Crispin Murray: What’s driving Aussie equities this week

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

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THE market anticipated the US Federal Reserve’s 25-basis-point (bp) interest rate cut last week.

However, the announcement’s tone was mildly dovish compared to expectations, with Chair Jerome Powell signalling employment was weaker and he was comfortable with inflation trends.

The Fed’s “dot plot” outlook for rates suggested only one more cut, but the market is pricing in two more.

The shift in balance sheet management was perhaps more important, with the announcement of a more aggressive purchase program of US shorter-term instruments, which helped underpin the US 2-year bond.

The US 10-year yield did rise marginally. This reflects the market’s concern about the Fed over-easing and is a feature of this easing cycle given the political pressure on the Fed.

This has the potential to mute the effects of rate cuts, as they do not translate to lower mortgage rates – and therefore support for the housing market.

The S&P 500 gained 0.5% and the S&P/ASX 300 moved up 0.7%.

US equities saw continued significant rotation away from tech – particularly some of the AI-sensitive names – towards small caps and industrials on the prospect of an improving domestic economy.

The tech sell-off is also occurring in Australia, but we are not seeing the same move to domestic cyclicals and small caps given the prospect of potential rate rises.

Resources remain the lead sector domestically, with gold still the strongest component.

US macro & policy

Fed rate cuts

The Fed cut rates 25bp to 3.50-3.75%, as expected.

It was hawkish in the sense that Chair Powell flagged a pause and the need to see data weaker than expected for further cuts.

However, ultimately the meeting was seen as more dovish than expected due to the following observations.

• Powell talked of policy being well-positioned.  While he talked of a pause – given rates are plausibly around neutral and noting this was a unique period in his tenure given risks to both sides of their mandate – he also noted the Fed’s view that payroll growth is overstated by 60,000 per month. This means the average reported rise of 40,000 from May to September equates to a decline of 20,000. In addition, he commented that adjusting for tariffs, the underlying inflation rates is in the low 2% range and that services inflation was coming down. The inference is the Fed sees the labour market as being soft and inflation not as imminent a threat to the upside, so there is less constraint to further easing.

• There were only 2 hawkish dissenters (and one dovish dissent). There were fewer members calling for a pause in rate cuts than the market expected, given the tone of recent comments. The “dot plots” indicated a median of only one more cut, although there were more dots projecting two cuts next year than there are indicating none.

• An aggressive shift from QT to natural growth purchases. The Fed will purchase US$40 billion a month of T-Bills, which reflects the underlying US$20-25 billion to cover maturities plus a catch-up component. These purchases started on 12^th December. This will allow the US Treasury to continue to stack debt issuance at the short end of the yield curve, which comprises about 84% of issuance in 2025 to date. This helps protect the 10-yr bond yield, although that rate has continued to rise gradually in recent months to 4.19%.

• The Fed has embraced a more positive view on growth and productivity. Powell noted that productivity improvements had shifted the Fed’s long-term projection for US GDP growth from about 1.8% per annum (pa) to about 2.0% pa – and that is before factoring in any major gains from AI. The Fed’s forward median economic projections have seen an increase in growth with only a marginal effect on the unemployment rate and inflation expectations slightly lower.

The conclusion is that this was a market friendly outcome, with risk skewed to the downside on rates, and the degree of dissent was less than expected.

The Fed have now cut 75bp in 2025, following on from the 100bp in 2024.

The Fed Funds rate is now broadly in line with the 2-year T-bill rate, which suggests the market sees rates as being close to where they should be.

Market expectations have a 57% chance of a cut in March and 80% by April and is pricing a 90% chance of a second cut by September. flat in 2026.

Fed Chair

We note Powell’s last meeting as Chair is in April – and the battle for the next Chair has livened up.

The odds on US President Donald Trump nominating Kevin Hassett – currently Director of the National Economic Council – have shortened from north of 75% in late November to around 50% now, according to predictive market platform Kalshi.

This was coincident to Trump’s reference to former Fed member Kevin Warsh being a “great” candidate as well. Warsh’s odd surged from the mid-teens to about 40%.

The potential issue for Hassett is his perceived lack of support from the market, which may lead to bond yields rising further if appointed.

The fundamental issue is the same for whomever is appointed; bridging the gap between the President’s expectations to drive rates far lower (Trump cited below 1% to the Wall Street Journal), while maintaining credibility with the bond market.

The Fed Board also unanimously re-appointed all regional Fed Presidents, save in Atlanta, where Raphael Bostic had already announced his retirement.

