Crispin Murray: What’s driving ASX stocks this week?

Here are the main factors driving the ASX this week, according to CRISPIN MURRAY. Reported by portfolio specialist Chris Adams

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MARKETS have been emboldened by several factors: continued signs of slowing inflation with a soft landing, signals from policymakers that possible rate cuts are on the horizon, and a failed meeting between OPEC+ constituents which drove oil prices back to recent lows.

This growing confidence in slowing inflation, combined with the unwinding of bearish positioning in the markets, has driven the S&P500 to calendar-year highs.

Since the end of October, the US Dollar has fallen about 3%, while US 10-yr Treasury yields are some 70 basis points (bps) lower, and oil is down about 8%.

This has all contributed to the S&P 500 rallying 8.9% in November.

This risk-on rally has led to the Goldman Sachs US Financial Condition Index easing the most in any single month for over forty years. And the VIX – a measure of volatility – has fallen from 19 to 13, which is a post-pandemic low and also signifies market confidence.

Interestingly, US Federal Reserve (the Fed) board member Christopher Waller’s comments last week fuelled rate cut expectations – sentiments Chairman Powell chose not to reverse in his speech on Friday.

The S&P/ASX has lagged the US, but still posted a 5% return for November.

It still sits about 7% below 2023 highs, reflecting a worse inflation/growth trade-off than in the US, which leaves policy risks higher here.

The S&P/ASX 300 returned 0.53% for the week, while the S&P 500 was up 0.83%.

Economics and policy

Inflation data continues to trend in the right direction.

The US Personal Consumption Expenditures index (PCE) was in line with expectations, with the headline measure flat month-on-month and up 3% year-on-year.

Core PCE was up 0.2% month-on-month and 3.5% year-on-year, while the core services ex-housing PCE (the Fed’s preferred measure) rose 0.1% month-on-month versus 0.4% in the previous month.

This shows we are back to a clear, slowing trend.

The weakness in oil has also helped reinforce these positive signals, while US macro data has also been softer – though not to a point that could fan recession concerns:

• There were some softer signals in the labour market, with continuing claims ticking higher. US payroll data is due later this week.
• US Real Consumption growth has slowed, rising 0.2% month-on-month and 2% year-on-year, even with demand bolstered by a fall in gasoline prices.
• Real disposable income growth picked up 0.3% month-on-month, the fastest rate in five months. This highlights one of the potential supports for the US economy into 2024, as wages catch up and inflation falls.
• The rundown of excess savings has supported consumption. Though this month savings rates improved slightly to 3.8%, this is still down from 5.2% six months ago.
• The Fed’s “Beige Book”, which includes anecdotes at a regional level, is also highlighting slowing activity and softer labour markets.
• The US ISM Manufacturing PMI data was slightly weaker than expected, staying flat month-on-month at 46.7 versus consensus at 47.6. The production and employment components both fell month-on-month, while orders improved.

All these signs of slowing are validated by the Atlanta Fed GDPNow tracker which – in previous quarters – has been a good predictor of economic growth proving more resilient than consensus expectations.

Now, it is slowing sharply.

Elsewhere, eurozone inflation was weaker than expected too.

Core CPI fell 0.15% month-on-month. The three-month annualised rate is 0.65% and is running at 4.9% year-on-year. Services inflation is rolling over, albeit with some one-off drivers, such as packaged tour prices.

The Fed

These signals are fuelling a bond market rally, which has been reinforced by Fed speakers.

Waller really fired things up, saying that if the data was to continue on the current trend for the next three-to-five months, then the Fed would have to consider rate cuts on the premise of keeping the real rate flat.

This was the first signal that the March meeting could be “live” for a cut.

Though he is not seen as central bank leadership, Waller has been hawkish through this inflationary cycle.

On Friday, Chairman Powell chose not to offset Waller’s comments – noting that policy is restrictive and putting downward pressure on growth and inflation, that the full effects of tightening have not been felt, and that the Fed remains “data-dependent”.

However, Powell also said it was premature to speculate on when policy may ease.

This has all been taken positively by a market that is keen to pull the trigger on a peak in the rate cycle. The first market-implied rate cut has been brought forward from June to April and the number of cuts for 2024 has increased from three to five.

There is a risk that the market is getting ahead of itself here, as it did in March and April of this year.

There is a self-regulating aspect to the US economy in that the rally in bonds and a weaker US Dollar already provide looser financial conditions, reducing the need for actual rates to be cut this quickly.

Markets

November’s equity market displayed some of the hallmarks of a liquidity-driven rally.

For example, the more speculative end of the technology sector outperformed the NASDAQ, suggesting some rotation away from larger tech names.

Within Australia, small-caps outperformed larger caps.

Commodities

Gold has been a key beneficiary of the shift in rate expectations, testing all-time highs.

Gold mining stocks, which lagged the gold price move in October, are now catching up and made gold the best-performing sector last week.

Copper also showed signs of life last week, despite the outlook for slowing growth.

This partly reflects supply disruptions, with the First Quantum Cobre Panama mine contract (which represents 1.5% of global supply) being ruled as unconstitutional and the President saying the mine would be closed.

First Quantum have taken the matter to the International Court of Arbitration.

Oil is testing its lows for the year, after the OPEC+ meeting failed to result in a new target for 2024 production cuts; instead, there is to be a deepening of existing voluntary cuts into Q1 2024.

Theoretically, this implies 700,000 barrels-per-day (bpd) of additional cuts.

Saudi will roll its existing voluntary cut through to March and Russia said it would raise its cut from 300,000 from 500,000 bpd. Elsewhere, the UAE, Iraq and Kuwait have all offered to cut by an additional 163,000, 223,000 and 153,000 bpd, respectively.

But the issue is that the market has no conviction in these cuts being met.

For instance, Russia is cutting exports – not production – and sanctions have not worked. The same is true for Iran. Meanwhile, Angola said it wouldn’t follow the deal and Brazil, which was added to OPEC+, said it would not be party to quotas.

The scale of the cuts, the limited impact on prices, and the prospect of a seasonally weak Q1 leave the market believing the additional cuts may prove to be less than 100,000 bpd and insufficient to offset weakness in oil.

We note that oil price weakness relates more to incremental supply in 2023 from US shale and Brazil – plus more supply from Russia and Iran reaching the market – than any demand weakness.

The concern is that any slowing in the economy could compound the imbalance.

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

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