Graeme Petroni: What’s driving the ASX this week?

Here are the main factors driving the ASX this week according to Pendal investment analyst GRAEME PETRONI. Reported by investment specialist Chris Adams

• The Fed and BoE cut rates by 25bps, the RBA remains unchanged
• Economists modelling various scenarios for Trump’s policies
• Find out about Pendal Focus Australian Share Fund

IT was a big week for markets following the US election.

The S&P 500 rose 4.69% on pro-growth policies around tax cuts and deregulation.

Bond markets stabilised after sharp moves higher in the lead up to the election, with the outcome suggesting a lower trajectory for US rates.

Trade tensions dragged on Europe, while China benefited from optimism in the lead up to the NPC meeting, which ultimately failed to deliver on expectations.

The Australian market echoed the US with respect to financials, tech and cyclical industrials outperforming, while taking a more cautious approach to resources – with the S&P/ASX 300 closing the week up 2.23%.

While macro moves dominated, there was a fair amount of news flow, particularly from bank reporting season.

Banks reported solid results but without any further follow through on the positive thematics that had been building around margins and balance sheet.

US election

The US election is widely regarded as having been won on the economy. The catch cry “are you better off than you were four years ago?” clearly resonated.

It looks likely to be a clean sweep of the popular vote, electoral college, Senate and House, potentially giving Trump a mandate for reform. However, the House is close and the Senate lead is slim, which may put some constraints on passing legislation.

Trump talked about some big policies throughout his campaign, like a significant lift in tariffs (50-60% on China, 10-20% rest of world), tight immigration controls (15-20 million deportations) and lower taxes (extend 2017 cuts, no taxes on social security, overtime and tips).

But in his post-election speech, there was no mention of tariffs or China and references to immigration were dialled down (“we’re going to have to let people come into our country… but they have to come in legally”).

This illustrates significant uncertainty on the extent to which Trump’s campaign policies are implemented.

Economists have modelled various scenarios.

If tariffs are limited to 20% for China and 5% for the rest of world, and if net migration only moderates to 500,000 per annum, the inflationary impact is contained to 0.5 percentage points (ppt).

There is also a negative growth impact, but this would potentially be offset by taxes and deregulation.

The end outcome for the Federal Reserve (the Fed) is estimated to be two to three fewer cuts in 2025, potentially implying US cash rates don’t fall much below 4%.

However, this will depend on the degree to which campaign policies are pursued.

The directional impact of Trump policies is clear: bad for bonds, supportive for equities (at least in the near term), some volatility risks, positive for financials, and negative for property, resources and US homebuilders.

Markets have moved a long way in a short space of time and there are still a lot of unknowns to play out.

US interest rates

The Fed played a straight bat, continuing with a 25-basis-point (bp) rate cut (4.50%-4.75%) and making only minor changes to statement wording.

In response to questions about post-election policy impacts, Chairman Powell made it clear that the Fed would not pre-empt changes, saying “we don’t guess, we don’t speculate, and we don’t assume”.

On the outlook, Powell noted that the labour market had cooled and that the Fed was alert to any further deterioration.

There was also confidence expressed that inflation would reduce to target.

Against this, economic growth has been stronger than expected, and Powell said the Fed was starting to think about when to slow the pace of cuts.

This suggests consecutive cuts for now, slowing into 2025.

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US economic data

US economic data remains reasonably strong, though there are some mixed signals for the labour market:

Initial jobless claims were benign, with 221k per consensus, continuing to moderate.

• The Michigan Consumer Sentiment Survey was published, covering the two weeks before the election. The index resumed its uptrend, lifting from 70.5 to 73.0 over the month (above consensus of 71.0). This was despite a 0.5 ppt dip in current conditions to 64.4 – more than offset by a surge in expectations to 78.5.

• The ISM Services Index lifted from 54.9 in September to 56.0 in October, which was above consensus of 53.8 and could suggest a pickup in the economy. However, the index appears more consistent with stability in Services spend rather than an acceleration. And within the ISM Services data, the price paid index remains supportive of a moderation in inflation.

