Elise McKay: What’s driving ASX stocks this week

Here are the main factors driving the ASX this week according to Aussie equities analyst ELISE MCKAY. Reported by portfolio specialist Chris Adams

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A NUMBER of new data points show the economy is holding up just fine.

Surveys of manufacturing purchasing managers are heading higher globally.  This is supportive for global growth and strength in commodities, particularly in a tighter supply environment. 

In the US, the Institute for Supply Management (ISM) manufacturing PMI index entered expansionary territory for the first time since September 2022. A similar manufacturing survey in China also delivered its highest reading in 12 months. 

Initially this manufacturing strength was taken negatively. But as we received ISM services and labour data, the market changed its tune. 

Payrolls were a big beat, but this was offset by a rise in labour force participation and moderation in wages. This points to an economy with big supply-side tailwinds, supporting the ability to grow strongly while keeping inflation in check and avoiding overheating. 

Progress on inflation should keep the US Federal Reserve on track to cut rates this year, though good economic data may limit the pace of the cutting cycle. This scenario remains positive for equities.

There seems to be differing opinions emerging at the Fed, with a lack of consensus on whether the strength of the economy being supply or demand driven. Recent data suggests the former.

Consensus has historically been important. There have been very few dissenting votes during Powell’s tenure.

The market is now pricing a 53% probability for a June cut. The total of implied expected cuts for 2024 has fallen to 67bps.

This week we will see US CPI data, minutes from the rate-setting Federal Open Market Committee (FOMC), European Central Bank (ECB) policy decisions and the start of US first-quarter earnings season.

The ECB is expected to start rate easing cycle in June rather than this month.  

The S&P 500 fell 0.93% last week while the S&P/ASX 300 was down 1.55%.

US economics and policy

Fed speak

Since Fed chair Jay Powell’s last dovish speech on March 20 we’ve heard differing opinions in comments from several FOMC members. 

There are three key areas of focus:

1. A lack of consensus on whether (disinflationary) supply or (inflationary) demand are driving economic strength. 
2. Differing views on how to balance the dual mandate of maximising employment and keeping inflation stable. The question is whether the Fed should accept a longer path back to 2 per cent inflation to ensure a soft landing.
3. Timing risk: If the Fed can’t justify cutting rates in June, it may have to wait until March 2023 — after the US presidential election.

Does a decision to cut rates need to be unanimous?  No, but reaching a consensus is desirable and Fed has a track record of bridging the gap between those who want to move versus those who prefer to wait. 

In 2015 when moving off zero rates, the Fed managed to reach consensus when its promise of “gradualism” was enough to get all members on board.

US payroll data

March non-farm payrolls beat expectations by a huge margin, rising 303k versus 214k expected. The three-month average gain of 276k / month is the highest level since March 2023. 

However, a rapid rise in US immigration has reduced the effectiveness of non-farm payroll growth as a historical indicator, with an estimated 200k / month increase in labour supply versus a historical growth rate of 100k / month.

It’s more relevant to look at other measures to determine whether the labour market is tightening or not. 

On such measures, the unemployment rate down 3bps to 3.83% and average hourly earnings (AHE) were largely in-line with expectations. 

The unemployment rate benefited from a 498k surge in the number of employed people. The labour force participation rate increased to 62.7% with prime age sitting at 83.4%. 

AHE increased 0.3% month-on-month and 4.1% year-on-year, continuing its downwards trend. Though it is still running ahead of the 3.5% rate estimated to be compatible with the Fed’s 2% inflation target. 

US manufacturing health

The ISM services index — a survey that gauges how busy factories are and how confident purchasing managers are about the future — fell to 51.4 in March. That was below expectations of 52.8 and down from 52.6 last month.

Typically a score of above 50 indicates manufacturing is expanding and the economy might be growing, while scores below 50 suggest a slowdown, with fewer orders and production.

About three quarters of the decline came from lower supplier delivery times. Business activity improved slightly from 57.2 to 57.4 — its highest level in six months. 

Importantly, we did see “prices paid” drop to a four-year low of 53.4 (down from 58.6) suggesting upward pressure on prices from labour cost is easing further. 

This has also been a good lead indicator for underlying core personal spending (excluding housing), suggesting a return to pre-Covid inflation levels are on the way.

Bond yields

Bonds moved 19bps higher last week off the back of strong payrolls. They are up 52bps in 2024.

This move has been driven almost exclusively by better growth expectations in 2024. 

US prices back on track

The Fed’s preferred read on inflation is the Personal Consumption Expenditures index, which tracks the prices Americans pay for everything from groceries and petrol to rent and haircuts.

The latest data was released on Good Friday.

Core PCE (which excludes volatile measures such as food and energy prices) rose by 0.26% in February — which was in line with consensus expectations of 0.3%, and up 2.8% year-on-year. 

January data was revised up from +0.42% to +0.45%, driven by medical services inflation from the Producer Price Index, which tracks business costs.

