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

Here are the main factors driving Australian equities this week, according to portfolio manager JIM TAYLOR. Reported by head investment specialist Chris Adams

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MIXED US economic data has morphed into scant data due to the government shutdown.

On one hand, we’re seeing strong spending, decent corporate cap-ex and resilient employment support solid corporate earnings and underpin full equity-market valuations.

On the other, we’re seen slowing labour demand, flat real labour income and a lagged inflation pulse heightening recession fears.

A lack of data means less clarity around which scenario is unfolding.

We will see September CPI data – originally scheduled for October 15 – released before the next meeting of the rate-setting Federal Open Market Committee on October 29.

Last week was pretty quiet on the news front until Friday, when geopolitical tensions between the US and China reared as Washington threatened more tariffs in response to restrictions on rare earths, sending the market down.

The S&P 500 finished down 2.4% for the week, while S&P/ASX 300 was off 0.3%.

On the AI front, US tech company AMD rose 30% on the announcement that OpenAI was buying US$300 billion of microchips over five years, with an option to buy 10% of the company.

The market is – once again – questioning the circularity in financing the chip roll-out.

There are also questions about the profitability of the chip rental model, with a story Oracle had 14% gross margin on US$900 million in sales in its Nvidia cloud business in the three months to August.

Elsewhere, an investigation into the collapse of auto parts company First Brands is raising questions about the implications of the explosion in private credit and standard checks and balances that may have been subverted in the company’s debt-fuelled growth.

This is significantly lower than Oracle’s overall gross margin of around 70%, reflecting the high cost of chips and aggressive pricing of the rental.

In terms of ripple effects, investment bank Jefferies has fallen about 25% since the bankruptcy, over concerns about its exposure of its funds to First Brands.

Gold continued its inexorable march, up another 2.5% on the week, with other commodities such as copper (-4.1%) affected by Friday’s geopolitical friction.

Quarterly reporting season in the US starts this week, with the major banks kicking things off.

US macro and policy

The NY Fed’s national survey of consumer sentiment showed expectations for household finances over the next 12 months fell in September – the first time since April.

The downbeat survey result likely stems from an uptick in 12-month inflation expectations and increased concerns about the probability of losing a job in the next 12 months.

The Michigan consumer sentiment index fell marginally to 55 in October, from 55.1 in September. About half of the survey was done prior to the government shutdown, so the weakness was possibly not as significant as it could have been.

The survey’s current conditions component rose to 61 from 60.4. But the expectations index – which has historically provided a better guide to momentum in consumers’ spending – fell to 51.2 from 51.7. This is the lowest reading since May. 

September Fed minutes

The minutes from the FOMC’s September meeting noted that “most” participants thought it would likely be appropriate to “ease policy further over the remainder of the year”.

“Some” noted that relatively easy financial conditions warranted “a cautious approach in the consideration of future policy changes”.

While “almost all” participants supported the committee’s decision to lower the Fed funds rate by 25bp in September, “a few” participants saw “merit in keeping the federal funds rate unchanged at this meeting”. One participant, Governor Stephen Miran, would have preferred a 50bp cut instead.

A narrow majority of 19 officials pencilled in at least two additional cuts this year, giving somewhat of a base for more cuts in the remaining meetings (October and December).

On the flipside, seven officials pencilled in no further reductions this year. This highlights the big job that Chair Jay Powell has in building consensus among the voters.

The search for the next Fed chair continues. CNBC reports Treasury Secretary Scott Bessent has narrowed the list to five candidates: current governors Michelle Bowman and Christopher Waller, previous governor Kevin Warsh, National Economic Council Director Kevin Hassett and BlackRock executive Rick Rieder.

Australia/NZ macro and policy

The Westpac consumer confidence survey retraced further in October, falling another 3% on top of a 3% fall in September.

This has reversed the uptick from May to August when expectations about further rate cuts in Australia was providing a material impetus to confidence.

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Weakness was broad based.

Across the Tasman, the RBNZ reduced rates by 50bps to 2.5%, reflecting concerns around “prolonged spare capacity” and the intention to provide “a clear signal that supports consumption and investment”. They flagged that further rate cuts were possible.

Markets had attached about a 45% chance for a 50bps rate cut going into the meeting and have now priced in nearly two more 25bps cuts (one in November and another by May).

Europe macro and policy

Finnish and European Central Bank official Olli Rehn warned there was a danger inflation could drop below 2%.

“At the moment we are roughly at that target – in that sense, the situation is currently good,” he said.

“However, over the next couple of years, there are downside inflation risks in sight – due, among other things, to the strengthening of the euro and stabilisation of wage and service inflation.

“There is a great deal of uncertainty in the air – stemming both from geopolitical tensions and the uncertainty created by the trade war – and that’s why we make decisions meeting by meeting, based on the latest data and analysis, using overall judgement.”

His conclusion? “In times like these, monetary policy is as much art as it is science.”

German industrial production fell 4.3% in August after the 1.3% rise in July, well below consensus of -1%.

Autos were down 18% and machinery and pharma was down about 4%. Industrial orders are at a roughly 2012 low.

The $1 trillion unlocked for defence and infrastructure spending cannot come quick enough for the manufacturing heart of the EU.

China macro and policy

Early data shows subdued consumer spending during China’s Golden Week holiday period.

China state media reported retail sales growth of 3.3% year-on-year in first four days of holiday, versus 3.4% for all of August, on a 5.7% ramp-up in trips.

Analysts noted softness in the figures, which would likely disappoint policymakers and consumer stock investors.

Elsewhere, the head of China’s Passenger Car Association, Cui Dongshu, said dealers in China were in urgent need of financial assistance as fierce price war and overcapacity in EV production left many of them struggling.

Cui said new car sales were causing losses among dealers, with many operating on negative cashflow. The government should offer more financial and funding support, and guide banks to be more flexible with dealers, he said.

Markets

The Goldman Sachs US equity sentiment indicator turned positive for the first time since February, suggesting broad investor positioning in the equity market is neutral.

The indicator combines positioning data from a variety of investor types, such as institutional, retail, and foreign investors.

Of the components, passive fund flows and retail margin debt are the only metrics looking stretched, at +1 standard deviation relative to the past 52 weeks.

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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