clothing and furniture sales are particularly weak.

This softness has flowed through into the Atlanta Fed GDPNow tracker, which has declined due almost entirely to lower expectations on personal consumption.

All this highlights that the economy is slowing down gradually which, combined with potentially lower Q2 inflation, should still be enough to allow the Fed to cut in June.

Japan

The Bank of Japan is under scrutiny, with last week’s wage data seen as the catalyst for a rate hike.

To put this significance into perspective, the last time the BOJ hiked was in 2007 – an era before iPhones, Bitcoin, Uber or Instagram.

The market is implying an 80% chance of the BOJ ending yield curve control and negative rates.

The bigger issue for global markets is how the balance sheet will be managed going forward – whether there will be some form of quantitative easing – and the likely extent of rate hikes in the next 12-18 months.

Australia

The monthly NAB Business Survey suggests business confidence remains subdued, however, current conditions are marginally better than January – notably in the trading and profitability category.

Forward orders were slightly lower than in January, but the pricing outlook improved which should support margins.

Australian bond yields followed the US higher.

This, combined with the Fair Work Commission wage settlement for aged care workers which impacts overall wages growth, could delay the first cut from the RBA.

Markets

Momentum remains strong across most equity markets.

A period of consolidation is likely, with the potential for a 5% drawdown in the US market.

But underlying technicals – such as the increasing breadth of the uptrend – remain positive. 

Copper is another market to watch – it has risen to its highest levels in twelve months despite all the pessimism on China.

The ASX has been a narrower market, with increased liquidity in the largest stocks a feature.

Looking over the year to date, it is interesting to see how concentrated the rally has been in the large cap industrials.

The returns from the Big Four banks, Macquarie Group (MQG), Goodman Group (GMG) and Wesfarmers (WES) – which are 26% of the index – can explain over 100% of the index return in 2024.

On both price-to-earnings and price to pre-provision-profit, the banking sector is at all-time high valuation (going back as far as 1996).

About Crispin Murray and the 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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