Rajinder Singh: What’s driving Aussie equities this week

Here are the main factors driving the ASX this week, according to portfolio manager RAJINDER SINGH. Reported by portfolio specialist Chris Adams

• Find out about Crispin Murray’s Pendal Focus Australian Share Fund

THE announcement of the new US Federal Reserve Chair last Friday led to a sharp reversal in the previously relentless rise of metals such as silver and gold, while the US dollar bounced off recent lows.

Oil continued its rise on increasing geopolitical risks and Treasury yields were relatively muted in their response.

Global equity markets were relatively flat (S&P 500 +0.35%), with most of the price action occurring in FX and commodity markets.

The Fed maintained rates, as expected, despite a couple of dissenting votes.

The statement and Chairman Jerome Powell’s comments were generally more upbeat on the job market and overall economy, with the current monetary policy settings being described as broadly neutral.

In Australia, December Consumer Price Index (CPI) data surprised to the upside and strengthened the case for the Reserve Bank of Australia (RBA) to begin raising rates at its meeting this week.

Australian equities were similarly flat to their international peers (S&P/ASX 300 -0.02%) however mid (-2.17%) and small caps (-3.08%) were weaker, partially reversing their strong start to 2026.

At a sector level, the Technology sector (-6.61%) was again weaker while Energy (+4.19%) stocks followed their underlying commodities higher.

Macro and policy Australia

Following the strong labour force numbers published on 22^nd of January, all eyes were on the December CPI release in order to give a better understanding of the RBA’s likely course of action.

This CPI release was the first to include both the full monthly and quarterly CPI data series. Most analysts and the RBA continue to focus on the quarterly data series for the time being, due to concerns on volatility and seasonal adjustments for the monthly series.

The fourth quarter headline CPI rose by 0.6% quarter on quarter and the annual rate was up 3.6% year on year (consensus 3.2%). The monthly CPI was 1.0% month on month and 3.8% year on year (consensus 3.2%).

The RBA’s preferred measure, the quarterly trimmed mean, gained 0.9% quarter on quarter and 3.4% year on year, which was above the consensus of 3.2%.

Importantly, the RBA’s most recent published forecast for this measure in the November Statement of Monetary Policy (SOMP) was only at 3.2% year on year. The RBA’s stated object for this measure is a target band of 2-3%.

This print was significant because as recently as the August 2025 SOMP, the RBA had forecast a slowing in this measure to 2.6% year on year – so this latest measure is a substantial upside surprise to its forecasts from only a few months ago.

Diving into the CPI components provided something for both the hawks and doves, especially with the mix of both monthly and quarterly data points.

One of the key drivers of inflation has been increasing housing and this was still strong on the year (+5.5%) but rising only 0.1% for the month of December.

Another key driver was electricity costs – rising over 20% for the year with the end of state-based electricity rebates.

Other strong increases were seen in international holidays and motor vehicle prices.

Governor Michele Bullock explicitly mentioned a focus on the housing, market services (excluding travel), and durable goods groups components of CPI.

She has also previously called out “sticky” services inflation – and this remained the case in this release.

There is a divergence in market views on the RBA’s response to this and other recent economic data.

However, pricing quickly moved to a 70% probability of a rate increase at the RBA’s meeting on 2^nd to 3^rd of February.  

A total of two rate hikes is now factored in by the second half of 2026.

The case for the RBA to maintain a “Hawkish hold” includes:

• The quarterly trimmed mean was only a +0.1% surprise relative to the RBA’s most recent forecast.
• The monthly components indicated a slowing in momentum of key categories of housing and market services.
• The rising AUD provides a deflationary boost particularly via cheaper import pricing.
• By raising rates, the RBA would effectively be admitting the three rate cuts of 2025 were at least a partial mistake.

The case for the RBA to raise include:

• Overall, inflation remains too high with both headline and trimmed being well above the 2-3% band.
• The inflation impulse is accelerating, with two-quarter trimmed mean run-rating at 3.9% annualised.
• Inflation is now broad based – the share of items with inflation annualising above 2.5% is now 60%.
• The RBA may have to make a “triple upgrade” for each of inflation, GDP and labour market at the February meeting.
• The RBA’s 30-year inflation credibility is now at stake, especially in an expansionary fiscal environment.

Other data points released during the week included the Producer Price Index (PPI), showing a 0.8% rise in the quarter and 3.5% annually.

This, like the CPI, showed the inflationary pressures currently in the economy.

Also, the NAB Business conditions and confidence survey rebounded in December with most components suggesting solid momentum in the economy coming into the year-end.

Macro and policy US

FOMC Rate decision

The Federal Open Market Committee (FOMC) maintained the mid-point of the target range for the funds rate at 3.625%, as widely expected.

The vote was 10-2 with only Fed Governors Stephen Miran and Christopher Waller dissenting in favour of a 25-basis-point (bp) rate reduction.

As discussed previously, Miran is US President Donald Trump’s chosen temporary appointee while Waller’s vote was seen as a pre-requisite for him to remain in the running for the Fed Chair role.

The FOMC statement itself contained more upbeat language, noting “economic activity has been expanding at a solid pace” (previously moderate) and while “job gains have remained low,” (previously slowed), “…the unemployment rate has shown some signs of stabilisation.”

Significantly, previous commentary on the downside risks to employment were dropped from this statement.

In the subsequent press conference, Fed Chair Powell commented that the outlook for economic activity has improved since the last meeting.

He also noted that most of the excess core inflation looked to be related to tariffs and his belief was that these effects should fade over time.

Overall, he stated that his assessment was the current Fed policy rate was within plausible estimates of neutral (though maybe at the higher end of that range).

