Crispin Murray: What’s driving the market 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

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US equities (S&P 500) gained 1.19% last week and reached a new all-time high – 106 weeks after the previous peak on 7 January 2022.

This happened against a rising US Dollar, an escalation in Red Sea tensions, and despite bond yields rising as Fed Governor Christopher Waller tried to cool the market’s view on the pace of rate cuts. 

A combination of positive US economic news, confidence on inflation, and cash on the sidelines beginning to chase the market were behind the move higher.

US corporate earnings season has been solid so far, with some small signs of hope from the regional banks and indications that the consumer is holding up okay.

The Australian market (S&P/ASX 300) was softer, down 1.05%, as sentiment on China continues to wane and drag on the resources sector.

Inflation

There was little incremental information on the inflation front.

The latest Expected Change in Inflation survey from the University of Michigan fell from 2.9% in November to 2.8% on a five-year view in December.

This is constructive in terms of expectations around wages and is at the lower end of the post-pandemic period, but is still above the average pre-Covid level of 2.5%.

The market is aware of the effects that Red Sea disruptions are having on freight rates as well as oil and gas prices, but it is not yet affecting bond yields.

This is probably because the impact has been mainly to Europe-Asia shipping routes.

That said, there is now some spill-over apparent in US-China routes, but the upcoming Chinese New Year may be exacerbating this.

Deflation in Chinese export prices is also acting as an offset.

Business and consumers are not yet showing any concern around the ability to access products, so we don’t see the hoarding noted during the pandemic – however, an escalation of the crisis could shift that sentiment.

Elsewhere, the Consumer Price Index (CPI) in the UK was worse than expected.

This is a reminder that the pathway to deflation may be rockier, even though the main cause was volatile components such as air fares, which are expected to reverse.

In addition, underlying economic data is soft (e.g. retail sales), suggesting inflation pressures should be easing.

Growth

Most recent signals support the view that the economy ended 2023 well and that it is not in recession.

US December headline and core retail sales were solid at 0.6% month-on-month, which is stronger than expected and reinforces the anecdotal evidence that Christmas spending picked up.

The overall trend implies real consumer spending was up 2.3% in Q4 2023, which also implies the economy is holding up.

The University of Michigan Consumer Sentiment indicator rose much more than expected, up 9.1 to 78.8.

This is the largest rise since 2005, though the overall level remains subdued.

Forward expectations of sentiment also rose; falling fuel prices and rising stock prices probably played a large role in this.

Initial Unemployment claims declined 16,000 to 187,000, indicating the labour market is holding up.

December housing starts were also stronger than expected, only falling 4.3% from November in what is traditionally a weak month.

New housing permits rose 1.9%, indicating more optimism over future demand.

Multifamily units under construction have risen to record levels, which is supportive to economic activity but also means supply should help ease pressure on rents – supporting lower inflation.

Policy

Fed Governor Waller dampened expectations on the potential scale of rate cuts for 2024.

He put a lot of store on the next CPI report, as it will incorporate seasonal adjustment revisions for 2023 which may change the rate of disinflation.

This suggests that the March meeting is “live” for a cut. 

Waller reiterated his perspective that rates can fall to ensure real rates do not rise as inflation falls, but he also saw ‘no reason to move as quickly or cut as rapidly as in the past’, which reflects the starting point being one where the economy is holding up better than in previous cycles.

He also indicated no rush to slow quantitative tightening.

Bond yields rose in response, as Waller is one of the governors who triggered the shift in sentiment on rates last year.

The European Central Bank’s Christine Lagarde also reiterated the message that rates won’t be cut until the summer, with the market anticipating April as an option.

She also noted that “the risk would be worse if we went too fast and had to come back to more tightening,” highlighting central bank reticence on declaring victory over inflation too early.

One big positive for Europe is that winter has been mild and gas prices have fallen sharply, which translates into lower power prices.

Geopolitics

The Red Sea remains the most immediate issue in terms of the knock-on effects on inflation.

But elsewhere, Trump won big in Iowa – with neither Haley nor De Santis emerging as clear alternatives.

The latter subsequently withdrew from the nomination process, which places considerable importance on the New Hampshire Primary on 23 January.

It is an opportunity for Haley, as independents are able to vote; if she can run close, that will potentially give her momentum for her home state of South Carolina on 3 February.

Should she fail, however, the race could be over before Super Tuesday on 5 March.

China

A raft of data for 2023 was released last week.

Q4 GDP came in at 5.2% growth year-on-year, lower than the 5.3% expected (and having grown 3.0% in 2022).

Interestingly, the GDP deflator was -0.5%, which is the largest fall since 1998-99.

This means Chinese economy grew less than the US in nominal terms (the latter growing 4.8%) and actually declined in US Dollar terms.

Given the weakness in Q4 2022, this reinforces how subdued the Chinese economy remains.

The negative inflation and Producer Price Index highlight how the economy is being driven by the supply side, while underlying consumer demand remains weak for structural reasons.

Growth of 6.8% in industrial production and 4.0% in fixed-asset investment for the twelve months ending December 2023 was better than expected – however, retail sales were weaker at 7.4% (versus 8.0% consensus).

The property sector remains soft, with property investment falling 12.3% year-on-year (worse than the -10.9% expected and having already fallen 10% in 2022). 

New home sales fell 12.7%, while the value of new home sales fell 17%.

New home completions actually rose 15.4% for the year, due partly to lagged effects and the efforts made to finish projects that were tied up with funding issues.

Unemployment rose to 5.1%.

The National Bureau of Statistics also released a new youth unemployment figure, which excludes those at university and school – this came in at 14.9% versus 21.3% in the old measure. 

There were 9.02 million new births in 2023, according to official data, which was more than the market expected but which still means the overall population fell marginally.

The current lack of confidence in the Chinese economy can be seen in stock market weakness and in bond yields falling to cycle lows.

Expectations for 2024 GDP growth currently lie around 4.5%, with piecemeal stimulus propping up growth and an emphasis on infrastructure investment, which should support commodity demand.

Australia

December employment data was weaker than expected, with jobs falling 65,000 versus market expectations of a 15,000 rise, though November was revised up to 73,000. 

The three-month run rate has stepped down from 30,000-40,000 to 15,000-20,000 per month and year-on-year employment growth is 2.8%.

Full-time roles fell 107,000 and part-time roles rose 41,000, while hours worked fell 0.5% month-on-month and landed at +1.2% year-on-year – the slowest since March 2022.

Unemployment was flat at 3.9%, as the participation rate fell back from a record high of 67.3% to 66.8%.

All of this indicates the economy is cooling and helped support the market’s view that rates have peaked.

Markets

The S&P 500 market broke to a new all-time high, clearing the peak we saw on 7 January 2022.

This came on option expiry day, which released the gamma overhang in the market, and had been flagged by some bears as a point where the market could roll over.

It was interesting that this occurred despite a higher move in bond yields, and suggests that there is still some scepticism on the economy reflected in positioning.

The early phase of US earnings season has been in line with normal experience, with about half of the companies reporting beating expectations so far.

Earnings revisions remain on track for a 3% uptick year-on-year.

The ASX was weaker due to continued challenges in resources due to softer commodity prices and poor sentiment on China.

We have begun to see more deferrals in mine developments, reflecting cost pressures, and weakness in base metal and lithium prices.

Growth stocks outperformed despite bonds rising, reflecting improving sentiment on the underlying economic outlook.

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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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