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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US ECONOMIC data continues to reinforce the narrative of a cooling employment environment providing scope for the Fed to keep cutting rates.

This was reflected in a US bond rally over the course of last week, with two-year yields reaching their lowest point in four years.

The market is now largely pricing consecutive cuts for the September, October and December meetings.

The US economy is best described as “slowing slowly”. Pundits have the risk of a recession sitting at about 30 per cent.

Conversely, Australian economic data is slightly hotter than expected, drawing a comment from RBA governor Michele Bullock that a continuation in this vein could see a curtailed rate cutting cycle.

This perspective was more in-line with our views coming out of reporting season: that the domestic economy is performing pretty well and does not require a significant cutting cycle to juice it up.

Elsewhere, the Saudis continue to hold up their end of the “lower is better” oil price deal with Trump.

OPEC+ commentary continues to support increased supply. Traders are jumping on the surplus supply bandwagon, with bullish oil bets at an 18-year low.

The iron ore price continues to hold up well, supported by renewed optimism for China’s prospects.

Equity market returns were subdued globally last week, in line with a historical trend of September as the poorest-returning month of the year.

The S&P 500 gained 0.4% and the S&P/ASX 300 shed 0.7%.

Tariffs

A US court of appeals upheld a lower-court ruling that President Trump’s use of tariffs under the International Emergency Economic Powers Act (IEEPA) was illegal.

This could affect 70 per cent of tariffs now in place. But enforcement has been delayed until mid-October to allows an appeal to the higher-level US Supreme Court.

A Supreme Court decision is not expected before early 2026.

If the original ruling is again upheld, the Trump administration could employ Section 122 of the 1974 Trade Act, which allows the imposition of up to 15% tariffs (versus the current weighted average of 16%) for 150 days.

Beyond that, Trump can look to use sectoral tariffs under Section 232 and 301.

The upshot is it looks likely that some form of tariffs remain in place.

If the IEEPA tariffs are deemed illegal, importers would need to file an action to have those tariffs repaid.

Tariff collection is running at US$370 billion annualised.

Macro and policy US

Consumer confidence

 A key US confidence index dropped nearly 6% in August, driven by respondents with income in the $US50,000 to $100,000 range. Confidence for people with incomes above and below that remains resilient.

This “middle class squeeze” was noted by several companies in dining, retail, fashion and air travel during the recent US reporting season, according to the University of Michigan survey.

The survey reported more US consumers were dialling down spending now, than during the 2022 inflation spike.

More than 70% of those surveyed planned to tighten their budgets for items with large price increases in the year ahead.

Manufacturing

Messages were mixed in the latest survey of purchasing executives at US manufacturing companies.

The ISM manufacturing index rose from 48 in July to 48.7 in August. This was slightly below consensus expectations at 49.

New orders were at the strongest levels since January, whereas manufacturing output dropped back to November 2024 levels and the payrolls component fell, suggesting a sharp near-term fall in manufacturing sector payrolls. 

Labour Data

Labour data continues to point to a cooling US employment market, according to the latest Job Openings and Labor Turnover Survey (JOLT) from the US Bureau of Labor Statistics.

There were 7.18 million US job openings in July, down from 7.36 million in June – with the latter also revised down by 80,000 and below consensus expectations of 7.37 million.

Openings are now about 80,000 above the September 2024 low and – assuming the usual level of revisions – could end up below that for August.

The retail sector was the weakest, probably reflecting an attempt to mitigate the cost impost of tariffs.

Health care – which had been strong previously – was weak for the second month and is now below the pre-Covid rate.

In contrast, federal job openings rose from 117,000 in June to 135,000 in July. But this was still slightly below last year’s range, consistent with a further gradual decline in federal payrolls ahead. 

The ratio of openings to unemployment fell from 1.05 in June to 0.99 in July. This was the first time the number of unemployed had exceeded the total number of openings since April 2021.

However the ratio remains above the 0.93 average ratio of the second half of the 2010s. 

The private sector “quits rate” was unchanged at 2.2% in July. This continues to suggest slower wage growth ahead. 

This data saw bond yields fall 4bps and equity markets up on the day of its release, as it underscored the case for near-term rate cuts.

Other data points:

• Initial jobless claims increased to 237K in the week ending August 30, from 229K, marginally above the consensus, 230K. The increase was broad based across states and is an 11-week high.
• Continuing claims fell to 1,940K in the week ending August 23, from a downwardly revised 1,944K, below the consensus, 1,959K.
• The unemployment rate ticked up to 4.3%, from 4.2% in July, in line with the consensus. Stricter migration policies are likely to have kept this increase modest.
• Average hourly earnings rose by 0.3% for the month and 3.7% year-on-year, in line with the consensus. This is consistent with the Employment cost index (ECI) 3.6% year-on-year.

August payrolls rose by 22K, well below the consensus expectation of 75K. The two-month net revision was -21K. This is likely to see the Fed cut rates in September and suggest that further action before year end is required to stabilise the labour market.

• Federal payrolls fell by 15K, accompanied by a small fall in state and local government payrolls, resulting in a 16K drop in government jobs, about 20K weaker than the year-to-date trend
• Healthcare rose 47K, though this was the weakest print since January 2022.
• Manufacturing payrolls fell by 12K as uncertainty about tariffs bites.

Expectations of lower retail sales are weighing on distribution sector jobs.

• Construction payrolls fell by 7K, the third straight monthly fall.
• Professional and business services payrolls fell for a fourth straight month.

The August employment data showed the U.S. has added less than 600,000 jobs so far this year. Excluding the Covid period in 2020, that is the fewest for the first eight months of the year since 2009, when the economy was exiting the GFC downturn.