Fed watchers took that statement and press conference to mean that Chairman Powell had delivered his last rate cut before his term expires in May 2026.

The market is now only pricing one Fed rate cut by mid-year, with just under two cuts in total priced by the end of calendar 2026.

Federal Reserve Chair candidate

After months of commentary and speculation, President Trump provided a surprise both in terms of timing and eventual final nominee for the Federal Reserve Chairmanship, announcing that he would put forward former Fed official and economist Kevin Warsh.

Kevin Warsh’s background summary:

• Graduate of Stanford University and Harvard Law School.
• Investment Banking expertise: 1995-2002 at Morgan Stanley.
• Public policy experience: President George W Bush appointed him as special assistant to the president for economic policy and as executive secretary at the National Economic Council.
• Federal Reserve experience: Fed’s Board of Governors from 2006 to 2011.

The market immediately moved to factor in implications of this nomination, versus the other favoured candidates.

While for the last year Warsh has consistently argued that rates should come down – a somewhat necessary stance for candidature given Trump’s statements – he has historically been viewed more as a policy hawk compared to the other Fed chair candidates.

This stems from his previous time as Fed governor during and post-GFC, when he argued that higher rates were needed to kill off sticky inflation even as unemployment was rising.

However, Warsh has recently argued a couple of interesting points, such as:

• The justification for lower rates is that the artificial intelligence revolution is set to unleash a wave of productivity growth that will ultimately be deflationary for the economy.
• The Federal Reserve itself requires significant changes, including reducing the size of its balance sheet and rethinking economic models it currently relies upon.

The move to reduce the Fed balance sheet may lead to higher rates as the Fed reduces its stock of Treasuries – but one potential offset is capital reforms to the banking system to encourage Treasury holdings.

Overall, Fed observers view Warsh as an experienced official who is well credential and pragmatic in his approach, while also quelling any fears about the independence of the central bank.

Any sudden changes to policy will likely be tempered by Warsh taking Miran’s temporary seat and then needing to convince the rest of the voting members.

Markets responded to the announcement in slightly hawkish terms with rates a touch higher, a steeper yield curve, and stock futures lower.

The Warsh announcement also helped to support the dollar by reducing fears of debasement and extended dollar weakness, which led to gold and silver moving sharply lower.

Other economic data

Other data release during the week included:

• Durable goods orders rose 5.3% in November versus consensus at 4.0%, but this was boosted by volatile aircraft orders.
• Consumer Confidence: The Conference Board index dropped to 84.5 in January, the lowest level since May 2014.
• Initial jobless claims dipped to 209,000 from 210,000 while continuing claims fell to 1.827 million.
• Headline PPI rose by 0.5% in December, versus consensus of 0.2%, and core PPI increased by 0.7% versus consensus of 0.2%.

Overall, these continued recent trends in data point to a patchy US consumer but a steady jobs market while the effects of tariffs work their way through the economy

Markets

Overall market sentiment remains elevated, with many indicators – such as ETF flows, put/call and bull/bear ratios – being close to recent highs

US equities finished up 1.5% for January. This has historically correlated with superior returns for the rest of the calendar year, relative to those years beginning with a negative January return.

Microsoft was down 12% on fears of slowing growth for its cloud computing software and questions about the returns from its significant OpenAI investments.

Meta, on the other hand, rose 10% driven by positive AI developments boosting user engagement and ad revenue.

Apple was flat despite reporting net sales rising 16% and the company struggling to source enough chips to meet its customers’ iPhone demands.

Commodities and FX Volatility

We saw extraordinary volatility in commodities, especially precious metals.

In the US, the iShares Silver Trust (SLV) was among the most-traded securities by volume last week, behind only the SPDR S&P 500 and Invesco QQQ Trust, and ahead of Nvidia, Tesla and Microsoft.

Gold hit another all-time high of $5,500/oz mid-week, having only crossed $5,000 on Monday, $4,000 in October 2025 and the $3,000 level in March 2026.

However, the nomination of Warsh as Fed Chair triggered a sharp sell-off on Friday, with gold down 9%, silver down over 25% (the worst day since 1980) and platinum down 17%.

Market observers stated that the stronger dollar and leveraged positions/margin calls exacerbated the moves.

Prior to these moves, the strength in gold has seen the gold mining sector reach 6.4% of the S&P/ASX 200, putting it in-line with major sectors such as Healthcare, Real Estate, Industrials and Consumer Discretionary while being substantially larger than five of the smaller GICS sectors.

Energy added to its strong start in 2026, with Brent crude reaching six-month highs as investors monitor US-Iran tensions.

The US dollar trade-weighted index (DXY) started the week softer on fears of intervention to support the Japanese Yen but ended higher on Friday.

Meanwhile, the AUD continued its strong run, cracking the 70 US cents level for the first time since early 2023.

Another area to watch is the reduction in Australian Investment Grade credit spreads to the lowest level since 2022. This helps at least partially offset the rise in Australian Government bond levels for borrowing costs.

---

About Rajinder Singh and Pendal’s responsible investing strategies

Rajinder is a portfolio manager with Pendal’s Australian equities team and has more than 18 years of experience in Australian equities. Rajinder manages Pendal sustainable and ethical funds, including Pendal Sustainable Australian Share Fund.

Pendal offers a range of other responsible investing strategies, including:

• Pendal Sustainable Australian Share Fund
• Crispin Murray’s Pendal Horizon Fund
• Pendal Sustainable Australian Fixed Interest Fund
• Pendal Sustainable Balanced Fund
• Regnan Credit Impact Trust
• Regnan Global Equity Impact Solutions Fund

Part of Perpetual Group, Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here