Sondal Bensan: What’s driving the ASX this week?

Here are the main factors driving the ASX this week according to investment analyst SONDAL BENSAN. Reported by investment specialist CHRIS ADAMS

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A SOFT LANDING is increasingly accepted as the most likely outcome in the US, with inflation-related data in check and the labour market not showing any material incremental deterioration.

Last week, we went from the market pricing next-to-no chance of a 50-basis-point (bp) cut by the Fed following Wednesday’s CPI data, back to an almost 50% chance of a 50bp cut by week’s end.

This drove equities higher and gold to new highs. The S&P 500 rose 4.06%, the NASDAQ was up 5.98%, and Australia’s S&P/ASX 300 was up 1.48%.

The change seemed to come from what was viewed as a leading article in the Wall Street Journal: “The Fed’s Rate Cut Dilemma: Start Big or Small”.

It quoted Jon Faust, who served as senior adviser to Fed Chairman Jay Powell until earlier this year, who said it was a “close call” between whether the first move is 25bps or 50bps but that the number of cuts over the next few months is going to be more important.

Markets also got a boost from the AI thematic as NVIDIA CEO Jensen Huang made positive comments about trends toward densification and acceleration in data centres at the Goldman Sachs Communacopia and Technology Conference. NVIDIA was up about 16% for the week.

Oracle also had an investor presentation that provided bullish future guidance well above market expectations. Its stock was up 14% for the week.

US macro and policy

August Consumer Price Index (CPI) and Producer Price Index (PPI)

There was not a great deal of new information, or anything to derail the path of inflation falling back to 2%, in the August CPI or PPI released last week.

Core CPI rose 0.3%, slightly above consensus but driven by segments that will moderate:

• A 0.33% increase in the core services ex-rents index was primarily driven by a 3.9% rise in airline fares, reversing a five-month decline. The impact of pandemic-related travel restrictions and the surge in travel demand in summer 2021 and 2022 has distorted seasonal patterns.
• A 1.8% jump in accommodation prices contributed an additional 0.10 percentage points to the core services index increase. However, accommodation price growth is expected to average just 0.2% in the coming months, as households cut back on discretionary spending due to a worsening labour market.
• Primary rents increased by 0.37% in August, down from July’s 0.49% rise. However, it was still higher than expectations given that Zillow’s new rents index has averaged a 0.29% increase over the past two years. It is anticipated that primary rent increases will converge to 0.30% over the next six months.
• Auto insurance prices rose by 0.6%, an improvement compared to the previous six months’ average increase of 1.2%. The downward trend in vehicle prices suggests that auto insurance inflation could continue to decline.
• CPI for hospital services increased by 0.4%, which was better than anticipated following a sharp 1.0% decrease in July.

The market’s reaction was an increase in the implied probability of an initial 25bp rate cut from 66% to 83%.

Core PPI increased 0.3%, a modest overshoot of 0.2% consensus expectations.

Importantly, most of the components of the PPI that feed into the personal consumption expenditures (PCE) deflator – the Fed’s key measure of inflation – were lower than expected.

In particular, the unadjusted PPI for domestic air passenger transportation fell by 1.8%, which means that the seasonally adjusted PCE deflator for airline fares likely dropped by about 2%.

There is a debate that airline fares will fall further over the next few months, given the drop in oil prices. But US airlines have been making no money and have cut capacity into the fourth quarter, so oil prices will likely drop to the bottom line and fares could actually go up.

PPI for portfolio management charges, health insurance, and hospital services also rose less than expected. Auto insurance prices were unchanged, in contrast to the CPI equivalent, which has continued to rise rapidly.

Growth in wages – the key input cost for services firms – is continuing to slow in response to the recent fall in the openings-to-unemployment ratio, the drop in the quits rate, and the decline in inflation expectations.

Mortgage applications

US 30-year fixed mortgage rates came back a long way last week.

While still high in an absolute sense, lower rates are already having an impact on the appetite for households to borrow again and breathe some life into the housing market.

Applications for home purchase rose by 1.8% last week. The year-over-year growth rate has improved to -3.5% from -7.9% four weeks previously, and a low this year of -22.8% in early April.

Weekly jobless claims

There was nothing alarming here. Initial jobless claims increased to 230k from 228k, a bit above the consensus of 227k.

Let’s not forget the market panic when this number shot up to 240k in July. Since that aberration, it has been relatively steady at these current levels.

