ASX outlook: What’s driving Aussie equities this week

Here are the main factors driving the ASX this week, according to Pendal investment analyst JACK GABB. Reported by portfolio specialist Chris Adams

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THE first central bank domino fell last week.

The Swiss National Bank pushed through a surprise 25bp cut to 1.5%, pre-empting expected moves by the US Fed and European Central Bank as soon as June.

The Fed kept rates unchanged but reiterated that it expects three cuts this year.

The ECB continues to flag June as the month by which it should know whether to cut. And even Bank of England hawks have dropped their push for more hikes.

It is small wonder then that the Reserve Bank of Australia walked back commentary warning of further hikes.

In short, most central banks appear increasingly poised for a scramble to cut rates, despite plenty of macro-level data suggesting there’s no need to do anything quickly. 

Against that backdrop the S&P 500 rose 2.31% (its best week since January) and hit another record high – its 20th year-to-date.

The S&P/ASX 300 also managed reasonable gains, up 1.29%.

Though neither matched Japan. The Nikkei jumped 5.6% on further signs the economy was strengthening – forcing the Bank of Japan to raise rates for the first time in 17 years.

Bonds rallied on higher rate-cut expectations, with yields on longer-dated Treasuries ending the week on lows.

It’s been a volatile month and a tough quarter for commodities, though most moved higher last week.

In particular lithium spodumene rose 18.2%, recovering from an oversold position.

Oil ended the week flat, giving up mid-week gains. Brent crude remains up 11% YTD, but lower gas prices and freight rates are acting as an inflationary offset.

Commodity Trading Adviser positioning in commodities was unchanged from the previous week with strategies continuing to hold “max long” positions in oil and gold, silver and copper.

Rate expectations

The US Fed remains odds-on to cut in June. Expectations were up 19% last week despite better-than-expected economic data released after the meeting.

We also note the Core Personal Consumption Expenditures (CPE) index – the Fed’s preferred gauge of inflation – is accelerating.

In Australia, stronger unemployment data offset the RBA’s shift to a more neutral stance, with a full cut now not priced in until November (versus September previously).

However, if the Fed and ECB cut in June, pressure will mount for the RBA to follow sooner.

US outlook

The Fed held rates unchanged for the fifth meeting in a row, as expected.

More importantly, it stuck to its view of three cuts by year-end. This was the main driver of a positive market reaction, though we recall the market started the year pricing in seven cuts.

As has previously been discussed, US inflation continues to move in the right direction despite the odd bump.

The Fed “judges that the risks to achieving its employment and inflation goals are moving into better balance”, according to Fed chair Jay Powell.

However it was a lot closer than the market reaction suggested.

Changes in the “dot plots” of each member’s expected rate levels very nearly skewed the median towards two cuts – which would likely have driven a different market reaction.

The market was also happy to shrug off a reduction in expected cuts next year from four to three, as well as a lifting in long-term rate expectations from 2.5% to 2.6%.

Other key changes to 2024 forecasts included raising expected inflation from 2.4% to 2.6%, expected GDP from 1.4% to 2.1% and cutting expected unemployment from 4.1% to 4%.

Powell also said it would be appropriate to begin tapering so-called quantitative tightening “fairly soon”.

Better GDP and employment forecasts weren’t the only indicators that the US is economy is doing well.

In data released after the Fed meeting, existing home sales rose 9.5% month-on-month to 4.38 million – the highest point over the past year and ahead of an expected 3.95 million.

The Conference Board Leading Index (a composite index that averages ten key economic variables) also rose 0.1% for the month, versus an expected 0.1% fall. It was the index’s first rise since February 2022.

As we highlighted back in November, this index has bottomed at a median of 61 days before the end of every recession since the 1969-70 downturn – and stocks have gained a median 23.4% in the year after these troughs.

The most recent trough was April 2023. Since then the S&P 500 is up 26%.

In short, the data is coming in stronger. However, as one commentator put it: “This is a Fed that wants to cut rates.”

The next Fed meeting is May, though the market is only pricing in a 16.5% chance of a cut then.

Instead, committee members are likely to wait for more CPI prints. Three more are due before the June decision, with the last one the day before their next meeting.

