What’s driving ASX stocks this week?

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

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IT was a fascinating and action-packed week in the market, though perhaps too action-packed for this time of year.

The news headlines of the week included US Consumer price Index (CPI) and Producer Price Index (PPI) data, local RBA and employment figures, and announcements from China’s Politburo.

While the data itself wasn’t groundbreaking, much of the discussion centred on the finer details and minor variations.

The 10-year yield has surged 80 points since the Fed’s rate cuts began in September. Inflation concerns persist, with core inflation stubbornly high.

The economy shows limited spare capacity in employment, and fiscal stimulus is expected under Trump.

Markets anticipate a rate cut this week, but will Powell signal the end of the rate cut cycle?

In Australia, the RBA opened the door to more dovish monetary policy on Tuesday. However, the door was slightly closed again due to a strong employment report on Thursday showing tightening conditions.

The NAB Business Survey and business turnover were weak, with the public sector providing support.

Liquidity remains positive, supported by seasonal trends, though January could be tricky.

It’s a good time to be cautious with positions and valuations. Market breadth is narrow, and relative valuations are extreme.

Implied volatility is almost non-existent, with Tesla’s surge to $420 and profitless tech stocks keeping pace with the Magnificent 7, indicating frothiness in the market. Google’s new quantum computer chip kept the bulls excited.

Monday’s momentum unwind marked Pure Momentum’s worst day since November 2022, highlighting market vulnerability.

This week, all eyes are on the FOMC and Personal Consumption Expenditures (PCE) data in the US, along with Australia’s Mid-Year Economic and Fiscal Outlook (MYEFO).

US macro and economy

Headline CPI rose by 0.3% (up 2.7% YoY), slightly above consensus. Core CPI also edged up, with a 31-basis point (bp) increase versus the expected 28bp, maintaining a sticky 3.3% over 12 months.

Other highlights include:

• Housing Inflation had its smallest monthly gain since January 2021.
• Core MoM has been stable since mid-year.
• Services Inflation appears on the decline.
• Rent numbers finally aligned with the Zillow Index.
• Super Core remains stubbornly high at over 4%, which should limit the Fed’s ability to keep cutting.
• Goods inflation ticked up after a benign period.

The market is comfortable with the current US CPI story, but persistent core inflation could challenge the Fed in Q1. Goods inflation rising above core services MoM for the first time since May 2023 adds to the discomfort.

With the PCE reading looming next Friday, headline PPI rose a bit higher at 0.4% MoM – surpassing the 0.2% consensus.

This marks the largest monthly gain since February 2023, driven – interestingly – by a spike in egg prices, encouraging a turn to quality and defensives.

Combined with this week’s CPI, the report positions next week’s PCE to only post a modest PCE acceleration, reassuring the Fed that its favourite inflation gauge is on track.

PPI final demand rose 0.4% in November (above the 0.2% forecast), with the prior month revised up to 0.3%. The year-on-year rate increased to 3.0% from 2.6%.

Core PPI was in line at 0.2%, but the annual rate rose to 3.4% from 3.2% after a revision.

Bloomberg noted the surging egg price helped drive some of the beat but indicated other categories suggested a muted increase in the Fed’s preferred PCE measure.

PPI for final demand rose 0.4%, the highest since June, beating the 0.2% estimate. Overall, services costs edged up 0.2% and goods prices (excluding food and energy) rose by a similar amount.

Economists see little change or declines in key service categories, allaying some concerns over recent firming in broader inflation metrics.

Elsewhere, the NFIB US Small Business Survey saw its largest monthly jump ever in November, surging eight points to a three-and-a-half-year high, surpassing the post-2016 election spike.

US initial jobless claims for early December rose by 17k to 242k (versus 220k expected), mainly due to seasonal distortions from the Thanksgiving holiday and wildfires in California affecting around 20k residents.

Insured unemployment claims also trended higher, indicating a cooling labour market.

China

Copper, zinc, and iron ore prices surged after China’s Politburo (the highest political bureau of China’s central governing committee) announced a shift to a “moderately loose” monetary policy for 2025, the first stance change in 14 years.

This announcement on Monday signalled greater easing and a more proactive fiscal policy.

This shift from a “prudent” stance comes as Beijing braces for a potential trade war with the US under President-elect Donald Trump.

