Jim Taylor: What’s driving Aussie equities this week

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

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Geopolitics continues to dominate, with the focus shifting from Venezuela to Iran and Greenland. 

Threats of US intervention saw a sharp oil price rally early last week, which tempered as the Trump administration indicated military action was not the primary strategy, for now. 

Instead, President Trump flagged 25% tariffs on countries doing business with Iran – though the market impact was muted, reflecting a high degree of tariff fatigue.  

Trade sanctions also form part of increased pressure around US efforts to purchase Greenland, with Trump threatening a 10% tariff on European countries opposed to the acquisition.  

The US Supreme Court had been expected to rule on the legality of tariffs deployed under the International Emergency Economic Powers Act the week before last, but is yet to do so. There is no indication of the reason behind the delay. 

Elsewhere, the Trump administration’s suggestion that credit card interest rates be capped at 10% was poorly received in the US banking and payments space.  

The market continues to price in 48bp of interest rate cuts for the US in 2026, with the next cut in June – which would be the first meeting for the new Federal Reserve chair.  

Outside of oil (Brent crude +1.2%) and gold (+2.2%), commodity prices were a touch softer for the week. However they remain elevated after recent strength and miners continue to be very well bid across the spectrum. 

This drove a 3.5% gain in the domestic resources sector last week, which helped the S&P/ASX 300 to a 2.1% return versus a 0.4% decline in the S&P 500. 

Breadth in the latter continues to improve, with the small-cap Russell 2000 index beating the S&P500 for the 11th straight session last week – the longest such stretch since 1990. 

It is early days for Q4 reporting season in the US.  

Several of the banks – a bellwether for the economy – reported without hoisting any red flags. They talked to cost growth, but bad debts remaining benign, which gave the market some comfort. 

Expectations for US Q425 earnings remain at a touch over 8% and haven’t really moved much over the quarter.  

The bottom line? The US economy remains in pretty good shape, notwithstanding a weakening labour market, with the prospect of some front-loaded impetus for growth in 2026.  

Macro and policy US  

Inflation 

There was nothing much to see in the December consumer price index (CPI) release. 

Headline CPI rose 0.31% month-on-month and +2.68% year-on-year, which was largely in line with expectations. 

The core measure rose 0.24% and 2.64% year-on-year, likewise as per the median forecast.   

Some of the stronger components such as airfares, hotels and clothing were related to a rebound following previous distortions due to data collection during the government shutdown.  

This also saw a rebound in rent and owner’s equivalent rent. 

The key observation is that inflation started in 2025 at 3% and ended largely unchanged in the last two months at 2.7%, notwithstanding all the fears around how tariffs would manifest in prices throughout the course of 2025. 

Housing 

There were sales of 4.35m existing homes in December, up from 4.14m in November and ahead of the 4.22m expected by consensus. 

A drop in mortgage interest rates earlier in the year continued to support sales – and December’s result was the largest in almost three years. 

That said, a recent stabilisation in mortgage rates may mean the recovery in home sales may ease in the near term. 

The US administration is acutely focused on the housing sector.  

A key issue is that the 30-year conventional mortgage rate remains stuck at 6%, while the average rate on outstanding mortgages is around 4%.  

This gap has remained wide since 2022. That’s in contrast to the prior ten years, when the average outstanding rate was usually lower than the 30-year mortgage rate. 

The administration is taking a broad-brushed approach to address affordability issues and thaw the housing market, given that mortgage rates have been much stickier than expected.  

Examples of the ideas being floated include:  

• Restricting private equity purchases of homes  
• Creating a 50-year mortgage  
• Mortgage portability from home to home  
• Slow walking federal funds unless local areas change restrictive codes  
• Allow building on federal land  
• Rent control  
• Tax incentives to bring down mortgage rates, perhaps temporarily  
• Banning share buybacks for homebuilders  
• Increase national timber production  
• Fannie Mae and Freddie Mac purchasing $200 billion of mortgage-backed securities  
• A tax credit for homeownership 

A lot of the rhetoric is pie-in-the-sky and hard to see happening.  

However the key observation is that the Trump administration is focused on addressing this issue and it remains one to watch. 

Retail sales 

Retail sales rose 0.6% in November, which was a touch above the 0.5% expected by consensus. Net revisions were -0.2% to October. 

Sales were up 0.5% (excluding autos), which was also slightly above the consensus expectation of 0.4%. Net revisions were likewise -0.2%. 

The producer price index (PPI) for core goods has seen a strong rise in October and November and was running at 3.3% annually for the latter.  