• Non-farm productivity increased 2.2% (annualised) in the third quarter. This slightly missed consensus of 2.5% but the prior history was revised up, pointing to strong post-Covid productivity gains. Within the data, unit labour costs increased 1.9% (annualised) in the quarter, which is a potential concern for inflation. But the index has tended to be heavily revised over time and other indicators point to a softening of the labour market.

• Initial jobless claims were benign, with 221k per consensus, continuing to moderate.

UK interest rates

As widely expected, the Bank of England Monetary Policy Committee cut the official rate 25bp to 4.75%.

Growth and inflation forecasts for 2025 lifted sharply following the UK Budget.

While guidance was retained for a gradual approach to policy easing, this is now subject to “evolving data” rather than “absent material developments”.

This suggests a pause in December and modest pace of cuts through 2025.

However, trade tensions could pose a risk to growth and increase the case for cuts over the course of 2025.

Australian interest rates

The RBA left the cash rate unchanged at 4.35% (in line with consensus) and made minimal changes to its outlook.

From the RBA’s perspective, restrictive policy settings are having their intended effect, with inflation moderating.

Household consumption has slowed, but with an offset from public spend.

The RBA made the point that local rates had never risen as much as in other developed countries, and even with cuts offshore (from the US, UK, EU, Canada, New Zealand), rates here remain less restrictive.

Reflecting this, it noted that inflation hasn’t moderated as sharply as offshore and labour markets remained relatively tight.

The market continues to debate when the local rate-cutting cycle will begin – whether early or mid-2025.

The RBA is not expecting inflation to reach the top of its band until late 2025, with the middle to be reached in late 2026.

But there is potential for US tariffs on China to have a negative flow through domestically, depending on China’s response.

China policy

If the US imposed the full 60% tariff on China, the impact to China is estimated at -2ppt of GDP.

This would fall to sub -0.5ppt in the event of a 20% tariff, with the potential for this to be offset by currency depreciation and fiscal policies. However, we have yet to see a fiscal response.

On Friday, the National People’s Congress (NPC) Standing Committee announced a RMB 10 trillion increase in the local government debt resolution over the next four years.

This should reduce local government interest costs and gradually improve infrastructure investment.

But there was nothing on the RMB 2 trillion worth of fiscal initiatives that had been speculated on in the press to cover bank recapitalisation and stimulate consumption.

Perhaps this is not surprising; the NPC is designed to approve pre-proposed policies – not launch new ones.

Policymakers will review fiscal budgets at the Economic Work Conference in December. Any announcement would then be communicated at the Two Sessions meetings in March 2025.

Given domestic weakness, in addition to any export threats, there is clear pressure to act.

US reporting season

Some 84% of S&P 500 companies have reported, with the largest stock – Nvidia – yet to come.

The frequency of beats returned to a more normal 51%, down on recent quarters.

Consensus EPS revisions are also back to a more normal trend.

Typically, consensus is downgraded as the year progresses, which we’re starting to see again for the “S&P 493”, excluding the Mag 7 stocks.

By sector, tech and financials were among the better performers while real estate, materials and energy struggled.

Markets

Australian non-bank financials reacted more positively than banks to the US election result, given more direct earnings leverage.

Effectively, the election helped solidify a 60-80bp move in bonds, which had yet to be reflected in share prices.

Among the banks, ANZ and CBA fared slightly better as they previously had more to lose from a fall in cash rates, given ANZ’s unhedged exposure to US institutional deposits and CBA’s very profitable domestic deposit book.

As a sector, banks could yet benefit from a rotation away from resources given disappointment on China stimulus, but reporting season was not particularly inspiring.

Bank reporting

Heading into results, the market was looking for upside on margins and/or the balance sheet, but neither came through.

Core margins were flat to down slightly, with guidance for similar outcomes given the ongoing mix shift in business deposits and emerging mortgage competition.

Credit quality deteriorated, most notably for NAB, where provisions are now being released to offset problem loans instead of being released to profits, as was hoped.

Capital initiatives were piecemeal, with sizeable buybacks appearing a 50/50 proposition given stretched payout ratios and the limit now being reached on optimisation initiatives.

Overall, there was nothing untoward, but no bottom-up catalysts for further sector outperformance.