These are five-year terms and dispels the speculation that the President would intervene and try to stack the board with new, more dovish, members.

The unanimous decision indicates that Trump appointee Stephen Miran was on board.

Economic data

The data on jobs was mixed, but there were no additional signs of weakness.

US job openings were better than expected for October, increasing 7.67 million versus 7.12 million forecast. This is however inconsistent with other jobs data.

The 1.8% quits rate was the lowest outside Covid since 2014, which would signal limited wage pressures in the US economy.

The overall outlook for the US economy looks constructive. It appears that tariff-related headwinds are already beginning to be offset by fiscal stimulus in terms of contributions to GDP. This steps up in Q1 and Q2 2026 as the tax refunds kick in from the budget bill.

Looser overall financial conditions are also likely to help offset the impact of tariffs, which are expected to remain a drag on growth through to Q3 2026.

Consensus expects 2% GDP growth in 2026, but the likelihood of policy support suggests that the risks lie to the upside. Goldman Sachs, for example, is forecasting 2.5%.

Australia macro & policy

The RBA left rates flat at 3.6% as expected, however the tone of the press conference was clearly hawkish.

Governor Michele Bullock effectively called time on the easing cycle, saying the RBA did not consider a cut ‘at all’ and she “didn’t think there are… cuts in the horizon for the foreseeable future”.

She emphasised the upside risk to inflation and didn’t dispute the market pricing of around 40bp of tightening in CY26.

November employment data was weaker than expected at -21,000 (versus the market at +20,000), driven by a 57,000 fall in full time employment.

This took the 3-month employment average to 10,000 per month, compared to 21,000 for the prior 12-months.

The year-on-year growth rate is 1.3% – the slowest since 2021.

Hours worked were flat with the year-on-year rate at 1.2%, down from 2.1% in October.

The weaker job growth signal was offset by a lower unemployment rate, which fell to 4.3%, versus 4.4% expected.

The employment-to-population ratio is 64.0% which is in line with the median level since 2022, so arguably the labour market remains tight. The number of people experiencing job loss is near to record lows.

Given this – and with inflation at 3.8% and GDP growth above trend – the market continues to raise the odds of a rate hike.

February is around a 25% chance, and a full hike is priced in by June. The cash rate is now around 50bp below the 2-year bond yield.

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Markets

US and Australian markets continue to see rotation away from tech/AI. In the US this is towards more industrial and financial names, while in Australia it is to resources and, to some extent, financials.

Oracle’s result compounded the negative sentiment shift. It fell 14% post result and is now 42% below the peak it reached following last quarter’s result, when it announced the surge in its order book.

• Despite future bookings rising 15% to US$523 billion, revenue came in at the bottom of the company’s guidance (cloud revenue +33%) and margins were well below expectations.
• Cash flow was weak at -US$10 billion, with capex of US$12 billion in the quarter (versus US$8.4 billion expected) and up 200% year-on-year.
• Capex is forecast to rise in FY26 to $50 billion, versus $15 billion under its prior plan.

Oracle indicated it is working on alternate financing mechanisms, including vendor financing, chip leasing and customers bringing their own chips. None of this inspires much market confidence.

The overall US market remains in good technical shape, hitting a new high last Thursday before selling off Friday.

Sentiment is bullish which makes the market vulnerable to negative news. For example, this time last year we were at similar levels and when the tariff issue emerged it led to a sharp drawdown.

However, for the time being the combination of falling rates, the Fed not being too hawkish, coming fiscal stimulus, a re-accelerating US economy, subdued oil prices and the US dollar holding at lower levels all supports the market, despite the strong sentiment.

Valuations in the US remain high by historical standards, however earnings growth is accelerating and can support current levels.

We note an expected surge in earnings at the small cap end of the US market, which is the catalyst for the move in small cap names there.

We are seeing more breadth in the US market, with small caps and industrials breaking out to new highs.

In Australia, the rotation to resources continues. The Metals & Mining subsector has outperformed the S&P/ASX 300 by 32% calendar year-to-date and by 14% this quarter.

Much of this has been driven by gold stocks, which continued to lead the market last week as the commodity moved back to its October highs.

Rare earths were the exception to the resource rally, falling as further funding of new supply was announced.

Beyond that Financials (+1.7%) were better, helped by the global lead and by the perception of them being beneficiaries of gradually rising rates.

Tech (-4.4%) continued to sell-off, with the move exacerbated by speculation of redemptions from some growth-orientated funds, with the risk it leads to further forced selling.

About Crispin Murray and the 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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