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

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MARKETS are seeing renewed momentum on the back of US Fed Chair Jerome Powell’s dovish message on rates late last week.

This offset earlier weakness, nudging the S&P 500 forward 0.3% while the S&P/ASX 300 gained 0.5%.

Unless there’s a significant strengthening in next week’s labour data, US rates should fall at the September 17 meeting.

US bonds rallied through the curve and the US dollar weakened on the new information.

This is constructive for risk assets and was reflected in a rotation to US small caps, which have been lagging the market.

Sentiment towards AI stocks took a hit from a Massachusetts Institute of Technology report indicating companies can’t deploy it effectively and OpenAI CEO Sam Altman referring to AI “overexcitement”.

The Nvidia result this week will determine whether sentiment recovers.

Australian results season continues to be mildly constructive for the market.

Domestically focused stocks are outperforming. REITs are up on renewed interest in property assets, banks higher on better margins and other stocks such as Seek, Downer and Super Retail all able to deliver good profit outcomes.

Volatility continues with severe negative reactions to results from James Hardie, CSL and Sonic Healthcare.
Markets generally remain constructive with the economy seen as holding up and liquidity supportive with interest rates expected to come down.

US rate expectations

The focus has been on Jay Powell’s Jackson Hole speech, and the signals he would give regarding the potential for a September rate cut.

Last week the market began to fear Powell would be cautious and seek to dampen expectations. This led to the probability of a September rate cut dropping into the 60% range.

But Powell struck a dovish tone and markets latched onto his remark that “with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance”.

The key signal is the Fed does need to see another weak employment data point to act, because they see policy settings as restrictive while risks on inflation and employment are balanced.

Powell dropped references to the labour market as “solid” and noted that a slowdown in payroll growth was “much larger than assessed” in the July meeting.

He also flagged that labour demand and supply had weakened together. While there was limited evidence of labour market slack, this was “an outcome we want to avoid”.

The RBA cites this view as well: once the labour market tips over it can gather momentum and this can create a structural issue as extended periods of unemployment see people fall out of the labour market.

Powell noted the inflationary effects of tariffs would “accumulate over coming months” and there was a risk it became protracted. But he also said second-round effects created by wages did “not seem likely”.

He has left himself an out should next week’s payroll data shows a dramatic firming of the labour market, but this is a low probability.

The washout is that the market is now pricing in around a 90% chance of a rate cut in September.

Powell appeared be sending a soft signal that the next rate moves may be limited (ie perhaps two 25bp total moves rather than a 100bp), partly through his point that the labour market was in balance.

There also appears to be a shift in the longer-term policy; the approach of allowing inflation to overshoot has effectively been dropped.

It is somewhat irrelevant what Powell thinks about rates medium term though, since he will have stepped down as Chair.

The pressure on the Fed from the Trump Administration continues to build. Fed governor Lisa Cook faces calls from the President to resign over allegations she had been misleading on a mortgage application form.

This adds to speculation that the Fed will move a lot more dovish next year.

This may help drive short-end yields lower, but could also lead to a steepening of the yield curve as the long end begins to question the inflation target commitment.

The market is expecting four rate cuts by June next year.

Tariffs

The US Federal Circuit Court is soon due to rule on the Trump Administration’s appeal against the Court of International Trade’s ruling that tariffs imposed under the International Emergency Economic Powers Act (IEEPA) were not legal.

Experts believe the ruling will be upheld and therefore this will go to the Supreme Court.
The market appears ambivalent about this, though there may be some risk to long bond yields as there is a complexity surrounding whether money already raised needs to be refunded, which would aa pressure to the fiscal position.

We also note that inbound containers to the Port of Los Angeles, which collapsed a few months ago, has also rebounded. This suggests trade flows are normalising, so we do not to expect any disruption to supply.

Markets

Powell’s dovish message fuelled US markets to new highs on Friday, led by airlines, homebuilders, banks and consumer discretionary stocks – all rate-sensitive sectors – while consumer staples, insurers and healthcare lagged.

We note the US small cap Russell 2000 index rose 4% on Friday.

It has lagged the larger-cap indices and is more leveraged to domestic stocks, highlighting how the market sees these rates cuts as underpinning growth rather than being reactive to a more significant slowdown.

As explained last week, the technicals for markets remain supportive. Japan continues to make new highs and China – another lagging market – is breaking out of a 10-year range.

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Australia

We are roughly 80% of the way through earnings season with some key bellwethers yet to report – notably the supermarkets, Wesfarmers, Qantas, Medibank Private, Scentre Group and Wisetech.

Volatility remains as high as we have ever seen in terms of stock-price reaction on the day of the result.

This, we believe, is creating some significant distortions in terms of value.

It highlights the growing importance of management’s role in setting their cost of capital.

Those who communicate well, are predictable and earn the trust of the market command substantial “sleep-at-night” premiums over other companies – even where the earnings growth is lower.

We see this in the divergence in price/earnings ratio between Wesfarmers and CSL, which reached extremes last week on a poorly-communicated CSL result.

CSL is now rated the same as Westpac.

The former is expected to deliver ~22% EPS growth pa over the next two years, while Westpac is expected to grow EPS 1%.

This reflects how earnings momentum, flow and narrative drives prices in the short term.

Themes to highlight from last week include:

1. Banks performed strongly as both Westpac and National Australia Bank delivered positive surprises on margins.
2. Consumer discretionary also performed well with Super Retail Group beating expectations on performance and outlook.
3. Domestic businesses are holding up better despite subdued economic conditions. Seek is seeing improved performance in Australia driven by yield and Downer is improving its margins.
4. Most US-exposed industrials continue to struggle with BlueScope Steel, Reliance Worldwide and James Hardie disappointing last week. The exception here was Brambles, which disappointed on revenue but was able to make up for this with lower costs and provisions.
5. Traditional REITs outperformed as they talk to improving valuations and a pickup in interest in property assets.
6. Other rate sensitive defensives such as Transurban and The Lottery Corporation also outperformed as the market rotated to predictable domestic stocks with some rate leverage.

With a week to go the revisions signal is similar to the last few years, with a skew to positive revisions. Some 28% of companies have beaten EPS by 5% or more, while 20% have missed.

Breaking down the P&L, margins – rather than sales – are performing better than expectations.

Only 13% of companies beat revenue expectations, while 11% missed. But 32% beat margin expectations while 20% missed.

This reinforces the view that companies are remaining cautious on investing and hiring given uncertainty in the global economic outlook and the difficulty in investing in Australia.

From a sector perspective global cyclical is the worse sector, with 13% seeing consensus FY26 EPS upgrades of 5% or more and 44% seeing downgrades of greater than 5%.

Growth is the best sector, with 25% EPS upgrades of 5% or more and 19% downgrades.

The ASX performance month-to-date has been led by discretionary stocks, driven by rate cuts, and materials on the improved outlook for certain commodities.

Healthcare is lagging and growth is also underperforming despite the decent earnings revisions.

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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