This is the highest rate since April 2023 and comes on the back of the tariff impact. 

However goods prices in the CPI have only risen 0.1% between September and December 2025, suggesting retailers have been absorbing this increase in the cost of goods.  

The degree to which this is being felt in margins, or offset by savings elsewhere in the business, will be a key issue to watch this reporting season. 

Employment 

Initial jobless claims fell from 207K to 198K in the week ending January 10. This was below consensus expectations of 215K.  

Continuing claims fell from 1,903K to 1,884K in the week ending January 3, which was also below consensus at 1,897K.  

Interestingly the unemployment rate has climbed at the same time that initial and continuing claims have fallen.  

This suggests new entrants to the labour market – who do not qualify for benefits – are finding it difficult to get a job in an environment of very low hiring activity. 

Monetary policy 

Fed Governor Stephen Miran, appointed to the board in September, noted that inflation was “very much headed in the right direction”. Elements such as housing costs would push inflation lower and political discussions around Fed independence were “just noise”. 

Others demurred and pushed back against the argument for imminent rate cuts, noting risks of a freefall in the labour market had subsided. 

• Chicago Fed President Austan Goolsbee noted that his concerns about an employment crash had been allayed in recent months and he was “comfortable that this is a stabilisation of the job market at a full-employment-like level”. He also noted inflation would come “roaring back if you try to take away the independence of the central bank”.  
• Philadelphia Fed President Anna Paulson stated her wish for “monetary policy restrictiveness” to help get inflation back to 2%. She saw the prospect of rate cuts later in the year, but only after validation that price pressures were easing or if the job market started to deteriorate unexpectedly. 
• Kansas Fed President Jeffrey Schmid saw little point in cutting rates with the economy “showing momentum and inflation that is too hot”. He noted the labour market had cooled, but this was necessary to keep the outlook for inflation in check. 

The majority opinion seems to be that current rates are about where they need to be. 

The Fed remains focused on the labour market, but data is suggesting that previous weakness is not leading into a severe downturn. 

Macro and policy Australia 

The Australian Bureau of Statistics Household Spending Indicator beat expectations by a handy margin for the second consecutive month. 

It rose 1% in November, versus consensus at 0.6%. This comes after a 1.4% gain in November, ahead of 0.6% expected. 

This takes annual spending growth to 6.3%, up from 5.7% in October and the fastest pace since June 2023. 

Spending has accelerated to 11.3% over three months and 7.4% over six months in annualised terms. 

Compositionally, monthly spending increased in both goods (0.9%) and services (1.2%).  

Discretionary spending was up 1.2%, after a 1.7% gain in October. Annual growth in discretionary spending has lifted to 6.1 per cent, the highest rate of growth since mid-2023. 

Gains were also broad-based across states. Tasmania (+2.1%) and Western Australia (+1.7%) led, but there were also sizeable gains in the larger states of NSW (+0.8%) and VIC (+1%). 

That said, there are clouds on the horizon.  

Australian consumer sentiment declined 1.7% to 92.9 in January, remaining in pessimistic territory.  

The report noted the “main catalyst continues to be a sharp turn in interest rate expectations”, with nearly two-thirds of consumers now expecting mortgage rates to move higher over the next 12 months. 

Australian consumer inflation expectations have risen since November and remain elevated in January.  

Central bankers care a lot about consumer inflation expectations as it can bleed into wage growth expectations. 

Markets 

US reporting season 

US Q4 reporting season has started well, though it is very early days with only 7% of the S&P 500 reporting so far. 

Of these, 79% have beaten EPS expectations, which is in-line with the yearly average and a touch above the five-year average of 78%. 

Two-thirds have surpassed consensus sales expectations, below the 71% one-year average and the five-year average of 70%. 

In aggregate, companies are reporting earnings that are 5.8% above expectations, versus a 7.4% one-year average positive surprise rate and the 7.7% five-year average.  

The blended expected earnings growth rate for Q4 S&P 500 EPS currently stands at 8.2%, versus 8.3% at the end of Q3. 

The blended expected revenue growth rate is 7.8%.  

Thus far, companies are reporting sales that are 0.3% above expectations, below the 1.3% one-year positive surprise rate and the five-year average of 2.0%. 

Australia 

Eighteen ASX 200 companies hit 12-month highs on Thursday, of which 17 were mining or mining services providers.  

Higher-than-expected commodity prices are driving the outperformance of resource stocks, with a quarter of the Materials sector’s 40% gain over the past six months occurring in just the past two weeks. 

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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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