Crispin Murray: What’s driving ASX stocks this week

Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by investment specialist Jonathan Choong

• Find out about Pendal Focus Australian Share fund
• Pendal’s Crispin Murray reviews the lessons from 2023 and outlook for 2024

THERE was nothing to de-rail the market’s bullishness last week, after the US Federal Reserve signalled its inflation mission had been accomplished.

The reaction was very positive with the S&P 500 up 2.5%, now 25% higher year-to-date.

US yields also fell by 30 basis points (bps) and have now ended up where they started at the beginning of the year.

Market price action is positive, with breadth widening and momentum indicators breaking higher and indicating the pathway to moderate growth and falling rates (ie a soft landing) is in sight.

Near-term consolidation will likely occur in the short term before another move higher into the start of 2024, which bodes well for risk assets.

In addition, last week we saw mildly positive inflation data on a net basis, with US economic data supportive of no imminent recession.

In Europe, the ECB and BoE both took a more cautious stance on the prospect of rate cuts – with the former struggling with weak economic data and the latter more understandable given England’s inflation.

China’s policy meetings were mildly disappointing. There were no strong policy signals, but the background message appears to be that fiscal stimulus would continue to be used to prop up growth.

The S&P/ASX 300 was up 3.5% for the week. The Australian economy continued to signal that things were better than sentiment suggested with a strong employment report.

This was reflected in a break higher in the Australian dollar to more than 67 cents.

Economics and policy

Inflation data came in as expected and continues to trend downward on a net basis.

In November, US CPI was higher at 0.1% month-on-month and 3.1% year-on-year.

Core CPI was firmer at 0.28% month-on-month and 4% year-on year.

There was a bit for the bulls and bears – with core goods seeing material disinflation despite a strong auto inflation component, which should unwind.

The service component was not quite as favourable, with rent growth remaining higher than expected. This is somewhat discounted, as more real-time measures of rents are now flat year-on-year.

Core services ex-OER (Owner’s Equivalent Rent) and rent also saw a small re-acceleration over a three-month period.

Medical services and health insurance were the main drivers in this underlying core services pick-up, but it should be noted that these services are known to lag the most – suggesting that inflation is not, in fact, rebuilding.

This will make the next PCE print (the Fed’s preferred measure for inflation) important, as we are seeing a divergence here from the CPI.

We also saw weaker PPI data in the US, and Michigan inflation expectations also fell back down.

In other US economic news retail sales bounced back, up 0.3% versus expectations, though negative revisions reduced part of this.

The underlying trend looks to be around 2.5% growth, which is consistent with the outlook for a soft landing. This means the overall inflation trend is still supportive for the Fed to shift its policy signal, with the headline target of 2% now plausible.

The Fed

In its meeting, the Fed clearly shifted its policy bias.

The market was initially wary that Chairman Jerome Powell would seek to settle things down given a fall in financial conditions since he spoke, and a warning from Fed member Christopher Waller.

But we got a set of dovish signals:

• The dot-plots signalled a move from two to three expected cuts in 2024
• Powell noted there had been discussions on how long to keep rates on hold before cutting. This was expected to be a topic for a more detailed discussion going forward
• Powell noted good progress on inflation, including core and core services
• He also talked about the risk of over-tightening. This was an important shift, relating to the central bank’s desire to avoid having to cut rates too far this cycle
• When pushed about the current easing of financial conditions, Powell did not use the opportunity to diffuse the reaction.

All up, the meeting was taken as a green light for markets.

The following day, Fed member John Williams of New York did try to diffuse the message – particularly given the move to March cuts by the market. But it was met with little reaction since the market believed the data would support a cut then.

The market is now expecting six rate cuts in 2024.

There is a concern from some that the Fed has been too dovish, which may prevent a proper slowdown – resulting in a resurgence of inflation. 

European Central Bank

President Christine Lagarde took a more cautious stance than Powell, repeating her message of no cuts in the first half of the calendar year, but her message was largely ignored given the perceived weakness across Europe.

She said the ECB had not discussed the timing of cuts, though the market has been pricing in 150 bps of rate cuts in 2024.

China

November data looked better year-on-year.

For example, retail sales were up about 10%, though they have been weak sequentially.

The outlook remains consistent. GDP growth is steady in the low fives for 2023 and the market expects this slowing between 4.5% and 4.8% in 2024.

Last week, the December Politburo meeting and the Central Economic Work Conference took place, where key economic targets are set (but not announced until March).

Signals were for policy support focused on fiscal policy, though there were no major initiatives which was seen as slightly disappointing.

Australia

Employment data was much stronger than expected (up 61,500) despite a marginal rise in unemployment (to 3.9%) given the continued rise in labour supply.

Total hours worked were flat, which implies average hours worked was lower.

This indicates that businesses are looking to save costs by lowering hours rather than layoffs – possibly due to the difficulty of rehiring in the past.

Forward indicators on unemployment still indicate it should be set to rise further, though these signals have so far not been validated.

Markets

The Fed cutting rates is not necessarily a green light for equity markets, as in the end, the economy gets the final say.

If a recession were to occur, the de-rating of earnings would overwhelm the benefits that the lower rates would bring.

This is why GDP growth next year is key.

We are also seeing some interesting shifts in market internals on the back of this. Notably, mega-caps have done their dash and market breadth is rising.

This can be tracked in the relative performance of the Russell 2000 vs the S&P 500.

For small-caps, this is a particularly positive signal for them to outperform.

Another interesting disconnect is that the market has a very different perspective on the economy than some of the traditional leading indicators of growth, shown by the rotation away from defensives to cyclicals. 

This makes early 2024 interesting, as the cyclicals would be sensitive to any weak growth.

In Australia, the ASX saw a broad-based rally with only utilities underperforming.

Rate-sensitive sectors such as REITs and tech led the market.

Energy was supported by the bounce in oil and the continued fallout of the potential STO-WDS merger.

Lithium stocks also had a strong bounce back given how oversold they have become.

Lastly, this environment looks to be positive for the AUD, which continues to look good technically.

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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