With China dominating metal demand, the prospect of rate cuts and increased stimulus spending is a welcome sign for investors seeking stronger economic growth measures.

The Central Economic Work Conference (CEWC) echoed the Politburo’s announcements, focusing on consumption demand as the key priority without providing any novel statements.

The government did announce a widening budget deficit for 2025, and the absence of “fiscal discipline” in post-conference commentary suggests a commitment to achieving economic targets.

More specifics on macro policy and stimulus measures will be revealed at the CEWC and the NPC meeting in March.

A new phrase was used – “enhancing extraordinary counter-cyclical adjustment” – which hints at stronger, unconventional stimulus measures, though details are lacking.

Other macro

Both the Bank of Canada (BoC) and the European Central Bank cut rates by 50bps and 25bps, respectively, which was as expected this week.

The BoC’s consecutive 50bp rate cut, its fifth straight, highlights the urgency to remove policy restrictiveness. Recent policy measures and new tariffs have increased uncertainty and clouded Canada’s economic outlook.

Elsewhere, the Swiss National Bank (SNB) delivered a larger-than-expected cut, Brazil saw a bigger hike, and reports suggest the BOJ may downplay the potential for a hike next week.

Australian economy

At its latest meeting, the RBA Board kept the cash rate target unchanged at 4.35% and the interest rate on Exchange Settlement balances at 4.25%.

While softer-than-expected data was anticipated, the Board made notable changes to its communication.

It now believes “some of the upside risks to inflation have eased” and is “gaining confidence that inflation is moving sustainably towards target.”

Some key phrases that had given a hawkish tone to previous RBA statements were removed:

• “Vigilant to upside risks to inflation” – language used since May.
• “Not ruling anything in or out” with respect to policy – language used since March.
• “Policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range” – language used since August.

The Board still isn’t ready to declare victory on inflation, reiterating that it will take time for inflation to reach the target range.

New language highlights that while aggregate demand still exceeds supply capacity, the gap is closing, and the Board is gaining confidence that “inflation is moving sustainably towards target”.

Moving onto employment data, Australia’s unemployment rate dropped to 3.9% in November, the lowest since March.

Employment rose a solid 35.6k, though total hours worked tracked sideways – indicating there is not much spare labour capacity to go around.

The data supports the RBA’s view of a tight labour market, with unemployment expected to average 4.3% in Q4.

The NAB Business Survey noted current conditions are at their weakest since August 2020.

This weakness is broad-based, especially in trading conditions and profitability. Manufacturing saw the sharpest decline with retail also soft. Government spending is driving growth, while private sector conditions are soft.

The ABS Nominal Business Turnover remains flat and CBA Household Spending is growing at low single digits, while household goods are relatively strong.

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Markets

It was a softer week for equity markets, which intensified further down the market cap spectrum.

Resources outperformed Industrials and Banks, while Tech stocks were hit hardest by rate concerns and sector rotation.

Financials and Real Estate also struggled due to rate expectations, while Staples remained defensive, and Energy held steady.

Two-year Treasuries rose 15bp, and 10-year Treasuries climbed 25bp.

Oil had a positive week, recovering some year-to-date losses. Most commodities saw slight gains, with gold and Bitcoin leading year-to-date performance.

Interestingly, the ASX 300 underperformed other global indices despite Australia’s resource exposure. The current darling, the Russell 2000, also had a notable decline.

The AUD/USD saw little change, while the DXY strengthened.

There was not a lot of action on the upside this week in Australian markets, with most stocks trading lower. Resource stocks led on the upside and high-priced growth stocks led on the downside

There are a few other market observations that investors should keep in mind:

• NASDAQ breaking 20,000 for the first time on record, with global flows leaving other markets and rushing into US equities.
• December is typically a strong month, especially in the days leading up to Christmas.
• Increasing chatter about the market’s narrow breadth with Tech’s leadership. Is it late cycle or time for new leadership?
• Momentum appears stretched and typically struggles in January.
• We are seeing a period of concurrent earnings and multiples expansion, which is not very common.
• There is currently almost no implied volatility in the S&P 500.
• Corporate executive stock sales have reached an all-time high.

About Crispin Murray and Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.

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

Find out more about Pendal Focus Australian Share Fund here.  

Contact a Pendal key account manager here.

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.

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

Contact a Pendal key account manager here