The Fed

Federal Reserve Governor Christopher Waller noted that “when the labour market turns bad, it turns bad fast … so for me, I think we need to start cutting rates at the next meeting”.

He added that “people are still worried about tariff inflation” but that he was not.

St Louis Fed President Alberto Musalem said the labour market still looked relatively healthy, while inflation concerns loom, especially given the impact of President Trump’s tariffs.

He also said “recent data have further increased my perception of downside risks to the labour market”, which could be seen as signalling openness to a rate cut soon.

Atlanta Fed President Raphael Bostic did not think it was “unambiguously clear” that the labour market was weakening materially.

He was more concerned with risks on inflation than labour market weakness. As a result he saw one cut as necessary this year, but was ready to pivot.

Macro and policy – Australia

Australian GDP increased 0.6% in the June quarter, with growth accelerating 40bps to 1.8% year-on-year.

This was slightly ahead of consensus and RBA expectations of +0.5% for the quarter and 1.6% for the year.

This marks the third consecutive quarter of recovery in annual growth since the cycle low in Q3 2024.

Notably, household consumption increased 0.9% for the quarter, versus consensus at +0.65%, with year-on-year growth accelerating 120bps to 2.0%. This is consistent with growth in real household incomes.

Growth was driven by higher discretionary spending across recreation, hotels and restaurants. Spending also rose firmly across health and food. The household savings rate declined 100bps to 4.2%.  

Business investment fell 0.4% for the quarter, with broad-based weakness across non-dwelling construction (-0.9%) and engineering construction (-2.4%).

Growth in dwelling investment decelerated following a strong increase in the prior quarter but remains positive at +0.4%.  

Household spending was up 0.5% month-on-month in July, in line with expectations, with the year-on-year rate accelerating 50bp to 5.1%. 

This paints a pretty resilient picture of spending levels and the trends noted are pretty consistent with the company commentary coming out of reporting season.

RBA Governor Bullock’s remarks on the better-than-expected Australian Q2 GDP and consumption figures leaned somewhat hawkish.

She noted consumption growth was a bit stronger than the RBA thought and that if the trend continues there may not be that many rate cuts left in the current easing cycle.

“We are seeing it (consumer spending) come back, and that’s welcome,” she said.

“We’re seeing the private sector start to demonstrate a little bit more growth now, which I think is positive… That’s good, but it does mean that it’s possible that if it keeps going, then there may not be many interest rate declines yet to come. But it all depends.”

Macro and policy – China

Beijing is reportedly looking at some measures to cool the stock market, which is up US$1.2 trillion since August.

It is suggested these include the removal of some short selling curbs, and follows China Securities Regulatory Commission Chair Wu Qing signalling in late August his intention to consolidate the market’s positive momentum, while still promoting long-term value and rational investment.

Markets

Foreigners bought US$163 billion worth of US equities in June – a record monthly inflow, perhaps suggesting fears of the end of US exceptionalism are overdone.

June’s inflow was nine times the magnitude of the US$18 billion outflow seen from US equities in April at the height of the tariff worries.

With US equities seeing $285 billion of foreign buying in the first half of 2025, cumulative net foreign purchases of US equities are easily back at record levels.

All Things AI

AI-exposed stocks have driven a considerable portion of the market’s overall strength for the last few years.

AI-exposed equities have returned 50% in 2023, 32% in 2024 and 17% year-to-date in 2025, according to Goldman Sachs.

That compares with S&P 500 returns of 26%, 25% and 11% respectively.

Notwithstanding this share-price strength, current valuations of the largest stocks at 28x price/earnings is lower than their peak in 2021 of 40x.

Similarly, the valuations of the ten biggest largest technology, media and telecom (TMT) stocks at a median of 31x is still well below the 41x seen at the peak of the dotcom bubble in 1999.

So far, the spoils have gone mainly to the AI infrastructure companies in the semi-conductor, electrical component, power, tech hardware and industrials sectors, as opposed to companies expected to see productivity or revenues boosted by AI. 

The trend in capex by “hyper-scalers” such as Amazon Web Services, Google Cloud and Microsoft Azure in the next few quarters will be one of the key drivers of sentiment for AI stocks in the back end of 2026.

In this vein, the question is whether we will see hyper-scaler capex intentions increase as the year progresses, as we saw in 2025 when 20% expected growth at the start of the year morphed into 54% growth. There were similar trends in 2024.

The market is grappling with how AI is going to affect software companies.

Is it an opportunity for sales growth in the medium term? Or will it reduce barriers to entry and prove disruptive to business models, pricing structures and ultimately compress profit pools of the software-as-a-service (SaaS) players?

There is little evidence of value creation in enterprise software applications so far. Until some evidence is shown, the market is discounting first and looking to see how things pan out.

The recent share price performance of software maker Salesforce is an example of how this is playing out – down almost 10% in the last three months.

It was also evident in the company’s earnings call where the very first question was whether the SaaS cycle was coming to an end due to the rise of AI.

The company noted in response that “the software industry is going through a tremendous transformation” but that AI large-language models are providing “a new platform that we can build on and extend our applications”.

In terms of productivity we are clearly at the very early stages of the AI rollout with the highest level of adoption in larger firms and concentrated in finance and technology.

AI-related commentary on earnings calls continues to ramp up, with 58% of S&P500 companies mentioning it in the most recent quarterly results season.

While the detail on the use case for AI technology is compounding, very few companies are actually directly linking the use of AI with EBIT or profit margins, though there are increasing  instances of companies quantifying time or productivity benefits.

 

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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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