Jack Gabb: What’s driving the ASX this week?

Here are the main factors driving Australian equities this week, according to portfolio manager JACK GABB. Reported by head investment specialist Chris Adams

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US inflation data and soft employment figures are amplifying expectations for rate cuts and supporting equity markets.

Bullish statements from software giant Oracle on demand for cloud-based services helped drive US indices to a record high last Thursday, before a slight easing.

The S&P 500 ended up 1.6% for the week, while the NASDAQ gained 2.1%.

Chinese equities – and the yuan – continued to rally with the Hang Seng up 4%. Japan’s Nikkei rose 4.1%.

European equities were quieter. The Euro Stoxx 50 gained 1.4% as the European Central Bank held rates steady. An easing cycle appears over for now.

Australian equities were also muted, with the S&P/ASX 300 gaining 0.1%.

Bonds rallied – particularly at the long end – with the key US 10-year falling briefly below 4%. That helped drive US mortgage rates lower.

However it’s worth recalling parallels with 2024.

Back then the 10-year yield hit a low point on September 16 – the eve of a Fed rate-cut decision.

(The Fed will announce its latest rates decision this week, early Thursday morning Australian time).

US macro and policy

Markets are fully pricing in a 25bp cut this week.

Another two-to-three consecutive cuts are also expected – despite current policy settings arguably providing little in the way of restrictive policy.

The Fed argues neutral rates are lower, but financial flows are rampant and consumer spending data belies perceived weakness in the jobs market.

Implied rates for December hit their lowest level since May and now sit at 3.629% versus 3.772% this time last week.

Softer jobs data drove the change, while inflation data was regarded as tame.

Six-month Treasury notes are now at 3.83% – 50 basis points below current implied rates. However a repeat of 2024’s 50-point September cut is seen as unlikely.

Inflation data

The producer price index (PPI) was lower than expectation, but the core consumer price index (CPI) accelerated to +0.35% in August (+4.2% annualised). Year-on-year core CPI rose to 3.1%.

Markets focused more on the job revisions. But by itself the CPI print does not appear to support a cut, let alone three-to-four in quick succession. 

That leaves a risk of a repeat of 2024 when the Fed cut by 100 points and inflation expectations jumped.

The 10-year yield subsequently rose by 118 points, sending mortgage rates higher.

That risk is arguably amplified this year by perceptions of Fed independence, with a cut potentially interpreted as politically driven.

In good news for the Fed, the PPI (and jobs) data was weak. 

PPI Final Demand fell to -0.12% month-on-month, versus +0.3% expected and 0.7% prior. Within that, services (which dominate the index) fell 0.16%.

By itself, the data is supportive of a cut. But data has tended to yo-yo and September or October’s print seems likely to see pricing rebound higher.

While the data does not measure import pricing (hence not tariffs directly), PPI for finished core good rose to 0.3% (3.8% annualised).

Jobs data

Besides CPI and PPI data, the labour market provided the key economic data of the week.

Initial jobless claims were a touch higher (263k versus 235k expected and 237k prior), but payrolls for the 12 months to March were revised down 911k.

This was well above most estimates and not far from the feared 1 million mark.

To put this in context, the monthly data estimated job growth of 2.35m over the 12-month period, an average of 196k/month. The reality was 1.44m, or 120k/month.

This is still ‘preliminary’ – the final monthly accounting isn’t due until February next year.

Based on what happened in February this year, the final revisions will again be revised materially – but to a less negative position.

All in all, it isn’t exactly confidence-inspiring. 

Other data

Other economic data was limited.

The University of Michigan sentiment index did weaken/miss at 55.4, versus 58 expected and 58.2 prior.

Five-to-ten-year inflation expectations also rose to 3.9% from 3.5% prior (3.4% expected), which isn’t likely to be the message from the Fed on Thursday morning (Australian time).

Tariffs

For those keeping score (and revisions and volatility aside) the PPI and jobs data count for the doves at the Fed, while the CPI arguably counts against.

Outside of political interference, the other key consideration is the potential loss of tariffs once the Supreme Court rules (tariffs are supposedly the exclusive purview of Congress) – albeit hearings will run through to November.

Monthly tariff receipts are now running at $US30 billion, versus $7 billion before April.

This is a significant amount. It materially reduces the amount of debt issuance that needs to be absorbed, which is important given US debt levels.

To put it in context, over ten years the tariffs are worth over $US3 trillion of debt and potentially significantly more.  US Treasury boss Scott Bessent says $750 billion to $1 trillion could be collected by June 2026.

A large chunk (though not all) of the tariffs are subject to a Supreme Court review, which is due before the end of the year.

To quote one commentator: “lose the case and Treasuries will throw a fit”.

Australia macro and policy

There was little meaningful Australian economic data last week with rate expectations largely unchanged ahead of a Reserve Bank meeting later this month.

Markets are pricing in a 12% chance of a cut. November is odds-on to deliver the only additional cut we see this year. 

