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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MARKETS continue to grind higher last week in a relatively quiet macro period, exacerbated by the northern hemisphere holiday season.

The most recent Recent US inflation data was okay.

The consumer price index (CPI) was slightly better than many expected and the producer price index (PPI) was a bit worse. But there is no evidence yet of tariffs having a larger impact than expected.

The US economy looks to be in better shape than some feared post the July payrolls shock, with survey data and retail sales indicating growth around 1.5% over the next few months.

US earnings season has played out and has been supportive for the market as well.

Market technicals are positive and suggest a continued up-trend, although systematic net long positioning is back close to its high.

The main near-term risk to markets would be a correction triggered by better US payroll data on 4th September, which could hose down rate cut expectations.

Australia got the interest rate cut all expected last week. Employment data was fine and Commonwealth Bank’s customer data released as part of its FY25 result indicated improving spending patterns.

The trends were generally constructive from the first genuinely busy week of reporting season. Commonwealth Bank was a little cautious on the margin outlook, but Westpac surprised on the upside, so that supported the overall banking sector.

Domestic insurers assuaged concerns over margins. Consumer-sensitive stocks saw solid trends continue. The main disappointments were in industrial sectors, with conditions in Victoria even softer than expected.

The S&P 500 gained 1% for the week, while the S&P/ASX 300 was up 1.6%.

Our current thoughts on markets

1. The US equity market remains in an up-trend driven by healthy earnings growth, economic resilience, the prospect of rate cuts and supportive technicals. While valuations are full and there may be some consolidation through the seasonally tougher period from late-August through September, any market fall is likely to be a short-term correction.

2. Despite the weak July US employment data, we do not believe the US economy has reached a tipping point and runs the risk of recession. Real time data suggest the economy is holding up reasonably well.

3. The largest threat to markets is if US inflation surprises to the upside as a resilient economy leads to greater tariff pass-through, which leads the Fed to believe they need to slow the economy more and therefore do not deliver on the 75bp of rate cuts the market is expecting by either January or March next year.

4. China’s anti-involution policy will be a slow-burn, selectively helping restore margins in over-supplied industries, but constrained by the need to manage economic growth. This should lead to a relatively benign commodity outlook, but no squeeze higher.

5. The Australian economy remains sluggish but should slowly accelerate as rate cuts flow through into consumption and investment. Low/no productivity growth may constrain the RBA’s ability to cut and extend their timeline. Corporate earnings should be able to deliver on moderate growth in this environment, underpinning the equity market.

Key macro issues for markets

We are watching four key macro issues, looking at each in turn:

1) US inflation trends and the impact of tariffs.
In the last week there were some relevant signals on US inflation which were okay in aggregate.

A benign July CPI print reinforced confidence in a September rate cut.

• While Core CPI rose a relatively high 0.32% month-on-month – the highest rate since January – to 3.1% year-on-year, this was anticipated and suggests the flow through of tariffs so far is in line with expectations.
• Headline CPI was +0.2% month-on-month and 2.7% year-on-year.
• The larger price rises were in categories such as tools hardware, children’s apparel and footwear which were likely related to tariffs.
• Core goods inflation was +0.3% month-on-month, boosted by used car and truck prices, which is less likely related to tariffs.
• Core services was inflated by airfares and dental. which had both been soft recently.

However the positive vibe on inflation was partly offset by the higher PPI data at the end of the week.

• Core PPI was +0.9% month-on-month, the highest since March 2022.
• However there are suggestions of distortion by the trade services component which inferred a large rise in distributor’s gross profit margins, which is unlikely. This component is often subject to material subsequent negative revisions.
• All the components of PPI which feed into the Fed’s favoured PCE deflator were benign and the component most likely tied to tariffs – durable goods – rose 0.3%. This is in line with July and below May’s 0.5% increase.

The conclusion is there is not anything in the current inflation data to derail a September rate cut.

It is also worth noting that the tariff revenues are beginning to flow through and ran at an annualised pace of $332bn in July. This indicates tariffs are being applied and we are now in the key phase of assessing the impact on inflation. We note that $300b equates to ~1% of US GDP.

2) US economic growth momentum

US growth signals have been more positive since the shock of July’s payroll data – and may constrain rate cuts.

Evercore ISI survey data has been collected for decades and is a decent real time indicator of the economy. It is suggesting that while growth was subdued in April through June, it is improving now.

The broader Evercore IS company survey is near a 12-month high. The surveys diffusion index – a signal of whether individual surveys are either improving or deteriorating – is also improving.

The data suggests the industrial side of the economy is struggling but that the consumer holding up okay.

This was reinforced by positive US retail sales data. Headline retail sales rose 0.5% in July, helped by motor vehicles and parts, while June was revised up to +0.9% from +0.6%.

Control retail sales (the preferred core measure) were up +0.5%, versus 0.4% expected, while also seeing positive June revisions.

