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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THE startling US jobs data from 1 August continues to set the tone for markets.

Large revisions to non-farm payroll data for previous months saw the three-month average monthly private sector jobs growth drop from ~150k to ~50k.

The resulting seasonally adjusted annual rate (SAAR) growth in private jobs of 1% versus the previous three months is a level rarely seen outside of times that the economy is either entering or exiting recession.

The market reacted quickly, shifting from a 37% to a 90% implied chance of a US rate cut in September. There is now an implied 57bps of cuts for the remainder of 2025, versus 40bps prior to the jobs release. 

This reflects the view that the US Federal Reserve will react to the material shift in recession risk that the jobs data revision embodies. Two Fed members – Mary Daly and Neel Kashkari – pivoted dovishly in their rhetoric in repose to the data.

Unease about recent Treasury auctions probably limited the benefit of the more dovish Fed positioning over the course of the week.

The combination of an increased chance of near-term rate cuts and a US reporting season coming in well above prior market estimates – and demonstrating the AI theme remains intact – saw equity markets heading back to all-time highs.

The S&P 500 gained 2.4% and the S&P/ASX 300 gained 1.7%.

Under the surface, dispersion of returns has been very significant, the spread of good and bad results has normalised, and volatility on results day (for poor results) is at new highs.

If the current setting of sub-par growth and inflation upside risk remains then we can expect a continuation of quality factor outperformance, though the extent may be limited by the current valuation premium.

Elsewhere, European Central Bank President Christine Lagarde flagged that EU rates “are in a good position”, suggesting a reasonably high bar for further cuts in the face of expectations that inflation will enter undershoot territory in 2H25.

The Bank of England required an historic second round of voting to achieve the 5-4 result required to cut rates 25bps.

This week is data-heavy in the US, with July CPI on Tuesday.

Goods prices will be under scrutiny amid expectations for tariffs to start having a more meaningful impact. The PPI will be out on Thursday, while retail sales for July and preliminary University of Michigan sentiment for August cap off the week on Friday.

US Federal Reserve

President Trump announced that he would nominate Stephen Miran, a former hedge fund executive turned top economic adviser, to fill the temporary vacancy on the Fed Board of Governors caused by the resignation of Adriana Kugler. 

Kugler’s term was due to end in January 2026.

Miran’s main focus has been on the overvaluation of the US dollar as a result of its role as the global reserve currency. The US dollar trade-weighted index fell 1.0% for the week.

Miran has also previously expressed a preference for shortening Fed member terms and allowing the President more scope for firing incumbents. He has also promoted the pro-growth and deflationary aspects of tariffs.

Christopher Waller is firming in the betting as the next Fed Chair, with a 29% chance versus 9% for Kevin Hassett and 6% for Kevin Warsh, though it appears a few more names have been added to the list of potential candidates over the last week or so.

San Francisco Fed President Daly took a turn towards the more dovish Fed faction of Waller and Michelle Bowman.

Daly noted that it could take six months to find out whether tariffs will push up inflation persistently, but that while she was “willing” to leave rates on hold last week, the slowing labour market sees her increasingly uncomfortable about making that same decision in upcoming meetings.

Minneapolis Fed President Kashkari followed suit, noting that “the economy is slowing, and that means in the near term it may become appropriate to start adjusting.” He stated that two quarter-percentage-point rate cuts by the end of the year would be reasonable.

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Macro and policy US

When the Fed held rates steady in July, part of Chair Jay Powell’s justification was that employment data remained solid, based on the June report showing the three-month average monthly addition of 150,000 jobs.

Three days later, that 150,000 jobs was revised down to circa 50,000 – suggesting the situation is not so solid.

Over the last five months the Bureau of Labor Statistics has revised nearly 600k jobs away.

Post-revisions, US private employment has increased only 52k per month over the past three months, with gains stalling outside the health and education sectors. Government jobs actually fell 16K per month over this period.

Private payroll growth is now below 1% SAAR over the past three months. Since 1970, that has only been seen three times outside of periods leading into or out of recession – in 1995, in 2005 and this time last year.

This downshift in labour demand does not suggest we are seeing a slide into recession. There is still evidence of labour hoarding and credit conditions remain benign. But a stall speed alert has been sounded.

Given a heightened sensitivity to recession risk, the July labour market report is likely to have had a significant impact on the Fed’s thinking.

Elsewhere, initial jobless claims rose to 226K in the week ending 2 August, up from 219K and slightly above the consensus expectation of 222K. 

Initial claims have been within a range of 210-to-250K for the last year. However, a couple of leading indicators suggest we may return to the top end of that range soon.

First, labour firm Challenger, Gray and Christmas’s July measure of job cut announcements, excluding federal government, was 13% above its 2024 average. 

Also, the Cleveland Fed estimates that the number of layoffs notified in June WARN filings was 24% above the 2024 average.

Continuing jobless claims increased to 1,974k in the week ending 26 July, up from 1,936K the week before.

This is the highest level in four years and is further evidence that payrolls are rising below the pace required to keep the unemployment rate steady.

The current level suggests a roughly 0.2pp increase in the unemployment rate, which was reported as 4.2% just over a week ago.

This, alongside other indicators consistent with higher joblessness, suggest the unemployment rate will rise in coming months and may exceed the FOMC’s end-year forecast of 4.5%.

Macro and policy Australia

The focus this week will be the RBA’s August Monetary Policy decision – due on Tuesday – and the accompanying Statement on Monetary Policy.

The market overwhelmingly expects the RBA to cut the cash rate by 25bps to 3.60% in a unanimous decision.

We will also see updates on the labour market and wage growth.

Markets

US 2Q25 reporting season

With 90% of S&P 500 companies having reported, fears of a post-Liberation Day earnings rout have been squashed.

The blended earnings growth rate for Q2 S&P 500 EPS currently stands at 11.8%, well above the 4.9% expected at the end of the quarter.

Thus far 81% of companies have beaten consensus EPS expectations, versus a five-year average of 78%.

The blended revenue growth rate is 6.6% and 81% of companies have surpassed consensus sales expectations, better than five-year average of 70%.

In aggregate, companies which are beating expectations are doing so by 8.4%, which is better than the 6.3% average over the last four quarters, but below the five-year average of 9.1%.

Companies are reporting sales that are 2.4% above expectations, which is better than both the 0.9% one-year positive surprise rate and the five-year average of 2.1%.

56% of companies raised their full-year EPS guidance, versus a long-term average of 46%.

Looking at year-to-date returns from the S&P 500, the market cap-weighted return has been 9.5%, but the median S&P 500 stock has only returned 3% and remains 12% off its 52-week high.

At the top end of the distribution, a basket of AI-exposed equities has returned 26%, among the strongest of any investment theme. The market has also rewarded themes such as cyclicals outperforming defensives and large caps outperforming small caps.

There has been divergence within themes. Among defensives, for example, the AI-exposed Utilities sector has done well while Health Care has lagged. Within cyclicals, commodity-exposed sectors like Energy and Materials have lagged other areas like Industrials.

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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