Jack Gabb: What’s driving the ASX this week

Here are the main factors driving Australian equities this week, according to investment analyst JACK GABB. Reported by head investment specialist Chris Adams

• Find out about Pendal Focus Australian Share Fund

AFTER moving largely in tandem for the past five years, yields on 10-year US and Australian government bonds have now diverged.

The former have slipped 1 basis point for the quarter while the latter have risen 38 basis points (bps). They are at -43bps and +32bps for the calendar year-to-date, respectively. The delta between the two has not been at these levels since mid-2022.

This saw the Australian dollar gain 1.4% versus the greenback.

Diverging fortunes were also on display in other asset classes. For example, Australian financial equities have started to underperform their US peers, after also tracking closely since mid-2022.

This shift is linked to diverging outlooks for inflation. Markets are now pricing in somewhere between flat rates and one hike in Australia in 2026, versus three to four cuts in the US.

At central bank meetings this week, expectations for a 25bps cut in the US stand at 96%. No change is expected in Australia.

US stocks are back close to all-time highs, after the S&P 500 rose 0.4% and the Nasdaq 0.9% last week.

Tech and energy stocks drove US indices higher, while health care and utilities led declines.

Australian equities remain more muted, with the S&P/ASX 300 up 0.2%, although the Resources sector maintained recent strength, up 3.2%.

US macro and policy

Inflation remains benign

It was relatively quiet in terms of economic data post the government shutdown, but core personal consumption expenditures (PCE), ADP Employment and the University of Michigan Inflation

Expectations data all added weight to calls for another 25bps cut on Wednesday.

• September core PCE came in at +0.2% month-on-month (MoM) and +2.8% year-on-year (YoY), in-line with consensus expectations and viewed as benign.
• ADP Employment pointed to a weaker labour market, although Initial Jobless Claims also fell to their lowest level in three years. For the ADP data, November came in at negative 32,000 versus +42,000 prior and +10,000 expected. Most of the weakness was in small business – in particular tech, manufacturing, construction and business services.
• Michigan Inflation expectations also showed a drop. One-year expectations fell to 4.1% from 4.5% (and 4.5% expected). Five-to-10-year expectations fell to 3.2% from 3.4% prior and 3.4% expected.

November’s ISM Manufacturing data was also weaker at 48.2, versus 48.7 prior and 49.0 expected.

Taken together, the data appears to lock in the likelihood of a 25bps cut this week.

QT is dead. Long live QE?

As flagged by the Fed, quantitative tightening (QT) – the shrinking of the Fed’s balance sheet – ended on 1 December.

In over three and half years of operation, the Fed shed US$2.43 trillion in assets, which is 27% of its total asset base, or less-than 50% of what it had added via quantitative easing (QE) between 2020-2022.

While the end of QT does not equal the start of QE, it is nevertheless seen as driving improved liquidity, which is positive for both fixed income and equities.

In addition, we are perhaps not too far away from a return to QE given a new Fed Chair next year.

Several FOMC members have also already called for a rapid return to an expansionary stance, which would be bullish for risk assets and, potentially, good news for the Treasury were it to coincide with a decision by the Supreme Court to refund all or part of tariff duties.

M2 money supply is already expanding

While QT has only just ended, the data on M2 money supply (i.e. physical money, bank accounts, retail money market mutual funds and other near-money assets) shows that it continues to expand.

Over time, this drives up asset values, which is good for asset owners – but not for those without.

Hence recent commentary on a two-tier, or “k-shaped,” economy.

Higher-income households are powering spending while lower-income households struggle. Consumer confidence is weak, but spending is rising. Data centre construction is soaring, but factories are laying off workers.

Ultimately, if inflation returns or becomes persistent, asset classes that inflate faster – commodities, equities and real estate, for example – are likely to outperform.

So where to from here?

One way to think about the outlook is in terms of changing expectations for GDP growth and inflation.

While somewhat simplistic, it allows the market’s division into four distinct quadrants, as used by investment research firm Hedgeye, depending on whether GDP growth is accelerating or slowing and inflation is accelerating or decelerating. Each segment has its own performance characteristics,

Typically, equities do better when growth is accelerating, regardless of whether inflation is accelerating or decelerating. Similarly, these phases favour credit and commodities.

Phases of slowing growth favour more defensive exposures such as fixed income and gold.

From an equity perspective, Tech, Consumer Discretionary, Industrials and Materials do better when growth is accelerating, with the reverse being true when growth is slowing.

The hit ratio of this simplistic approach has been good.

In Q1 next year, most economic forecasts for the US are that growth will accelerate, while inflation falls.