This brings annualised inflation for the last 3 months to 3.52%. 

Core goods inflation accelerated 0.31% after three consecutive negative prints, primarily driven by a jump in prices for video and IT equipment. 

Core services (excluding rent) increased 0.18%, but three-month annualised is now tracking at 3.7% due to the big January print.   

US consumer spending

Personal income grew 0.3% in February — slightly weaker than expected. 

Consumer spending rose 0.8% (versus consensus of +0.5%) in February, with much stronger services consumption (+0.9% in February and +1% in January).

Airfares, recreational services (such as gambling) and financial services were the biggest drivers of services spending. In contrast, goods consumption only increased 0.5%.

US economic growth

The Atlanta GDPnow index monitors a range of economic data such as manufacturing figures, consumer spending and trade numbers, to create a real-time estimate of GDP growth.

The latest data from the Federal Reserve Bank of Atlanta estimates US GDP growth is tracking towards 2.5% for the first quarter of 2024 (at April 4).  

Meanwhile the Evercore ISI Trucking survey has improved to the highest level since October 2022 and is showing signs of stabilisation, although still depressed levels by historical standard. There is usually good correlation between trucking survey and US real GDP growth.

Destocking of inventories by retailers appears mostly in the rear-view mirror although, there are not signs of significant restocking activity either.

Surveys of US companies by researcher Evercore ISI are now back in the “solid” 50-55 range on a 100-point scale, having rebounded from the “struggling” 45-50 band.

Global growth

Inflation is coming down in most economies around the world.

Eurozone inflation, having peaked at 10.6%, is now back to 2.4% and within its “normal” historical range.

As mentioned above, surveys of purchasing managers (PMIs) have been heading higher, which is supportive for global growth and strength in commodities, particularly when combined with a tighter supply environment. 

• In the US, the ISM manufacturing index was 50.3 for March 2024 (versus consensus of 48.3) and was in expansionary territory the first time in since September 2022.
• China’s NBS manufacturing PMI picked up to 50.8 in March 2024 from 49.1 in February, the highest reading in 12 months and ahead of consensus.  This was well received by the market with the Hang Seng Index rallying 3%. 

Historically, copper is the biggest metal beneficiary of re-accelerating global manufacturing PMIs, with an average 25% move over the 12 months following a PMI trough, slightly ahead of zinc and nickel. 

Unemployment rates in most major economies have also remained low and in check, with some signs they are beginning to rise.

Australia

Inflation data for February came in below expectations, moderating to 3.4% (consensus at 3.5%) and unchanged from January. This is the equal slowest since November 2021. 

Goods inflation eased to 2.9% year-on-year (from 3.1%) but services lifted to 4.2% (from 3.7%). 

Markets

It was a generally soft week for markets with bright spots among some commodities such as oil, copper and gold. 

Consumer discretionary (-2.8%) was one of the worst-performing sectors in the US. Trading updates caused concern despite strength in recent consumer spending and labour-market data.

Investors are concerned that recent management commentary from consumer-facing companies suggests some signs of weakness.

Luxury goods house Ermenegildo Zegna was down 15% on Friday as they guided first-quarter revenues lower.

Costco missed consensus US sales estimates for February. Lulu Lemon, Nike and Ulta have all recently issued disappointing forward guidance.

Last month, McDonalds called out a “challenging consumer environment” while Darden Restaurants recently missed on revenues.  

Oil was up 4% last week and over 18% for the year, after an Israeli strike escalated worries of a broader Iran-Israel war. This is feeding into gasoline futures which are up 80c this year — not helpful for inflation.

Global supply of public equities is getting smaller, with a net decline of $120 billion so far this year, compared with a total net decline of $40 billion in 2023.

The number of listed companies in the US has fallen from >7k in 2000 to <4k today. 

US earnings season is due to start next week and expectations are set for a bullish 2024.

Consensus expects 3% year-on-year EPS growth for the aggregate S&P 500 index, a deceleration from the 8% growth posted in 4Q23 earnings season.

This quarter’s expected growth rate is the highest pre-season bar set by consensus since Q2 2022.

Notably, aggregate results have exceeded pre-season EPS growth estimates in each of the previous four quarters by an average of 4%.

Bottom-up consensus expects the S&P 500 will post 10.9% net margins in Q1, a 28bps quarter-on-quarter contraction but a 2bps year-on-year expansion.

Energy, materials, and health care are expected to post year-on-year margin contractions >100bps.

The 10 S&P 500 stocks with the largest market caps are expected to expand margins by nearly 400bps year-on-year while the remaining 490 firms in the index will see margins fall by 57bps.

Looking back at Q1 2024 performance, areas like AI, copper and obesity drugs all performed well and are expected to continue to be focus areas for the remainder of the year.

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About Elise McKay and Pendal Australian share funds

Elise is an investment analyst and portfolio manager with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.

She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.

Pendal Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.

Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.

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

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