Crispin Murray: What’s driving the ASX this week

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

• Environment may signal equities pushing higher
• Find out about Pendal Focus Australian Share fund
• Watch Crispin’s most recent Beyond the Numbers webinar

WE saw a reversal in recent trends last week.

After rising 47bps in April, US 10-year government bond yields fell 16bp last week, triggering a continued bounce in equities.

The S&P 500 gained 0.56% and the NASDAQ lifted 1.44%.

This followed dovish comments from US Federal Reserve chair Jerome Powell after US interest rates were left unchanged.

Powell clearly indicated rate hikes were not on the agenda and the Fed did not expect a recent jump in inflation to be sustained.

A subsequently softer payroll report and moderating average hourly earnings data lent credibility to his comments.

The fall in bonds yields was reinforced by a 7.3% drop in Brent crude oil on higher weekly inventories.

The key question is whether this is the beginning of a larger reversal in bond yields as inflation momentum begins to wane.

We suspect this will happen, though we anticipate a relatively moderate bonds rally given resilience in economic growth and recognition of structural factors supporting inflation. 

Trends also reversed in currency markets (with a potential near-term top in the US dollar/Japanese yen trade) and Chinese equities (where internet stocks have made strong gains this month).

Such an environment may signal the equity market is going to push higher.

US earnings have been supportive. Apple was the latest tech name to surprise on earnings and capital management.

In Australia the S&P/ASX 300 rose 0.74%, supported by tech and banks stocks. National Australia Bank’s half-yearly results were largely as expected and the CEO struck a positive tone.

In contrast, Woolworths delivered another disappointing sales update, indicating they were seeing consumers “trade down”.

US inflation and policy outlook

The Fed left rates on hold, as expected.

The focus was on Powell’s press conference and the potential for rates to rise after recent disappointing inflation data.

The market was pricing a 30 per cent chance of a hike by year’s end.

Powell firmly knocked this back.

He acknowledged a set-back on the path to 2 per cent inflation and the need for rates to stay on hold for longer.

But he also noted policy was already restrictive and the question was therefore how long rates should be kept at current settings.

Powell noted the criteria which could allow rates to fall – such as unexpected easing of the labour market – rather than the factors that could lead to a rate rise.

This was likely a deliberate signal on where the Fed is focused.

He also indicated that the Fed expected inflation to move back down this year, noting recent pressure was tied more to lagging factors built into the inflation-measuring process (eg healthcare and rents) as well as confidence in a supply response to support disinflation.

Our conclusion remains that while the Fed retains its current “hold” bias, there is a skew towards looking for reasons to cut rather than reasons to raise rates.

The market’s implied expectations of a rate hike this year have fallen back below 10 per cent.

Liquidity a key factor

Market liquidity has been a key factor driving the equity rally from November 2023.

After the FOMC meeting, the Fed announced a relatively dovish slowdown in Quantitative Tightening (QT) from US$60 billion per month in US Treasury bonds to US$25 billion, effective from June.

This is important as it supports the liquidity environment for markets – and extends that support well into the northern summer. 

Elsewhere, the US Treasury announced its projected financing requirements for the September quarter. This is watched carefully since it also affects market liquidity.

Last year more financing was shifted to the short end of the yield curve, which supported liquidity and helped turn markets around.

This time the plan is a moderate reduction in the Treasury General Account (ie their cash on hand) from US$940 billion to US$850 billion. This is not as aggressive as some looked for, but still partly offsets bond issuance.

The mix of issuance remains largely unchanged, retaining the relative skew to the short end of the curve.

The reverse repo market can also serve as a source of further funding for Treasury issuance in coming months.

US economic outlook

The economy continues to hold up well, but there are signs employment growth is slowing.

US employment

April non-farm payrolls rose 175k, well below a three-month average of 269k and 240k consensus expectations. There were also net revisions of -22k for February and March.

The government sector drove the downside surprise, adding just 8k jobs versus a 60k average over the past six months.

The private sector held up at 153k new jobs, with healthcare and social assistance representing half the rise.

The forward signals are mixed. The NFIB small business survey indicates a material slowdown over the next few months, while jobless claims data is more benign.

The average US work week fell marginally to 33.7 hours — another sign the labour market could be weakening.

