Crispin Murray: What’s driving the ASX 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 walk-back of US-China tariffs has reinforced a faster-than-expected reversal from Liberation Day’s shock announcement and underpinned the rebound towards equity market highs.

The S&P 500 posted a 5.3% gain last week, while the NASDAQ gained 7.2% and the S&P/ASX 300 rose 1.5%.

General tariffs on China’s imports have been reduced to 30% for 90 days. This is better than the market was hoping for.

It also removes the effective embargo on Chinese imports – and has probably come soon enough to prevent it from having a major impact on economic growth.

Effective tariffs on China are still around 40% – and at a 14% blended rate for aggregate imports to the US – so we will see inflationary pressures build and slowing growth.

However, the tail risk of recession has fallen markedly. The consensus among economists has the chance of recession at around 35%, down from more than 50% in early April.

The removal of this tail risk, combined with the recent strong US quarterly earnings and a weaker US dollar and oil price, are all supportive for equities.

But this has been a significant bounce and some consolidation is likely, given there is still uncertainty over policy and the economy.

Détente on tariffs has also affected bond yields, with the forward curve removing one implied rate cut in the US; expectations are now for two cuts by the end of 2025.

This, in combination with what looks to be a stimulatory US budget bill, has seen US 10-year Treasury yields rise 29 basis points (bps) to 4.41% in May.

In Australia, employment data suggests the economy is in good shape.

Employment growth was stronger than expected (+89k jobs in April versus consensus expectations of +20k), while the unemployment rate remains at 4.1% as a result of growth in participation of 0.3% to 67.1%.

Hours worked are more subdued at 1.1% growth year-on-year.

The RBA is still expected to cut this week, which will underpin growth.

The results and outlook for tech companies Life360 (360) and Xero (XRO) were positive and we expect continued rotation from defensives into growth and deeper cyclical names as the outlook for world growth becomes more secure.

US macro and policy

In the space of four weeks, we have moved from probable recession in the US to a likely scenario of moderating, but positive, growth.

The market had feared a downward spiral as the direct effect of tariffs on consumer spending would be compounded by a significant fall in confidence, lower investment, supply chain disruptions, tighter financial conditions and a Federal Reserve unable to cut rates due to inflation.

We have subsequently seen the walk-back in tariffs, while the US economy is proving more resilient than expected, corporate earnings were stronger, oil prices were lower, and financial conditions have eased as equities and credit rallied and the US dollar fell.

This virtuous circle has taken the market within 2% of its February high.

We will probably never know if this was chaotic “policy-on-the-run” or some grand plan, but there are two take-outs we would emphasise:

1. The Trump administration has shown they are not prepared to tank the US economy in the pursuit of their long-term economic agenda. The speed of initial trade agreements has surprised the market. We note that Treasury Secretary Scott Bessent recalled in one interview that one of the first questions President Trump asked him was how they can change the economic order without triggering a recession. When faced with that risk, they clearly looked to adjust policy.
2. The US economy has more momentum than the market appreciated. Growth has been more resilient despite sentiment indicators being weak and corporate earnings have surprised on the upside, which underpins jobs and investment.

In our view, the market is likely to consolidate from here.

Despite the suspension of reciprocal tariffs, the overall tariff level is rising from 3% to around 14% – and this looks set to be a permanent feature, as they remain an important pillar in the strategy to reduce US economic reliance on other countries.

During this period of tariff suspension we will see the work done on the other pillars of this policy, which are deregulation, tax incentives and lower energy costs.

These are to incentivise and enable investment to help balance the negative effects of tariffs.

There are still uncertainties which can check the market’s continued immediate rise:

• A blended tariff rate of 14% now is materially higher than the 3% at the start of the year. While this is a more manageable level, it will lead to higher prices and eat into consumer spending power.
• We still are not clear whether the fall in sentiment indicators will translate into real economic data.
• We do not know if the US can reach a constructive deal with Europe.
• Finally, the US equity market sits on relatively high multiple of 22x price/next-12-month earnings, with less transparency on earnings growth and the market consensus still around 11% EPS growth in CY26.

