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Crispin Murray: What’s driving the market this week?

June 03, 2024

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

EQUITY markets have been quiet and were down marginally last week.

Combined with a lack of follow-through on the Nvidia result and weakness in US software, this suggests we may see a period of consolidation.

The S&P 500 fell 0.49% while the S&P/ASX 300 was off 0.34%.

In the US, Personal Consumption Expenditure (PCE) inflation data was marginally lower than expected, which kept the chance of a pre-election rate cut alive.

Economic growth data was a touch softer than expected, but this week’s employment data should provide a clearer picture.

Australian inflation data was worse than expected and – despite softer retail sales – the prospect of rate cuts seems remote.

BHP’s attempt to take over Anglo American has ended for now. UK rules mean it can’t try again for another six months.

US inflation outlook

April’s PCE data was incrementally positive for the inflation outlook, but the Fed remains in “wait and hope” mode.

It is unlikely to cut rates in June or July.

The PCE – the Fed’s preferred measure of inflation – was in line with expectations, with Headline up 0.26% and Core up 0.25% month-on-month (or 2.8% year-on-year), versus a 0.3% run-rate in the last two months.

The market read this as marginally positive as the “super core” data – which adjusts for some of the imputed service components – fell from 0.3% month-on-month in March to 0.17%, which is consistent with 2% inflation.

But it is too soon to be bullish on inflation, as the trend remains too high – with three-month and six-month annualised growth at 3.5% and 3.2%, respectively.

The year-on-year reading is in the high 2% range, and in the past few months the outlook for inflation at the end of 2024 has also shifted there from the sub-2.5% range.

As a result, the Fed remains on hold – waiting for three months of data that indicates inflation is fading again.

We note that the base effect of slowing inflation in the second quarter of 2023 will also work against readings in the second half of 2024.

Digging into the details, core services inflation is moderating again but is still above the trend of late 2023, suggesting it sticks in the 3% range.

Meanwhile, goods deflation has now ended.

The bull case here is that retail margins, which are materially higher than pre-Covid, will be driven lower by competition in a softer economy, which could help bring inflation down.

The upshot of all this for markets is that we are unlikely to see rate cuts in either June or July. The question is, then, whether the Fed will cut ahead of the Presidential election.

The market is currently implying a 4% chance of a cut in June, 17% in July, and 63% in September.

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US economic growth

Here, the incremental news was softer, though it remains on trend for somewhere around 2% in 2024.

Headline first-quarter GDP was revised down from 1.6% to 1.3% (as expected) – driven mainly by lower consumption growth and lower net exports and inventory accumulation, while investment was stronger.

However, the drag from inventory and exports overstates economic softness.

Final sales to private domestic purchasers is a better indicator, which rose 2.8% versus 3.1% in the initial estimate.

Data on personal consumption was also softer, with consumer spending up 0.2% in April following 0.7% growth in March.

Personal incomes rose 0.3% and the savings rate was steady at 3.6%.

Real consumer spending – adjusted for inflation – was weaker than expected (-0.1% in April), continuing the signal of a slightly weaker consumer.

Services remains the strongest component, but this is fading. Spending on goods is down 1% on a three-month annualised basis.

This has seen second-quarter GDP forecasts reduced, though this is only the first month of the quarter.

The Atlanta Fed GDPNow estimate has shifted from the 3% range into the high 2% range. Market consensus is at 2%.

Anecdotally, in some sectors, US corporates are still constructive.

Booking.com and Airbnb are saying leisure travel demand is solid, while Uber is seeing no “trade-down” activity in restaurant delivery. Demand for digital advertising is also holding up.

The conclusion at this point is that US economic growth is decelerating at a moderate pace, but still heading for about 2% in 2024.

News of Trump’s conviction has led to a small shift back towards Biden in the betting odds, with the Real Clear Politics Betting Average showing Biden at about 39% and Trump at about 48%.

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Europe

The European Central Bank (ECB) is expected to cut rates for the first time in this cycle this week.