Average hourly earnings also softened from 4.1% year-on-year in March to 3.9% in April. There was weakness in leisure, hospitality, construction and government.

This reinforces the signal that wage growth is slowing towards a level consistent with low inflation in the low 2 per cent range.

A household survey saw unemployment rise from 3.83% to 3.86% – not quite as large as some were expecting.

We have crossed a threshold for the “Sahm Rule” – which indicates that a 0.5% increase in unemployment signals a recession will follow.

We have some reservations about this rule and do not read too much into it.

The outlook for lower wages was supported by the latest Job Openings and Labor Turnover Survey from the US Bureau of Labor Statistics.

Notably, the favoured “Quits” rate – a decent lead indicator on wages – continued to move lower. Its current level is consistent with 4.5% unemployment based on historic data.

While we note there are still structural factors underpinning inflation, this is all supportive of easing inflationary pressure in the near term.

US service sector activity

There was some focus on the US services sector after an April ISM survey showed a fall of two points to 49.4 – its lowest point since the pandemic.

The data suggested the worst of all combinations: business activity down materially and new orders also lower, while pricing expectations were higher.

We note this is a volatile series, where weather can play a part. But it does provide a warning shot, particularly in the context of a series of consumer facing companies such as McDonalds and Starbucks signalling weaker demand.

The April S&P Global US Services PMI remains above 50 – and the ISM had been running above it for some time.

We may be seeing a convergence of these series, rather than a material change in trend.

Markets

US earnings season

First-quarter US earnings have been positive, partly reflecting a low bar of only 3 per cent expected earnings growth.

The response to beats is also much more muted than normal, suggesting the market was positioned for good news.

Apple provided a boost to both the tech sector and overall market, with earnings coming in better than many had feared.

There is also a shift in sentiment towards the potential impact of AI – from concerns that it posed a risk to Apple’s outlook, to speculation it may drive a handset upgrade cycle.

Looking across the tech sector, several trends have been supportive:

1. Demand is strengthening and prices are increasing, supporting revenue growth
2. Capital returns picking up; Alphabet and Meta both announced their first dividends in 2024, alongside share buy-backs
3. Rising profitability; margins are up in 80% of internet companies as a result of greater focus on costs
4. The AI cycle; AI use cases are increasing the focus on cutting costs and improving services.

Market signals

There has been some notable price action, likely tied to the reversal in bond yields.

Technology stocks and gold miners represent two ends of the thematic spectrum.

The former’s surge in outperformance from October to February (measured by the Technology Select Sector SPDR Fund versus the VanEck Gold Miners ETFs) reversed entirely in March and April —  but now may have turned higher again.

This may be supportive for equities given tech’s weight in global indices.

There are a couple of other reversals to watch, which are potentially positive signals for the market:

1. The USD/JPY currency cross rate, which has seen a material reversal off sentiment extremes.
   This may be a catalyst for the US dollar trade-weighted index to start easing. This is positive for markets as it supports liquidity.
2. A potential shift in sentiment towards Chinese equities. This may be seen in the KraneShares CSI China Internet sector ETF, which has been in extended bear market. There has been a material break higher in recent weeks — on short-term time frames at least. This reflects changing sentiment on the Chinese market combined with very low exposure to it. Allocation to China in active global equity funds is at it record lows — and in the first decile of historical allocation by one measure.

What does this all mean?

We think it means markets are probably supported at current levels and we could see rotation back to higher beta sectors — those stocks with rate exposure such as telcos and REITs, as well as China consumer-related names.

Australian market

National Australia Bank (NAB) delivered the first bank result — which seemed good enough to sustain the sector’s premium valuation rating — with a surprisingly positive message from the new CEO.

Consumer anecdotes were softer, notably from Bapcor (BAP), Ampol (ALD) and Woolworths (WOW).

Gold stocks rolled over reflecting the bond reversal, while lithium names ran higher on a clean-out of IGO’s (IGO) inventory by its Chinese partner.

High-quality growth names began to run again (eg Goodman (GMG), Xero (XRO), Pro Medicus (PME)), reflecting more positive sentiment on rates.

---

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. 

Find out more about Pendal Focus Australian Share Fund  

Contact a Pendal key account manager