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

Here are the main factors driving the ASX this week according to portfolio manager JIM TAYLOR. Reported by investment specialist Jonathan Choong

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DESPITE much anticipation for the new US President’s policies, which marked the beginning of a new direction for the country, last week was notably quiet with minimal market impact.

Early White House statements aligned with pre-inauguration rhetoric on immigration, energy, trade and tariffs, causing little market movement except for China tariff news affecting resources.

Economic data was sparse and the Federal Reserve (the Fed) remains in blackout ahead of the FOMC meeting at the end of January. US bonds rallied 15-20 basis points (bps) from recent highs.

A broadening of market strength will be a key indicator of market health, but it might be too early to call yet. We saw a few days of broad strength punctuated by one day, led by mega tech.

The Fed is widely expected to leave rates unchanged at 4.25-4.50% on 29 January, with a 25bp rate cut in March having a probability just below 30%.

Rate cut expectations for 2025 remain stable.

Last week saw the replacement of Fedspeak with “Trumpspeak”, where President Trump – at Davos – demanded global interest rate cuts and urged Saudi Arabia and OPEC to lower oil prices. Here, he emphasised the vast oil and gas reserves for the US.

Trump also signed off a slew of executive orders, with the most relevant to markets including:

• Return to office: All executive branch employees must return to in-person work, with necessary exemptions.
• Tariffs: Trump emphasised an America First trade policy, proposing a 10% tariff on China due to fentanyl issues, and hinted at tariffs on the EU for “fairness”.
• TikTok: Trump suspended the Protecting Americans from Foreign Adversary Controlled Applications Act for 75 days to reassess its impact on national security and TikTok. He suggested the US should get half of TikTok’s value, threatening high tariffs if China disagrees.
• Infrastructure: Trump announced a $500 billion private sector investment in AI infrastructure, with OpenAI, Softbank and Oracle’s Stargate project planning to create more than 100,000 US jobs. The first of 20 data centres is under construction in Texas.
• Energy: Trump’s agenda focuses on lowering energy costs – urging US companies to increase oil drilling i.e. “drill baby drill”. The transition to supermajors has improved efficiency and cash discipline, but its future under the new regime is uncertain.

On another note, the breakout release of Chinese developed AI assistant DeepSeek garnered significant attention for its sophistication, rivalling US mega-tech generative AI at a fraction of the cost. This has raised concerns about the massive spending of mega-tech companies on AI and, in particular, chipmaker Nvidia – more to come next week.

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US macro and policy

Initial jobless claims rose to 223k, above the 220k consensus. Continuing claims increased to 1,899k – well above the 1,866k consensus.

WARN layoff announcements in November and December were 22% higher than the first 10 months of 2024. WARN data are very closely related to layoffs in one-to-two months’ time.

Indeed’s job postings remained unchanged after hitting a four-month low in December, suggesting laid-off workers may struggle to find new positions quickly. Some see these factors as pointing to a continued rise in initial claims to 250k by March, which could help the Fed lean towards further rate cuts.

On the growth front, the Atlanta Fed’s GDPNow model estimates Q4 growth at 3.0%. The 2025 growth consensus is 2.1%, up from 1.8% prior to the election.

Cleveland Fed data shows that underlying rental growth aligns with private sector data (such as Zillow) when excluding new leases.

Existing home sales rose to 4.24 million in December (above the 4.20 million consensus), with a 2.2% increase in Q4. The average mortgage rate on existing homes is about 4%, compared to 7% for new mortgages, contributing to sluggish sales.

Local macro and policy 

It was a particularly quiet macro week in Australia, with the only notable datapoint being that consumer confidence is slowly grinding higher.

In New Zealand, headline CPI rose 0.5% quarter-on-quarter in Q4 2024, with annual growth steady at 2.2% (within the Reserve Bank of New Zealand’s (RBNZ) 1-3% target).

This was slightly above RBNZ’s forecasts but aligned with consensus expectations. The surprise came from tradables prices, while non-tradables were lower than expected.

Measures of core inflation also showed ongoing signs of disinflation, with the ex-food and energy measure easing to 3.0% annually. The weighted-median and 30% trimmed-mean measures also decelerated to 2.6% and 2.5%, respectively.

Eurozone macro and policy

Eurozone economic data continues painting a bleak picture – particularly for Germany, which is often considered a canary for Europe.

Since 2017, Germany’s industrial production has fallen 15% (2.3% annualised). Car manufacturing has dropped to 1985 levels, with exports at 1998 levels.

The decline has been attributed to demographics, the green transition, and years of underinvestment. A recent study suggests that EUR600 billion in public investment over the next decade (1.5% of GDP) is needed for education and transport.

To the UK, productivity growth fell from 2.22% annually (1998-2007) to 1.12% (2011-2019), a decline known as the “productivity puzzle.”

China

The yuan strengthened notably alongside equity markets after President Trump told Fox News he would rather not impose tariffs on China-made goods.

He added that the tariffs represented “one very big power over China” and that Beijing did not want tariffs to be implemented.

Markets

Fourth quarter earnings season for the S&P 500 is off to a strong start, with both the percentage of companies reporting positive surprises and the magnitude of those surprises above 10-year averages.

Overall, 16% of S&P 500 companies have reported Q4 results, with 80% exceeding EPS estimates – above the 10-year average of 75%. Earnings are 7.3% above estimates, slightly below the five-year average but above the 10-year average.

The Q4 year-over-year earnings growth rate rose to 12.7%, which is the highest in three years.

Financials led the positive surprises, boosting the overall earnings growth rate, while Energy saw downward revisions.

If the 12.7% growth rate holds, it will be the highest since Q4 2021 and will also mark the sixth consecutive quarter of growth.

Seven of the eleven sectors in the S&P 500 reported year-over-year growth, with six showing double-digit increases such as Information Technology, Financials and Health Care. Energy was the only sector with a double-digit decline.

Looking ahead, analysts expect earnings growth of 11.3% and 11.6% for Q1 and Q2, respectively, and 14.8% overall for 2025.

The forward 12-month P/E ratio is 22.2, above both the five and ten-year averages.

More than 100 companies, including some of the Mag 7, are reporting this week. Market implications include shorting of companies near the $4.5 billion market cap cut-off, anticipating MSCI World deletions.

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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