Brenton Saunders: What’s driving Aussie equities this week

Here are the main factors driving Australian equities this week, according to portfolio manager BRENTON SAUNDERS. Reported by head investment specialist Chris Adams

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EQUITY markets continue to make gains, even with the US large cap indices held back by a negative reaction to Nvidia leading up to and post its result last Thursday morning AEST.

Nevertheless, the S&P 500 gained 0.9% last week, while the small cap Russell 2000 was stronger at 2.8% and the Euro STOXX 50 was up 3.5%.

Energy markets were weaker as the latest round of negotiations between the US and Iran gave some hope for a resolution, with Brent crude down 5.2% for the week.

Further comments from US President Donald Trump over the weekend that “an agreement has been largely negotiated” which involved opening the Strait of Hormuz leant some substance to this, though as of Monday morning this is still yet to be confirmed.

Long-term bond yields in OECD countries continue to rise. This is getting more attention and raising concerns around the possible structural nature of yield increases relating to generic risk premia and the potential for structurally higher inflation.

Domestically, a weaker employment release saw Australian bond yields and implied interest rate trajectories fall.

In contrast, US implied interest rates continue to rise, with 1.5 hikes now priced in by April 2027, reflecting ongoing concerns around rising inflation.

A fair amount of political and market backlash to the Australian budget spilled over into the week, with particular focus on the new macro prudential implications for real estate.

Gulf conflict

There were headlines over the weekend relating to some potential progress with regard to Iran’s contemplation of the latest US 14-point proposal. The details are as yet unknown.

The major ideological points around Iran’s nuclear capabilities and control over the Strait of Hormuz continue to seem intractable.

Both sides are however under pressure to find a solution, but the offramps remain unclear.

There have been some shipments through the Strait in the last week, but volumes remained close to zero.

Both China and Russia suggested that a comprehensive ceasefire in Iran was imperative, in the wake of Russian President Vladimir Putin’s visit to Beijing.

One of the stories of the week has been the precipitous decline in oil and product inventories in the US and other countries.

It still feels like the world could be sleepwalking into a real supply shortage issue without imminent resumption of Middle Eastern exports.

The US Energy Information Administration (EIA) data showed US crude inventories reduced by 7.9 million barrels last week. Including the strategic petroleum reserve (SPR) drawdown, it’s the largest drop in US crude stocks on record. Gasoline stockpiles also fell 1.55 million barrels.

US policy and macro

US data was mostly more of the same; inflation fears are making policy makers more hawkish at the margin and there was little change to the trajectory of real estate (soft) and labour markets (stable).

Housing

US housing data was mixed (and largely unchanged) but continues to reflect a market that is battling with high mortgage rates.

• Residential starts are looking like being down for the fourth year in succession and declined in April as construction of single-family homes dropped by the most in nearly a year, suggesting builders are growing cautious amid higher mortgage rates.
• The main geographical weakness remains in the South.
• Building permits were stronger but driven by multi-family dwellings, while single-family permits declined.
• MBA mortgage applications fell 2.3% for the week and applications for home purchases were down 4.1%, with prospective buyers pulling back as the US 30-year mortgage rate rose 10 basis points (bps) to 6.56%. This mortgage rate has since moved higher to ~6.7% given the move in the US 30-year bond yield.

The Fed

US interest rate expectations continued to increase, with 1.5 rate rises priced by April 2027 in light of high energy prices and its impact on inflation.

During the week Richmond Fed President, Tom Barkin, said the ability of businesses and consumers to tolerate supply shocks would determine whether the Fed can look through higher inflation without raising rates.

Meanwhile, Chicago Fed President Austan Goolsbee said he’s most focused on a resurgence of inflation against a backdrop of mostly stable employment indicators.

Fed Governor Christopher Waller was notably hawkish, suggesting supporting the removal of the easing bias and tabling the possibility of hikes in the absence of inflation abating.

FOMC meeting minutes from late April were released last week. The commentary was incrementally hawkish – and moderately more hawkish than expected – but given there were four dissenters in the meeting, the content is understandable.

The committee pointed to persistently high inflation and the vast majority saw increased risk that inflation takes longer to get back in target.

New Fed Chair Kevin Warsh was sworn in. He is seen as somewhat of a centrist on rates, but definitely not as dovish as Trump.

Not many have much to say on how Warsh’s likely tack on interest rate policy will differ from recent history. Most think he’s a sensible replacement with, if anything, a slightly hawkish bias.

Employment

Despite job cut announcements at Meta and Intuit, employment data remained fairly unchanged/stable and reasonably strong.

Meta began the first round of its planned 10% workforce reduction, cutting ~8,000 roles as it ramps up spending on AI infrastructure and automation. Management noted that workforce efficiency is needed to fund that capital outlay without eroding core operating margins.

Intuit announced ~3,000 roles (~17% of workforce) would be cut as well, citing similar reasoning to Meta regarding a focus on AI spend. US jobless claims were little changed for the week, signalling aggregate layoffs remain muted despite the recently announced job cuts.

Global rates

Concerns around the outlook for inflation are building at central banks globally.

This was clear in the FOMC’s last 8-4 split decision, more hawkish rhetoric from the European Central Bank (ECB) and Bank of England (BoE) and Norway’s Norges bank delivering a surprise rate hike earlier in May, when the market was only ~50% priced.

Every major central bank has seen pricing for their policy rate lift since the Iran war began.