It seems inconceivable that the Fed could cut in November given the US presidential election.

So that leaves just four meetings (June, July, September and December) to put through three cuts.

Australia

There were no surprises from the Reserve Bank’s mid-week meeting (rates were held at 4.35%), though we noted a change in language “in response to some data that makes us more confident about the path we are on”.

The RBA effectively walked back commentary warning of further hikes, by “not ruling anything in or out” rather than the previous “a further increase in interest rates cannot be ruled out”.

Semantics maybe, but there’s no doubt the previous stance was increasingly at odds with other central banks eyeing rate cuts sooner.

At this point the Fed is rated 85% chance of a cut by the end of June, the ECB above 90% and the RBA at only 40%.

There are three factors affecting the outlook for Australian interest rates:

1) Labour market challenges remain

One issue the RBA has to contend with is continued strength in the labour market.

Data after the RBA meeting revealed unemployment declined to 3.7% in February, down from 4.1% prior (4% expected). Some 116,500 jobs were added in the month versus 40,000 expected (500 prior).

While the data can be volatile, it nevertheless challenges a dovish view and sent rate cut expectations lower.

We note that is a parallel with the Fed, where Powell has previously noted that “in and of itself, strong job growth is not a reason for us to be concerned about inflation”.

This is only an issue if workers are spending and driving up inflationary pressures. Still, it is something to watch.

2) Then there’s the tax cuts

Some $20 billion in annual income tax cuts will begin kicking in from July 1.

This is clearly inflationary – some estimates say it is worth two-to-three rate cuts – and may well encourage the RBA to pause while gauging the inflationary impact.

3) Borrowers are coping

Commentary from the RBA Financials Stability Review added more weight to a hold-for-longer view.

Despite mortgage repayments rising 30-60% since May 2022, borrowers are seen as being able to cope if rates stay higher for longer.

While arrears would rise, they are expected to remain low at less than 1% in terms of home loans 90 or more days in arrears.

Japan

As expected, the Bank of Japan became the last central bank to exit the era of negative interest rates, raising the benchmark to an eye-watering 0.0-0.1% from -0.1% – the first increase in 17 years.

The move marks a step back towards mainstream central bank policy after decades of experimentation.

While negative rates no doubt helped stem the tide of deflation, ultimately it was quantitative easing, Covid and Russia’s invasion of Ukraine that drove inflation back above 2%.

As a former BOJ director in charge of monetary policy said: “the negative rate did nothing, nothing at all” to stoke inflation.

Interestingly, the start of Japan’s last three hiking cycles (going back to 1986) has preceded a global recession.

Though we note that is clearly at odds with most of the current macro data.

Markets

It was a good week for nearly all sectors in the US last week.

Tech stocks continued to do a lot of the heavy lifting – apart from Apple, which fell on an anti-trust investigation.

Artificial intelligence was again front and centre with Nvidia up for the 11th straight week after holding its GTC event (the ‘Woodstock of AI’) which packed in some 11,000 people.

Industrials also did well with bellwether FedEx reporting a third-quarter beat.

Real estate was weaker, with Equinix down on a short report.

Elsewhere Nike and Lululemon reported weaker results – the latter warning it had seen a shift in the shopping behaviour of its high-end US consumers.

Overall though it was a good week, pushing the price/earning multiple back to January 2022 levels.  Materials led in Australia, offsetting weakness in utilities and consumer staples.

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About Jack Gabb and Pendal Focus Australian Share Fund

Jack is an investment analyst with Pendal’s Australian equities team. He has more than 14 years of industry experience across European, Canadian and Australian markets.

Prior to joining Pendal, Jack worked at Bank of America Merrill Lynch where he co-led the firm’s research coverage of Australian mining companies.

Pendal’s Focus Australian Share Fund has an 18-year track record across varying market conditions. It features our highest conviction ideas and drives alpha from stock insight over style or thematic exposures.

The fund is led by Pendal’s head of equities, Crispin Murray. Crispin has more than 27 years of investment experience and leads one of the largest equities teams in Australia.

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

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands.

Find out more about Pendal Focus Australian Share Fund  

Contact a Pendal key account manager

 

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