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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THE post-election rally in equities hit the wall last week, driven by a combination of being overbought, a rise in bond yields, hawkish comments from the Fed, and concerns over some of Trump’s cabinet appointments.

The Fed’s Chairman, Jerome Powell, signalled that a December rate cut was not a certainty. We have now had four cuts taken out of forward expectations in the past two months.

The US economy continues to travel well and is increasingly divergent from the rest of the world.

This is leading to a strong US Dollar, which is also acting as a check on equities. The S&P 500 shed 2.05% for the week.

There were several results for ASX-listed companies which were, on balance, positive. The S&P/ASX 300 finished up 0.07%.

Commonwealth Bank’s quarterly update reinforced the benign credit environment, leading to small upgrades that fuelled further outperformance from the banks.

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US interest rates and economy

The outlook for interest rates continued to shift higher on a slightly more cautious tone from the Fed as Chairman Powell signalled that a December rate cut was not locked in.

“The economy is not sending any signals that we need to be in a hurry to lower rates,” he said.

He further noted that current economic strength was giving the Fed “the ability to approach our decisions carefully”.

In a break with recent messaging, there was also no mention of rates being “a long way from neutral”.

The US government two-year bond yield has risen from roughly 3.6% in September to 4.3% now, as a signal of where the market thinks rates are likely to go.

The market is still pricing a 62% probability of a rate cut in December, before a pause in January.

While expectations for the end of 2025 are broad, the market is assigning the highest probability for rates to be 3.75-4.0% – that is, three more cuts from current levels.

All up, four cuts have been removed from expectations in the past two months. This reflects three factors:

1. The economy is holding up well. The latest Atlanta Fed GDPNow indicator for Q4 is 2.5% growth. The latest consensus data has US GDP growing 2% over the next twelve months, with Goldman Sachs – which has called GDP well this year – estimating 2.4%.  Jobless claims data remains benign, falling back down to 217k last week. October’s personal consumption data was solid and indicates consumer growth is around the trend rate of 2.5% to 3.0%.
2. Inflation is holding up above target levels. October’s CPI data was okay and certainly better than September. Headline CPI was up 0.2% month-on-month to 2.6% year-on-year, while core CPI rose 0.28% month-on-month (versus 0.31% in September) to 3.3% year-on-year. As always, CPI data can be cut to support multiple arguments. Core CPI looks to be trending the wrong way, but the super core measures – excluding idiosyncratic categories – are more consistent with the Fed getting towards its target. Ultimately, there is enough uncertainty here to indicate the Fed will be careful with rates.
3. Trump policies. Tariffs are seen as a one-off reset of prices rather than an ongoing issue. However, immigration policy may have more of an impact on rates. If immigration slows from the estimated annual run rate of three million people to 750,000, then labour supply is tighter which can affect wages. The employment growth needed to hold the unemployment rate steady is estimated at 170k per month, and this could be down to 60k-70k in H2 2025.

Elsewhere, the Senior Loan Officer Opinion Survey (SLOOS) still indicates relatively tight credit standards, but these continue to normalise and suggest that credit demand will pick up in the US over the next 12 months.

The Fed watches this carefully as a gauge for how tight monetary policy actually is.

Markets

US equities corrected last week, and a period of consolidation is understandable given the recent move.

Australia, like the US, has seen a significant sector rotation.

Resources have been weak on disappointment over China stimulus. Consumer Staples and Utilities are underperforming due to defensive attributes and rising capital intensity.

Technology and Banks lead the market. 

Currency markets

One issue to watch is currency markets.

The US rate outlook is moving higher at the same time as the market is becoming more pessimistic about European growth. Expectations of sub-1% growth in Europe in the next 12 months would require the European Central Bank to cut more aggressively.

The implied interest rate differential between Europe and the US has widened to 200 basis points (bps) by the end of 2025. There has been a similar issue with Japan and this has led to a significant move higher in the US Dollar.

The roughly 5% increase in the US Dollar trade-weighted index is not good for equity markets. A similar move in July to October 2023 coincided with a 9% correction in the S&P 500.

That said, the 2023 sell-off also coincided with a 130bp increase in US 10-year yields – we have only seen an 80bp move here so far.

Oil also rose $20 in that period to $95, whereas it is sitting at its lows currently.

So while there are some early warning signs, this is not as material a headwind as last year.

Liquidity/risk-on signals such as Bitcoin remain positive. Credit spreads are close to 20-year lows, which suggest this is more a consolidation than a market reversal.

US earnings are also supportive, with earnings per share (EPS) growth expected to pick up in the next 12 months.

Banks

Banks had another big week and have fully recovered from the China stimulus sell-off in late September.

The sector has now outperformed about 25% over the past 12 months, with the market almost uniformly negative and underweight the sector.

The move, relative to Resources, is even more extreme – now about 66% over 12 months.

Given the earnings outlook for banks is flat, the bulk of the move in Banks has been valuation re-rating.

To highlight the relative valuation shift, we need go no further than the example of Commonwealth Bank which, at 25.88x next-12-month price-to-earnings, has just overtaken CSL (25.14x) for the first time.

Bear in mind that CSL is expected to grow EPS by more than 10% per annuum for the next five years, whereas CBA is likely to be low single digit.

There is no doubt there are significant distortions affecting the market. A lot relates to passive investing, with flows – particularly from offshore – into a small number of mega-cap stocks.

It is hard to predict when these distortions reverse.

But we are reminded of the period where bond yields were around 0% and the market began to justify why this made sense – only to eventually see it unwind.

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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