It is also important to watch the bond market, which may present another risk if yields rise too high. They have continued to back up this month, though they are still manageable at around 4.5%.

The US fiscal position is an important factor here – Moody’s downgrade to the US credit rating reflects its longer-term concern here.

US – China trade détente

Monday saw the US and China walk back from the trade brink with a 90-day reduction in general tariffs on China from 145% to 30% (10% reciprocal tariffs, plus 20% related to fentanyl). This is a better outcome than most expected.

China agreed to a cut from 125% to a 10% on US imports.

If nothing is agreed by the end of the 90 days, then both sides will increase tariffs by 24% i.e. tariffs revert to 54% on China and 34% on US.

These tariffs do stack on the original 2018 Section 301 tariffs and the fentanyl one stacks on top of Sectoral 232 tariffs. That means the weighted average tariff on China is estimated to be around 40% for the next 90 days, which compares to 11% prior to the escalation.

The market is not expecting a deal to be done by the early August deadline.

However, if negotiations are progressing then the suspension could be extended, with the UN General Assembly meeting in New York in late September providing an opportunity for Presidents Trump and Xi to meet, with a deal possibly formalised around mid-October.

The other components of negotiations include progress on fentanyl and Tik Tok ownership.

The ultimate outcome is now expected to be tariffs on Chinese imports around the 34% level which, adding on sector-specific tariffs, rises to the low-40% range.

This is, however, all conjecture – and the market did not expect the scale of walk-back in tariffs so soon. The direction of risk, in our view, is probably slightly lower tariffs than implied by the market.

Implications of the deal

Both sides were motivated to land a deal. Previous tariff settings were effectively an embargo on trade, with expectations that Chinese exports to US would fall more than 65%.

The freight industry has been warning that US shelves would begin to empty out of key products within weeks as a result – and it was feared that US GDP would see a hit to growth expectations between 0.5% to 1.0%.

Beijing was also facing an 2.5% hit to China’s GDP and there were 16 million jobs directly affected in their export sector.

The suspension buys both sides time to prepare, should there be no agreement in future.

The US can work on its tax legislation – which will be looking to put more money into the hands of consumers to offset the effect of tariffs – while China can work on other measures to support its economy.

The consequences of this deal are:

1. Better US growth expectations. Estimates have increased around 0.5% for GDP growth in 2025.
2. Lower inflation in the US.
3. Chinese growth net revisions for 2025 in the range of 0.5% to 1% – this is reduced by less need for stimulus.
4. The market has removed 1-2 cuts from the forward curve in the US. There has also been one cut taken out from the ECB’s forward curve
5. A bounce in the US dollar, though this has been relatively limited.

Clearly, removing the tail risk of a major trade breakdown – combined with a lower risk of recession – has been a catalyst for US equities to catch-up with the rally we have seen in other markets.

US economic growth signals

Some demand was pulled forward into Q1 to front-run tariffs. This supported economic data but is now expected to unwind. Along with the weaker sentiment signals of recent weeks, it is expected to lead to a few months of softer data.

We began to see the first signs of this in retail sales, which were up 0.1% month-on-month in April, after rising 1.7% in March.

The control group measure – which excludes food, gasoline, autos and building materials and feeds into GDP – was down 0.2% month-on-month, possibly reflecting some of the sentiment issues rolling through. 

The Food service sales component remained firm. This is an important discretionary measure and indicates spending is still holding up OK.

Homebuilder confidence was weaker and looks to be a soft part of the economy. Weaker sentiment may weigh more here, as uncertainty tends to lead to deferral of major decisions and mortgage rates remain elevated.

However, the sector is already subdued. Housing starts are at the historically muted rate of 1.36m annualised for April and building permits are declining about 5% month-on-month.

So, while this sector remains a headwind, it is unlikely to be an additional material one.