Real consumption, measured by three-month-on-three month growth, looks to be settling into a 1.0 to 1.5% annualised range, which is in line with GDP forecasts. 

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This is the sweet spot — low enough to allow rate cuts, but not too weak to lead to job declines.

The market remains very focused on the payrolls data due 4th September and also fed Chair Powell’s Jackson Hole speech next Friday.

3) Chinese policy initiatives

We saw some softer data for July. Industrial production growth fell to 5.7% year-on-year, from 6.8%, while retail sales rose 3.7% from 4.8% in June. Both these results were below consensus expectations.

Fixed asset investment fell -5.2% year-on-year, versus consensus expectations of +2.1%. This was the lowest level since the early Covid period.

This may reflect the impact of the anti-involution campaign and, given China’s on-going economic fragility, suggests Beijing will need to be careful as to how aggressively it applies these policies.

All this indicates a softer H2 CY2025 for China after the economy proved more resilient than expected in H1 – and indicates we will see more incremental stimulus measures

4) Australian economic growth momentum

The Australian economic outlook looks reasonable

The RBA cut rates 25bp to 3.6% as expected, with the RBA’s forecast for trimmed mean inflation of 2.5% in December 2027 probably suggesting they share the market’s view that rates fall in November and February, with another potential cut in May 2026.

They did cut their long-term productivity forecast from 1.0% to 0.7% – this is not low enough to constrain them yet on rates. However, the reality is productivity growth is 0% and may be an issue if growth reaccelerates, as it would indicate it flows through to inflation sooner.

July employment data was in-line with expectations, but better than June with employed people growing +0.25% month-on-month and unemployment falling from 4.3% to 4.2%.

• The three-month average is soft at 8k having been running at 30k and year-on-year job growth is 1.8%, versus a 2.0% long-term average.
• The underutilisation rate, which is a broader measure of slack in the economy, also fell to 10.1% from 10.3% and remains well below the long term average of 12.7%.

All this suggests the labour market is still quite tight and will encourage the RBA to remain measured. The final signal worth noting was the CBA customer data released with their earnings report, which indicates a clear improvement in discretionary spending saving in younger demographics, which is supportive signal for the economy and retail demand.

Markets

Summer holidays in northern hemisphere means market activity remains quite subdued.

In this environment — and given the positive earnings backdrop and benign macro — equity markets continue to grind higher.

US remains in good shape technically. While the mega-cap stocks have led the S&P 500, the “average” stock is still seeing tailwinds and the index is not at “overbought” levels.

The wash-up from earnings season was positive and this has reasonable breadth across sectors.

The median technology stock saw 15% EPS growth in Q2 2026, but the median financial stock was not far behind at 14%.

All sectors were positive on this measure except materials (0%), consumer staples (-3%) and energy (-13%).

So while valuations are high, they are supported by earnings momentum.

Having delivered 11% earnings in Q2 2026 (and 8% for the median stock), consensus expects 7% year-on-year EPS growth for the S&P 500 in Q3 and Q4 2026.

While the Mag 7 has been the dominant driver of earnings and revisions the dispersion to the rest of the market is set to narrow.

In Q2 the Mag 7 saw 26% EPS growth versus 7% average for the remaining S&P 493. Consensus has this at 14% and 5% respectively for Q3.

We are also seeing other global markets perform well. In Japan, the TOPIX has broken out to new highs, with decent breadth — 84% of stocks are trading above their 200-day moving average.

Australia has also hit new highs, with the resource sector no longer acting as a drag on the index.

Elsewhere, the US dollar has failed to rally and remains near its lows, oil prices remain subdued and the US 10-year bond yield is at the lower end of its recent range. All of this is helpful for equity markets.

The main risk to markets near term is a firmer payrolls data which may take some of the excitement on US rate cuts out of the market and send bond yields higher.

Australian reporting season

The theme of recent reporting seasons — both domestic and offshore — has been amplified reactions on the day of a company’s result. This continues, reflecting the impact of systematic and quant strategies.

Key themes last week were:

1. A rotation in banks away from CBA – and notably towards Westpac, reflecting better margin trends from the latter and conservative guidance from the former.
2. Reassurance that domestic insurance margins will hold up – despite premium growth slowing – due to a disciplined market structure (helped by consolidation) and benefits of reinsurance.
3. Positive anecdotes from the likes of JB Hi-Fi, Temple & Webster and Baby Bunting of continued resilience in the consumer and growth into FY26.
4. Industrials facing a tougher environment, particularly those exposed to southern states (eg SGH) or the US consumer (eg Amcor, Treasury Wine). We note that signs of stabilisation at Orora led to strong bounce in the stock, reflecting the discounts being applied to some of these companies.
5. A contrast of fortunes in domestic energy market stocks; Origin Energy is doing fine, while the cost of replacing coal with batteries is hitting AGL Energy’s P&L.

Beijing’s anti-involution theme had its first tangible manifestation with the suspension of a significant lithium mine in China, boosting lithium stocks.

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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