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 investment specialist Chris Adams

• Find out about Pendal Focus Australian Share fund
• Crispin Murray: Five key questions for 2024 (and how we’re going so far)

GLOBAL equity markets continued to rise last week despite another sell-off in bonds.

The market continues to see stronger economic data — and is now pushing out the expected timing of rate cuts in the US to May or June, rather than March.

Equities were supported by a good US earnings season and the prospect of higher growth to underpin positive earnings revisions. The S&P 500 gained 1.4% for the week.

There was little new insight on the US economy, though a Federal Reserve survey of US bank lending showed early signs that credit tightening was coming to an end. In addition, annual US CPI revisions produced no surprises.

Oil bounced on rising concerns about geopolitical risk but remained in its recent trading range. Brent crude gained 5.6%.

In Australia the Reserve Bank held rates steady and gave a mixed signal on the outlook, effectively conceding they do not really know which way things will break. The S&P/ASX 300 fell 0.65%.

Early half-yearly results were mixed among ASX-listed companies, but largely reflected stock-specific issues.

Sentiment on China continued to deteriorate ahead of the Lunar New Year with base metals lower, which in turn dragged on the resource sector (-3.36%).

US growth outlook

The latest Fed Reserve bank-lending survey pointed to a significant reduction in the number of banks tightening financial conditions.

Credit tightening has been an area of concern for recession bears. Easing here would support the soft-landing case.

Lending standards may be a lead on improving US manufacturing data.

Anecdotally, we are hearing of companies that have reached inventory target levels — and are now waiting on consumer signals before dialling up production.

Jobless claims continued to stay low in the US, averaging 212k per week. This indicates February payrolls will be more than 200k.

The Atlanta Fed GDPNow — a monthly forecasting model created by the Federal Reserve Bank of Atlanta —continues to signal good growth of just under 3.5% for the first quarter of 2024.

Fiscal policy — which has not tightened in the US despite low unemployment — is one factor which explains the resilience of growth.

US Inflation

Inflation news remains supportive, despite better-than-expected economic growth.

This is good for equities, since we’re still seeing the economy holding up with rates able to come down.

The Atlanta Fed’s wage-tracker continues to improve, with 12-month wage growth falling to 5%.

The US Employment Cost Index is back near pre-pandemic levels. Unlike Australia, productivity is strong in the US, which is supportive of the disinflation thesis.

The annual revision of US CPI was also helpful since it contained no surprises (unlike last year). Some feared the progress on disinflation may have been overstated. This has not been the case.

Overall, three-month annualised core CPI stayed at 3.3% with goods a bit higher (-1.2% from -1.6%) and services lower (4.8% vs 5.1%). 

There are some signs to be mindful of on inflation.

The service prices component of the ISM Manufacturing Index rose materially and we continue to have freight disruption due to the Red Sea.

There are some concerns the January CPI due this week may be higher than expected. There has been a seasonal effect recently as certain industries load price increases in that month.

There are offsets to these concerns. Chinese deflation remains material, providing a very different context to the situation during Covid. At this point the market has all but given up on a March cut in US rates.

Find out about

Pendal Horizon Sustainable Australian Share Fund

Read more

A May cut is regarded as lineball. June is priced as a near-certainty.

China

Chinese deflation continues.

Its consumer price index (CPI) dropped 0.8% in January (year-on-year) versus -0.5% expected.

Core CPI rose 0.4%. This was the lowest since June 2022 when the economy was in the midst of its zero-covid policy.

The producer price index (PPI) was down 2.5%, in-line with forecasts.

The Lunar New Year holiday may provide some respite from bad news on the Chinese economy.

There remains a lot of speculation about whether its weak stock market will trigger a more aggressive policy response.

Last week Beijing replaced the head of its China Securities Regulatory Commission with a banking veteran who was serving as deputy party secretary for Shanghai.

This is a signal that China president Xi Jinping was not pleased with how the sell-off has been managed. Though the issues are more to do with the economy than anything the regulator is able to control.

We doubt this is a sufficient catalyst for China to become more aggressive on stimulus, since the equity market is still not widely owned and the issues are more structural (related to consumer and private business confidence).

Credit data in terms of total new loans was stronger than expected. Though this was also the case last January and did not follow through then. So we do not place too much faith in this signal.

We note that Chinese fiscal policy was not as supportive in 2023 as it could have been.

This provides room for expansion. Any announcements are likely to come out ahead of the National People’s Congress starting March 5.

Australia

The RBA stayed on hold last week.

The message from the press conference was “each way.”

On one hand Governor Michele Bullock noted inflation was too high and needed to fall. This was important because it was tied to cost-of-living pressures.

On the other, she said recent developments were encouraging. The first cut would not require inflation to be in the 2-3% range if confidence was high that’s where it was heading.

Bullock’s testimony to the parliamentary committee was a little less hawkish but with no forward guidance.

There is an expectation that the economy is slowing and there are some anecdotal signs of this, notably with talk of job cuts.

However, retailers have seen decent sales, the housing market fired last weekend and the US is holding up better than expected.

We also note New Zealand inflation data has been worse than expected, prompting expectations of another hike.

On balance, we suspect the market’s current expectation of an August rate cut may be optimistic.

Markets

Three-quarters of the way through US earnings season we are seeing positive earnings revisions.

The market was expecting 3% EPS growth for CY24 and Q1 is currently signalling around 7%. Stripping out the “Magnificent Seven” tech stocks this is still coming in around 6%.

This strength is supported by resilient margins, as input and labour costs are coming in less than expected.

On the negative side, we’ve seen a step-up in layoff announcements.

This may be a seasonal factor — we saw similar announcements in January 2023. It also has not flowed through yet into claims data.

We are seeing cash deployed. Stock buy-backs were down in the first three quarters of 2023, but began to rise from Q4 and now stand at about US$150 billion.

We have also seen a strong start to investment-grade credit issuance, which is also supportive for funding requirements.

The US market is up 5.52% so far this year. But similar to last year, much of the gains are driven by the Magnificent Seven (which are up 15% while the rest of the market is flat).

We note that gains in the “Mag 7” stocks are supported by earnings growth.

In Australia, resources were weak last week due to concerns over China.

Meanwhile a collapsed deal between Santos and Woodside weighed on the energy sector (-3.53%). 

Healthcare (+1.36%) and technology (+1.01%) were the best sectors.

That reflects a benign environment for quality growth stocks with rates likely to fall while the economy holds up.

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. 

Find out more about Pendal Focus Australian Share Fund  

Contact a Pendal key account manager