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 portfolio specialist Chris Adams

• US economy slows, but no signs of a recession yet
• Green light confirmed for a series of rate cuts in the US
• Find out about Pendal Focus Australian Share fund
• Coming soon: register to join Crispin’s Beyond the Numbers webinar

MARKETS continued trailing back toward their July highs last week, driven by commentary from Federal Reserve Chairman Jay Powell.

Powell expressed confidence that a soft landing is achievable and said that the Fed would focus on keeping the labour market strong as it makes progress towards its inflation target.

The “Fed put” is back in terms of monetary policy, providing important insurance against recession risk.

US bonds rallied and the market is now pricing in a roughly 50% chance of a 50 basis point (bp) rate cut in September.

The US Dollar weakened, which is supportive for risk assets, and crypto rallied, indicating that liquidity is coming back to markets.

The S&P 500 gained 1.47%, while the S&P/ASX 300 finished up 0.90%.

The main check on equities is the fear of September, which is seasonally the weakest month.

Local earnings results remain supportive, albeit with some pockets of weakness which tend to reflect specific industry issues rather than broader economic malaise

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US economy: green light confirmed for a series of rate cuts

Two years ago, Powell used his Jackson Hole address to signal that the Fed would risk recession to restore price stability.

His speech at the same venue last week was as close as you get in central bank world to a declaration of victory.

The message was the labour market will not be a source of inflationary pressure. Instead, it is cooling – and the Fed does not want it to cool any further.

Powell noted that “the time has come for policy to adjust” and that “the direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks”.

There was no specific lead on whether we see a 25bp or 50bp cut in September; this depends on employment data.

However, the key point is that we will see a series of cuts into next year.

This is supportive for equities as it reduces the tail risk of a recession. Should the economy slow quicker than expected, it will still affect the market – but the downside is limited, as it would be mitigated by more accelerated easing.

The more material tail risk is a re-acceleration of inflation as the economy cools, but this looks unlikely for now.

US economy: slowing but no signs of recession

There were a number of data points supporting the notion of an economy which is slowing, but not sliding into recession.

1. US payroll data saw its annual revisions and was adjusted down 818k for the year – this is much larger than normal and gives fuel to bearish arguments. It was expected, to some degree, given the gap between this data set and the Household Survey. The key observation is that the economy wasn’t as strong as previously thought and that cracks in the labour market started earlier. But this does not imply that the odds of recession have risen. We note this data is often revised again and the final estimate has been above the preliminary for the past five years.
2. Jobless claims data remained benign again last week
3. The Flash US composite Purchasing Managers’ Index (PMI) data was solid, falling to 54.1 versus 54.3 the previous month, but above the consensus of 53.2. Services rose to 55.2 from 55.0 and beat expectations of 54.0. Manufacturing was weaker at 48.0 versus 49.6 last month and the 49.5 expected. There was a drop in the employment component to 48.9 from 51.6, which highlights there are still risks to employment data.
4. New home sales were stronger than expected, which could signal that the impact of lower mortgage rates is beginning to flow through. This may help clear the inventory issue holding back new home construction.

The Atlanta Fed GDP Now measure is still hanging in there at 2.0% for Q3. It has dropped from just under 3%, which relates to home construction, which may turn soon.

Europe

Stronger PMI data was put down to a combination of the Euros, Olympics and Taylor Swift.

Underlying growth remains soft, with Germany quite bleak.

The European Central Bank’s (ECB) indicator of negotiated wages fell materially from 4.74% to 3.55%. This should remove one of the barriers to future ECB rate cuts.

Markets

Last week’s weakness in the US Dollar was interesting.

The US Dollar Index (DXY) fell 1.7% – just breaking down through a technical resistance level – and is down 4.9% in the quarter to date.

This reflects the more benign US inflation outlook, allowing the Fed to move faster on rate cuts.

A falling US Dollar, combined with weaker oil and lower bond yields, is typically helpful for equities.

The other potential positive is that a weaker US Dollar may allow Chinese policy to be more stimulative. This remains the key concern for global growth and has weighed on commodity prices and resource stocks.

The oil price is resting on technical support levels. Iraq is making noise about breaking its quotas, so the Saudi reaction will be interesting.

Australia

The ASX continues to grind higher.

Resources didn’t drag last week – the main sector moves were driven by stock-specific factors relating to results, notably Wisetech Global driving tech and Brambles lifting industrials.

Thus far, the take-outs from reporting season are:

• The market is looking for beta – any promise of upside is being enthusiastically embraced rather than being challenged, as seen in Wisetech last week and Pro Medicus the week before. 
• Good industry structures and capital discipline are being rewarded (e.g. insurance).
• Some signs of a turn in industrials which have been navigating a post-covid hangover (e.g. Brambles, Ansell and Reliance Worldwide)
• Consumers are receptive to product innovation and good value propositions (eg Breville Group and Super Retail)
• The steel industry is suffering as a result of China’s over-production and exports
• Earnings volatility and rising capital intensity are being penalised by the market (eg A2 Milk and Ampol).

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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