Sentiment indicators remain poor, with the Michigan Consumer Sentiment Index falling to 50.8 in May from 52.2 in April, below consensus and forecasts of 53.4.

The survey is distorted by the Expectations component – which sits well below the current conditions level.

The Inflation expectations component is also continuing to rise.

There is a question mark over the reliability of the Michigan Consumer Sentiment Index – as it has been poor for some time and not translated into real data. There is also a huge political divergence with sentiment among Democrat voters at 22.5 versus Republican voters at 90.

So, we are not placing too much weight on this indicator.

Weekly initial jobless claims held steady at 229k.

The upshot is that data is softer at the margin, but suggests an economy which is slowing but still holding up

We note that the Atlanta Fed GDPNow indicator – which tanked in Q1 and was one of the early indicators that suggested growth was weakening – is looking much better in Q2 so far, suggesting growth near 2.5% quarter-on-quarter.

Inflation signals

April’s US consumer price index (CPI) was slightly lower than expected and is giving us an insight into inflation trends before the impact of tariffs.

• Overall, the trend is solid: Core CPI was +0.24% month-on-month (MOM) and +2.8% year-on-year (YOY).
• Core goods rose +0.1% MOM after a decline in March, though excluding used cars there has been a tick-up on a 3-month basis. This may indicate that, broadly speaking, companies are in a position to pass through the effect of tariffs – some, such as Walmart, are indicating this is what they will do.
• Core services (excluding rents) rose 0.3% (MOM) but is still decelerating on a three-month basis, possibly reflecting a slowing in the economy and helping to absorb the inflationary effects of tariffs.

April’s Core Producer Price Index (PPI) at -0.4% was below expectations, driven by a 1.6% fall in trade services, which reflects distributor’s gross margins.

At face value, this may indicate tariffs are being absorbed into gross margin. However, this data is prone to significant revisions and it may be the tariff increases surprised distributors, who had not adjusted prices at the time the data was collected.

Walmart’s CFO said that consumers will start to see price increases from the end of May. We will get updates from other retailers this week. 

US budget update

The latest indicative proposal from the House is to bring forward a series of tax cuts which will be financed in later years i.e. a near term fiscal stimulus starting in CY26.

This is at a time of full employment and inflation still above target range.

While good for growth and corporate earnings, it could be a catalyst for bonds yields to rise further and make it more difficult for the Fed to cut rates.

We note Moody’s downgrade to the US credit rating, which highlights the lack of action on the structural fiscal deficits.

Markets

One important dynamic of the market recovery has been the better performance of the Mag 7.

This is relevant for Australia as it tends to correlate with the performance of our growth stocks versus defensives.

Mag 7 earnings have surprised to the upside, which has led to them reversing part of the underperformance they have seen earlier this year.

This is an important support to the overall market and underpins the rotation we have seen to tech in the ASX.

The other dynamic to note is that sentiment is far more subdued than it was when the market hit its highs at the start of the year. This is important as it means the market is less vulnerable to a deterioration in news flow.

The S&P/ASX 300 is now 14% off its 7 April lows, up 3.7% in 2025 and within 2.5% of its February highs.

The 1.5% gain last week was driven by tariff détente, as well as supportive results from tech stocks Life 360 and Xero.

The index move higher was held back by a rotation away from defensives and gold stocks.

Consumer Staples fell 3.5%, Utilities 2.5% and REITs 0.5%.

The rise was led by Tech (up 5.3%) and bombed-out deep-cyclicals, notably some of the more leveraged resource stocks – for example, Mineral Resources (MIN) rose 25.4% for the week.

Given i) supportive domestic economic backdrop, ii) the reduction of offshore tail risk (notably Chinese growth and commodity demand), iii) the likely cut in domestic rates this week, iv) stable government and, v) loose fiscal policy, the market is well-placed to test the prior high and consolidate there, in our view, while we wait to see how the various global trade negotiations play out and the degree of slowing in the US.

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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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