The markets are pricing two-to-three rate cuts by the year’s end.

However, growth data, wages and inflation have been stronger than expected in last couple of months, so ECB President Lagarde may be cautious in the press conference and not commit to cut rates again in September.

Australia

The April Consumer Price Index (CPI) rose 0.73% month-on-month, taking it to 3.6% year-on-year, versus 3.4% as expected.

Core CPI rose 0.24% to 3.8% year-on-year.

This pushes out expectations around rate cuts. Inflation is falling, but it remains too high for the RBA’s comfort.

The food, clothing and health components drove the upside surprise.

Construction costs have accelerated in the past few months.

High construction costs are a structural issue for Australian inflation, as it leads to a lack of supply of housing, retail space, distribution centres and other physical capacity.

Subsidies are helping ease some pressure, with the electricity component down 1.9% month-on-month and rent inflation slowing due to higher Commonwealth rent assistance.

Elsewhere, retail sales for April were softer than expected at 0.1% month-on-month and 1.3% year-on-year.

The read-through is messy due to the timing of Easter and school holidays, but the trend is flat-lining and has been reliant on population growth, which is now slowing.

On the positive side, there has been a pick-up in credit growth on the back of rising house prices.

This suggests that the stabilisation in interest rates is feeding through, and policy may no longer be as restrictive as it was.

The takeaway is that Australian inflation looks stickier than most countries and is being held up by structural problems. Even though the consumer is softening, rates look set to stay on hold for some time.

Markets

Markets appear to be consolidating and there are signs of deteriorating breadth.

Despite the S&P 500 being up about 11% calendar-year-to-date, 45% of stocks are down.

Higher bond yields are weighing on equities and ten-year bond yields are rising towards key resistance levels.

Positioning is getting more extended. Cash levels in US equity mutual funds are as low as we have seen in decades, though hedge fund exposure has room to rise further.

At this point, we see markets in something of a holding pattern and we believe liquidity can continue to support them through the September quarter.

The Magnificent Seven have become the “Fab Five” of Amazon, Apple, Microsoft, Google and Nvidia.

Indicators suggest that mutual and hedge fund managers are still underweight these stocks in aggregate, so there is still potential for them to squeeze higher.

When the 27% year-to-date index return of these stocks is removed, the roughly 6% or more return from the rest of the S&P 500 looks closer to a roughly 3% return from the S&P/ASX 300.

The AI thematic helping drive the Fab Five is also seeing bifurcation in the tech sector.

This can be seen in the divergence between the iShares Semiconductor ETF and the Global X Cloud Computing ETF, which have traded largely in tandem in 2022 and 2023.

However, the AI theme has seen semiconductors materially outperform since early 2024 – a trend which has accelerated in the last two weeks.

In this vein, the US Software sector was down 5.4% on Thursday, which was biggest day of underperformance in more than 10 years.

This was on the back of a quarterly result for Salesforce.com, which was in line with expectations but saw softer revenue guidance – leading the stock to drop about 20%.

The key debate is whether slowing revenue is company-specific or a broader macro issue.

We have seen this divergence in an Australian context in the performance of Goodman Group (GMG), which has also decoupled from a previously close correlation with a fellow industrial property company in the US, Prologis.

GMG has outperformed massively since Q3 2023 on the back of GMG’s pivot towards data centres.

Australian market

The S&P/ASX 300 rose 0.85% in May.

The thematic winners included aluminium/alumina names like Alumina and South32, as prices caught up with copper, as well as AI-related names such as Goodman Group and NextDC.

Other good performers such as Aristocrat Leisure, Xero, Technology One, Bendigo & Adelaide Bank, and AGL were driven by stock-related news.

Thematic losers were discretionary retailers such as Super Retail, Bapcor and Nick Scali as anecdotes of softer trading came out.

Some caution around the outlook for corporate travel saw Corporate Travel Management and Flight Centre softer.

The market was relatively quiet in the last week, with limited rotation. A weaker iron ore price saw some of the miners underperform.


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  

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