We did get some survey data on consumer confidence which showed a 3.1% drop versus August – mostly on expectations around unemployment and future economic conditions.

However, the latest CommBank Household Spending Insights data continues to show strong spending. The index was up 0.3% in August (versus +0.7% in July and +0.5% in May and June).

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Spending growth has been consistently positive since the RBA began cutting in February.

China

Total financial flows passed the value of goods and services in China for the first time last week – a historic moment.

Financial account flows have grown rapidly over the past five years, driven by loosening of capital controls.

But the shift is arguably more impressive given China has also continued to dominate trade in global goods.

While it still lags developed economies such as the US and Japan (where the ratio is more like 10-15 to 1) the move is illustrative of the growing importance of the yuan.

It also serves as an important reminder of Beijing’s goal of globalising its currency.

Illustrative of this was the recent discussion by the People’s Bank of China to create a better mechanism for issuing sovereign debt overseas.

This would help feed growing demand for alternatives to US Treasuries and arguably add to pressure on long-dated yields.

Nearer term, the yuan has continued to strengthen relative to the USD.

With US rate cuts looming, and the Trump Administration happy to see the currency weaken, the likely direction of travel is for further strength.

That’s good news for commodities and the AUD.

Elsewhere it was relatively quiet on the economic front outside of a slight improvement in deflation trends.

August PPI landed at -2.9% year-on-year versus -3.6% in July.

While prices remain negative, the improvement was seen as a sign that anti-involution policies are having an impact.

Core CPI also rose to 0.9% (from 0.8%), the highest level since 2024.

Positively, last week Beijing also began plans to tackle the significant backlog of debts owed to the private sector by local government.

Up to 1 trillion yuan (US$140 billion) will potentially be earmarked in the first phase of a longer-term initiative.

Commodities

While energy stocks fell, it was a better week for oil, with Brent Crude +2.3% despite US Commodity Futures Trading Commission data showing the smallest long oil market position since 2010.

Gold also posted 1.6% gains on USD weakness – a trend that looks set to continue.

The PBOC also announced plans to ease licensing rules for gold imports and exports, potentially flagging further purchases.

In lithium, spodumene fell 5.5% on reports a large CATL lepidolite mine in China may restart sooner than expected. CATL reportedly held an internal mobilisation meeting on restarting, triggering a decline in spodumene prices back to c.$800/t.

Uncertainty remains regarding the outcome of the current lepidolite resource audit, due for completion end September. Pricing has now given back half of its recent rally.

Iron ore fell 1.1%, but pricing has so far proved resilient to typical seasonal weakness.

China steel production and exports remain strong while iron ore inventories are flat. USD weakness/RMB strength also helps.

There has been a pick-up in steel inventory and a recent decline in steel margins.

But iron ore is likely to remain rangebound while uncertainty persists regarding anti-involution policies and potential steel cuts.

Markets

Flows and AI remain supportive

Interest rates aside, two key trends continue to support equities: market flows and growth in AI.

On the former, in the US 1% of GDP is being directed into index funds every month, “regardless of valuations, sentiment or macro”.

That (along with strong consumer spending) appears incongruent with restrictive Fed policy.

AI also remains a key foundation for markets.

Tech is now more than a third of the S&P 500. That’s akin to the financial sector on the ASX.

Tech led gains last week in the US with headline AI-infrastructure agreements reshaping cloud compute dynamics.

Oracle was key, surging to a record following an incredibly bullish outlook for its cloud business.

Its deal with OpenAI to supply some 4.5GW of computing capacity beginning in 2027 is expected to require $300 billion of computing power over five years.

That took Oracle’s forward book to $455 billion, up $317 billion. Its market cap was up US$170 billion for the week.

Cloud Infrastructure revenue is now forecast to grow from US$18 billion in 2026 to US$144 billion by 2030. That was way in excess of sell-side estimates.

Meanwhile Microsoft struck a major contract with Dutch data centre company Nebius  –potentially worth $20 billion over five years – to secure graphics processing units (GPU) capacity.

The utilities sector was not far behind tech, with increasing power demand from AI a growing tailwind.

Data centre power demand was estimated at 1.5% of global electricity demand in 2024.

By 2030, its share is forecast to double. In the US, demand is forecast to grow by 130% (at least).

Australian equities were flat last week, but under the surface there were big gains for gold, tech and property.

On the negative side, lithium and energy stocks fell.

About Jack Gabb and Pendal Focus Australian Share Fund

Jack is an investment analyst with Pendal’s Australian equities team. He has more than 14 years of industry experience across European, Canadian and Australian markets.

Prior to joining Pendal, Jack worked at Bank of America Merrill Lynch where he co-led the firm’s research coverage of Australian mining companies.

Pendal’s Focus Australian Share Fund has an 18-year track record across varying market conditions. It features our highest conviction ideas and drives alpha from stock insight over style or thematic exposures.

The fund is led by Pendal’s head of equities, Crispin Murray. Crispin has more than 27 years of investment experience and leads one of the largest equities teams in Australia.

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

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