Pricing by the end of 2026 has shifted ~60bps higher for the Fed, ~87bps higher for the ECB, ~54bps higher for the Bank of Canada and 114bps higher for the BoE – for an average increase of 78bps across these major central banks.

The shift in short rates is also reflected in longer dated yields. Across these major economies 10-year yields have risen by an average of 65bps since the Iran war began.

The shift in the curve appears to largely reflect greater inflation uncertainty and the expectation that rates will remain higher for longer.

Australia macro and policy

Employment

Last week’s weak unemployment print surprised the market.

Unemployment increased to 4.5%, versus 4.3% previously and expected by consensus, with some evidence the labour market is feeling the pressure of higher rates and the Middle East shock.

Youth unemployment rose 0.9% to 11.1%.

Both full-time and part-time employment fell, and the decline was concentrated in female employment. Westpac flagged Easter timing as adding noise, but the underlying signal appears genuinely weaker.

The unemployment rate is at a five-year high, although there was some noise in the data and it was not all bad.

Hours worked jumped 0.8% month/month to be 3.5% higher year/year, the highest rate of growth since July 2023.

Nevertheless, this likely rules out the possibility of a June RBA rate hike.

Implied interest rates still show another hike in 2026, but the amount and probability of further hikes have decreased materially in the past month – from 2.5 hikes to one.

RBA minutes

Minutes from the RBA meeting in early May where the board hiked 25bps to 4.35% in an 8-1 vote were mixed.

The board made clear it will tolerate weaker growth and rising unemployment (baseline UR 4.7% by mid-2028) rather than risk inflation expectations de-anchoring after a prolonged period above target. The RBA also acknowledged that it has space to pause and observe.

Given underlying inflation is forecast to stay above 3% until late 2027, and total financial conditions have tightened more in Australia than global peers given rate hikes and currency appreciation, the full transmission lag from hikes in February and March is still potentially to come.

This means the economy could weaken further from here even if rates stay on hold.

The board did explicitly leave the door open to future hikes if the data warrants. The market interpreted this as a potential hold coming for the upcoming meeting.

Federal budget

The 2026–27 federal budget continued to attract criticism.

Given it landed in a high-pressure environment, with inflation at 4.6% and the cash rate at 4.35% after three consecutive hikes, there is a view it is excessive and poorly thought through.

Polling showed as much with a continued rise in One Nation’s numbers, primarily at the expense of the ALP in the last month.

The main points of conjecture have been the impacts on residential real estate – and particularly first-time home buyers – and the impact to trusts.

Auction clearance rates continue to fall against a backdrop of high rates and the partial removal of incentives for residential real estate buyers and investors.

Other data

Westpac consumer confidence rose 3.5% to 83.0 (prior: 80.1, consensus: -1.1%).

• This was a modest bounce from April’s 12.5% plunge, driven by lower petrol prices after the government halved the fuel excise.
• Despite the uptick, the index remains deeply pessimistic and well below the long-run average of ~100, with 85% of respondents expecting further mortgage rate increases.

Consumer Inflation Expectations came in at 5.6% for May, versus the prior month at 5.9%, which is a mild positive for the RBA, but still well above comfort levels.

CBA confirmed it would be passing on the full 25bp RBA hike to variable home loan rates, effective 22 May 2026. Other major banks followed suit, adding to mortgage stress for households already strained by three consecutive hikes.

China macro and policy

Chinese economic data disappointed last week. Retail sales, industrial production and fixed asset investment all disappointed market expectations.

• A lack of consumer confidence and the effects of higher global fuel costs were evident in retail sales, up just 0.2% year/year relative to market expectations for a 2.0% gain.
• This came amid an ongoing decline in house prices – existing house prices fell 0.23% month/month, continuing a prolonged downturn in the housing market. Across China’s largest 70 cities, 49 saw price declines in the month.
• Industrial production of +4.1% year/year fell short of market expectations for 6% growth.
• Fixed asset investment fell 1.6% year-to-date relative to consensus looking for a 1.7% gain.

Broadly speaking, the Chinese domestic economy continues to disappoint expectations, with the export industry remaining the primary support for growth.

Markets

Nvidia result

The world’s biggest company reported Q1 2026 results last Wednesday. It was another “beat and raise” but failed to inspire markets – the stock traded lower before and after the result against the backdrop of a reasonably buoyant semi-conductor sector.

• Nvidia also announced an additional US$80 billion buyback and a dividend increase to US$0.25 per share from US$0.01.
• Management commentary continued to highlight strong AI infrastructure demand, alongside the company’s dominant market position, with Vera Rubin (its next-gen AI computing platform) on track for a H2 rollout.
• This came alongside solid execution in managing supply chain pressures, while maintaining a commitment to mid-70% range gross margins.
• The most notable developments were the newly announced reporting structures, increased attention around their CPU strategy (US$200 billion TAM), and higher capital returns (both buybacks and dividends), which were in focus ahead of the release.

The stock’s reaction is interpreted more as a response to heavy positioning in the stock and semiconductor sector generally. Nvidia’s stock price has had a similar response to the last seven quarterly results on a T+1 basis, despite ongoing beat and raise results.

Australian equities

Broad market moves on the ASX were moderately higher, tempered in the mid and small cap sectors which were hurt by a weaker gold sector (-6%).

Consumer staples (+2.7%), banks (+2.9%) and consumer discretionary (+1.2%) advanced while utilities (-3.7%), communication services (-2.3%) and industrials (-2.0%) lagged.