That implies a bullish outlook for equities, particularly Tech, Consumer Discretionary, Materials and Industrials. It is more bearish for Utilities, Real Estate, Consumer Staples and Financials.

Australia macro and policy

Australian 10-year yields rose to their highest level since 2023, with stronger spending and wage data spurring expectations of a potential rate hike next year to rein in inflation.

While implied probabilities for this week’s RBA meeting remain firmly at “Hold”, one hike is now priced in next year, versus half a cut priced in pre-last month’s CPI print.

Making the U-turn more pronounced is the bifurcation relative to the US, which is still pricing in three to four additional Fed cuts.

All else being equal, that suggests the Australian dollar will continue to strengthen, although much also depends on whether China can offset recent weakness in its economic data.

Overall, data last week demonstrated the domestic economy continues to recover, underpinned by growing household wealth.

2026 growth expectations also ticked higher, now standing at 2.2-2.3%, versus the RBA at 1.9%, potentially adding to inflationary pressure.

Household spending for October came it at +5.6% YoY and +1.3% MoM, well ahead of expectations for +4.6% and +0.6% respectively.

The household saving to income ratio also rose to 6.4%, from 6.0% in the June quarter.

Q3 GDP was a touch softer at 2.1% YoY versus 2.2% expected, but still the highest since Q3 2023.

According to the Australian Bureau of Statistics, growth was driven by domestic final demand led by private investment and household consumption.

GDP per capita was flat (0.0%) in Q3, but increased 0.4% since September 2024.

Private investment growth contributed 0.5%, driven by machinery and equipment (+7.6%) mostly reflecting ongoing expansions of datacentres.

Unit labour costs rose 4.9% YoY, seemingly inconsistent with a 2-3% inflation target.

Building approvals fell 6.4% MoM in October, versus -4.5% expected. The total value of Australian residential property rose by $316.8 billion, to $11,928.2 billion.

RBA commentary

Governor Michele Bullock spoke Wednesday at a Parliamentary hearing, saying that the central bank is closely monitoring inflation pressures and is ready to act in the event its shows signs of regaining strength.

If inflation “proves more persistent, and we’ll get more information on this in the next couple of months, then that’s suggesting to us that the demand pressures are persisting and that might have implications for the future path of monetary policy”, she said.

Positively, she added that “projections still see inflation coming back down”.

In addition, the bar to hike is high. As such, a prolonged run of holds is arguably more likely at this point.

China macro and policy

Later this month, the Central Economic Work Conference (CEWC) is due to outline the policy tone for 2026, although key targets (GDP etc) will not be released until the National People’s Congress meeting in March.

Last year, the outcomes were focused on expanding fiscal spending and implementing targeted measures to reinvigorate private sector investment and household consumption.

While this led to the economy expanding at >5% in 1H 2025, performance since then has been weaker as stimulus measures faded.

As a case in point, China’s infrastructure fixed asset investment (FAI) fell 7.4% in July-October, its sharpest drop since the pandemic period despite record fiscal support.

Infrastructure represents approximately one-quarter of total FAI.

Property is also likely to be a major focus, with property sales in the thirty largest cities down 33% YoY in November, versus -27% YoY in October.

Data is also becoming more scarce – last week a private reporting agency was reportedly told to suspend publicising home sales data.

China Vanke, a key property developer, also sought to delay a second bond repayment as its liquidity challenges continue.

While more support seems likely, achieving a meaningful turnaround appears optimistic given the failure of past efforts.

Markets

Copper was the main story of the week in commodities, rising 3.8% following lower production guidance by a handful of companies and a further squeeze on stocks outside of the US.

While overall inventories suggest no imminent deficit, tightness outside of the US – coupled with a lower rate outlook and forecast demand increases – is continuing to drive bullish sentiment.

Australian equities were fairly muted, however, there were big gains for mining stocks. On the negative side, Tech and Healthcare led declines.

---

About Jack Gabb and Pendal Focus Australian Share Fund

Jack is an investment analyst with Pendal’s Australian equities team. He has more than 14 years of industry experience across European, Canadian and Australian markets.

Prior to joining Pendal, Jack worked at Bank of America Merrill Lynch where he co-led the firm’s research coverage of Australian mining companies.

Pendal’s Focus Australian Share Fund has an 18-year track record across varying market conditions. It features our highest conviction ideas and drives alpha from stock insight over style or thematic exposures.

The fund is led by Pendal’s head of equities, Crispin Murray. Crispin has more than 27 years of investment experience and leads one of the largest equities teams in Australia.

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 here