Jim Taylor: What’s driving ASX stocks this week?

Here are the main factors driving the ASX this week according to portfolio manager JIM TAYLOR. Reported by portfolio specialist Chris Adams

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LAST week saw the release of highly anticipated January US Personal Consumption Expenditures (PCE) data.

While it showed an increase on previous months, it was in-line with consensus, and there has already been a significant change in expectations around rate cuts in 2024.

So, the market’s reaction was fairly muted – with the S&P 500 ending the week up 0.99%.

The question remains whether the uptick is a blip in the road to further disinflation – as the Fed suggests – or if it is the start of a more significant uptrend.

Locally, the market took Australia’s Consumer Price Inflation (CPI) data for January in its stride, with the S&P/ASX 300 returning 1.68% for the week.

Bonds rallied across the curve, with US 10-year Treasury yields falling 7 basis points (bps).

Commodities were mixed, with Brent crude oil up 2.5% and iron ore down 1.6%.

Bitcoin fired up and is back to its highest level since 21 March.

The Nasdaq and S&P 500 both hit records and were up for the seventh week in the past eight – with the S&P 500 now up in sixteen of the past eighteen weeks, its best run since 1971.

Fedspeak

Last week saw several members of the US Federal Reserve (the Fed) making the case for rate cuts in 2024, while also exercising some caution. In summary:

• Atlanta Fed President and FOMC voting member Raphael Bostic noted that he expects the first cut in the summer.
• Boston Fed President and non-voting member Susan Collins suggested that the path of easing may not be as rapid as in previous cycles.
• New York Fed President (and FOMC Vice-Chair) John Williams observed that there is still “a ways to go” until inflation is back to target.
• Cleveland Fed President and voting member Loretta Mester said that she thinks three cuts for 2024 currently sounds about right.

This week will see Chair Jerome Powell testify before Congress.

The recent convergence between market expectations around rate cuts and the Fed’s own dot-plots should be helpful.

US inflation

January’s PCE index rose 0.34% month-on-month, up from 0.12% in December.

This was the fastest monthly rise for a year but was largely in-line with consensus expectations.

It was up 2.40% year-on-year, down from 2.62% in December.

The Core measure rose 0.42% month-on-month and 2.85% year-on-year.

The Goods component (about 23% of the PCE basket) continues to do much of the heavy lifting, falling 0.05% month-on-month in January.

Core Services (about 65% of the basket) was up 0.58% month-on-month in January after increasing 0.29% in December.

This was despite Housing – which is 15% of the basket – rising at 0.50%, which was lower than the aggregate Core Services inflation.

These results have driven the three and six-month annualised figures back above the Fed’s 2% inflation target.

Personal income rose 1.0% which was well ahead of expectations.

However, once the annual increase in social security payments and the effect of dividends were stripped out, core wages and salary growth rose 0.4% which was in-line with expectations.

US growth

Both initial and continuing jobless claims came in a little above consensus expectations, while January new home sales grew 1.5% which was slightly weaker than expected.

February’s ISM Manufacturing Survey came in at 47.8 – down from 49.1 and well below the 49.5 expected.

The Consumer Confidence Index for February was also weak at 106.7 versus the 114.8 expected and down from 110.9 in January – the first drop in three months.

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Australian economy

The CPI fell 0.33% month-on-month in January, following the 0.66% rise in December.

The annual rate rose 2bps to 3.40%, which was a touch under consensus expectations of 3.6%.

The Core measure – which excludes volatile items and travel – was flat month-on-month and the annual rate fell 9bps to 4.13%, which was also lower than expectations.

Food (ex-meat), furnishings, clothing and travel prices are all declining, while rent, home maintenance and utilities are all going up.

The latest round of fortnightly Enterprise Bargaining Agreement (EBA) data showed that wages growth had eased from 4.1% in December to 3.7% in January – though January’s data covered just 9,000 workers versus 199,000 in December.

While the more modest pace suggests we may have seen the peak in wages growth, it also suggests that wages growth is likely to remain relatively elevated.

Interestingly, union wage agreements are continuing to run about 100-150bps higher than non-union agreements.

Retail sales grew 1.1% in January versus the 1.5% expected, suggesting that retail sales are near stalling at current levels.

It is worth noting that the Reserve Bank of New Zealand (RBNZ) kept rates unchanged at 5.5% despite some speculation it would hike.

Rates in New Zealand are unchanged since May last year and the RBNZ remains of the view that sustained high rates are constraining economic activity and prices.

US earnings scorecard

About 97% of the S&P 500 has reported Q4 2023 earnings.

Of this, 73% of companies reported a positive EPS surprise (which is below the five and ten-year averages of 77% and 74%, respectively) and 64% of companies reported a positive revenue surprise.

In aggregate, companies are reporting earnings 4.1% above estimates – again lower than the five-year average of 8.5% and the ten-year average of 6.7%.

The year-over-year earnings growth rate for the S&P 500 is 4.0%, the second-straight quarter of earnings growth.

Looking forward, consensus is expecting 3.6% earnings growth for Q1 2024 and 9.2% for Q2 for overall calendar-year 2024 earnings growth of 11.0%.

The 12-month forward price-to-earnings ratio is 20.4x, which is above the five and ten-year averages of 19.0x and 17.7x.

Australian reporting season wrap

Reporting season began well, with FY24 earnings projections largely unchanged in the first couple of weeks.

Then it faded into the close, with financial year earnings revised down 1.5% over the month – the weakest outcome since February 2009.

Consumer Discretionary, Financials and REITS saw positive revisions, while the sharpest downgrades came in Communication Services, Energy, Consumer Staples and Materials.

Dividend projections were also scaled back.

There are three factors at play:

1. Softening margins: seven out of ten GICS sectors (excluding Financials) saw margin compression, with Consumer Discretionary providing one pocket of resilience.
2. Interest cost projections are still rising, with consensus estimates higher for every sector bar one.
3. High capex projections.

Despite this, the majority of stocks in the index made gains in the wake of their results – with the market price-to-earnings ratio expanding around 0.7x as a result.

Valuation change was the dominant element of price moves during reporting season.

Single-day stock price volatility in reporting season has been elevated since Covid and remains so, though this reporting season was a touch less volatile than previous episodes.

Meanwhile, 35% of companies beat expectations, which was in-line with the historical average, while 46% missed, which was higher than the 34% historical average.

About Jim Taylor and Pendal Focus Australian Share Fund

Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.

Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 14 years of its 18-year history (after fees), across a range of market conditions. Find out more about Pendal Focus Australian Share Fund here.

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