Forward indicators for jobless claims point to the number falling further based on layoff announcement data.

US election

The second US Presidential debate was largely a non-event. While the candidates remain neck-and-neck, post the debate the odds swung marginally toward Harris.

A Harris win is generally seen as a pro-market outcome given spending continues and we don’t have the negative growth and inflation impacts of tariffs from Trump. The election is 5 November, two days before the FOMC meeting.

Australia macro and policy

August CBA retail data confirmed some of the partial-month retail updates from corporates through reporting season.

Some of these numbers may have got a slight bump from the timing of Father’s Day this year and there is likely still some upside from tax cuts.

The conclusion remains that the consumer is holding up quite well in Australia. There still seems no real chance of the rate-cutting cycle beginning in Australia this year.

That said, the NAB Business Survey Index deteriorated for August, with retail conditions one of the big areas of weakness.

The Consumer Sentiment Survey for August was also soft. Compositionally, weaker perceptions of the economic outlook offset a marginal improvement in perceptions of personal finances. Perceptions around the labour market and house prices continued to soften.

The Melbourne Institute inflation gauge, which is a timelier measure of where inflation is headed, points to further easing in Australian inflation back to within the RBA target band.

China

As the S&P 500 retests its highs, Chinese equity markets are retesting their lows as both the property market and domestic demand remain problematic and as policymakers sit on their hands – most likely until after the outcome of the US election.

This underperformance is also being reflected in Australian companies that are leveraged to growth from China.

There are three broad issues in China:

1. High savings rates are leading to lower domestic demand, domestic deflation and a growing trade surplus in goods.
2. The housing problem remains after years of overbuilding. Housing starts and sales are tumbling.
3. Birth rates are low as people lack confidence to have babies, creating a demographic problem.

There is no easy solution, other than perhaps handing out cash and free homes to those willing to have a few children.

On Friday, Beijing approved a plan for the first hike in retirement ages since 1978, raising the age to 63 for men and 58 for women.

China’s export growth for August was stronger than expected at 8.7% year-on-year (YoY), versus 7.0% YoY in July.

Imports lagged and slowed from 7.2% YoY in July to 0.5% YoY in August.

For most of the post-pandemic period, exports and imports have been tightly correlated.

However, from the start of this year imports have consistently fallen short of export growth, supporting a prognosis of weak domestic demand.

Europe macro and policy

The European Central Bank (ECB) cut its deposit rate for a second time this year, by 25 bps to 3.5% as expected.

It also lowered its growth forecasts through 2026, with President Christine Lagarde saying the recovery is “facing some headwinds” and reiterating that the path for rates is not pre-determined.

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Lithium

Lithium equities rebounded over the week following news that CATL (Contemporary Amperex Technology Co. Limited), a Chinese battery manufacturer and technology company, has suspended production of a lepidolite mine in China.

Lepidolite is a mineral from which lithium is extracted.

The announcement drove a short squeeze across the sector, with the suspension expected to take roughly 10% of China’s existing supply, or 3% of global 2025 supply, of lithium carbonate equivalent out of the market.

The suspension is driven by the sharp drop in pricing – with the CATL mine cash cost estimated at US$11k/t, or RMB89k, below where spot was trading.

The news also follows recent moves by Arcadium Lithium and Mineral Resources to defer growth projects and near-term supply.

Pricing has dropped below marginal cost, providing more support to pricing from here.

However, the market remains in surplus and new projects that were approved and/or funded over the past two years will continue to drive material supply growth near term, limiting expected price gains.

Markets

US equity sector performance was led by a rebound in materials (with gold stocks up about 9%), continued performance in tech and interest rate-sensitive sectors like homebuilders.

Energy stocks were the key laggards, even with a small reprieve in oil prices, as the oil price move was more from traders short covering as Hurricane Francine ripped through key oil-producing zones in the US Gulf of Mexico.

In Australia, Materials gained 5.69% and Real Estate 5.65%. Financials were weakest, down 0.76%.

About Sondal Bensan and Pendal

Sondal is an investment analyst with more than 20 years’ experience covering the Retail, Telecom, Media and Transport sectors. He joined Westpac Investment Management in 1999 and has previously held roles with Commonwealth Bank and Bell Commodities.

Sondal holds a Bachelor of Commerce (Finance) and a Bachelor of Science (Maths and Statistics).

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management. 

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