Jim Taylor: What’s driving ASX stocks this week

Here are the main factors driving the ASX this week according to portfolio manager JIM TAYLOR. Reported by portfolio specialist Chris Adams

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MARKETS strengthened last week ahead of the US June CPI report and surged again when the cooler inflation data met with approval.

There was some consolidation on Friday as second-quarter US company results started to come through, though things were okay on that front.

The CPI print, bolstered by a supportive and instructive Producer Price Index (PPI) print, means the market now has peak Fed rates firmly in its sights.

Investors are pricing in one more 25bp rise in July. Some are even saying that would be one hike too many. 

The notion of a soft landing in the US gained further traction with a good labour market print and stronger consumer sentiment.

As a result, there was a notable improvement in the breadth of the equity market rally, though mega-cap tech performed strongly as well.

Commodities rose, notwithstanding some poor economic data out of China. The DXY — a trade-weighted index of US dollar strength — headed to 12-month lows.

The S&P 500 rose 2.44% and the S&P/ASX 300 was up 3.73%.

Central bank watch

Fed commentary last week was mostly hawkish, persisting with the line that there is more to be done.

Mary Daly of the San Francisco Fed noted that “we are likely to need a couple more rate hikes this year”.

Fellow non-voting FOMC member Loretta Mester, of the Cleveland Fed, agreed there was “more tightening needed”.

The market, though, was not buying this line. Scepticism may have been bolstered by the resignation of St Louis Fed president James Bullard.

Bullard had been among the most hawkish members of the FOMC, pushing for stronger moves to fight inflation over the past two years. He leaves to take up an academic post.

There was a slightly softer line from Atlanta Fed president Raphael Bostic (another non-voting member), who said policy makers “can be patient” given that we are “in restrictive territory”.

Michael Barr (who is on the Fed board of governors and was the only voting member to speak), noted the Fed had made progress and was “close” to a sufficiently restrictive level — but “still have a bit of work to do”.

Elsewhere the Reserve Bank of New Zealand left the official cash rate unchanged at 5.5%, as expected.

This was its first pause since it started lifting rates in October 2021.

US macro

June’s CPI came in 0.2% higher than May — below the +0.3% consensus expectation.

On an annualised basis it was 3% — also below the consensus of 3.1% and the lowest rate since March 2021.

Core CPI (which excludes food and energy), was up 0.2%. This was down from 0.4% in May and below the expected 0.3%.

Annualised Core CPI is running at 4.8%, versus 5% expected. It is at its lowest since October 2021.

Importantly, the shelter component has now fallen from a peak of 9.5% down to 5.5%. Based on effective rents, this will continue to fall for the rest of the year.

Used car prices fell 4.2% — the biggest monthly drop since the pandemic’s early days. This component accounts for about 4% of the CPI basket.

This well-received reading was supported by the PPI which rose 0.1% in June on a headline and core basis. This was below consensus expectations of 0.2% and the third straight month of a 0.1% gain.

Core PPI is running at 2.4% versus 2.6% in May. But the annualised three-month rate is 1.0% — its slowest rate since early 2020.

It is expected to be at 1.5% in August and may turn negative given leading indicators of downward pressure on prices.

All this was seen as a signal of further weaking pressure on the CPI.

As inflation falls, there was some resilient economic data prints, which fed the narrative of a soft landing.

• Consumer sentiment measured by the University of Michigan’s index rose from 64.4 in June to 72.6 in July — well above the consensus of 65.5. That said, it’s worth noting that 5-to-10-year inflation expectations remain elevated versus pre-pandemic levels.
• Initial jobless claims fell to 237K from 248K, well below the 250K consensus

Australian macro

The Westpac-Melbourne Institute consumer sentiment index improved by 2.7% in July, up from a 0.2% in June.

However it remains in “deeply pessimistic” territory.

Underlying sub-indices were mixed.

Perception of family finances have fallen to new cycle lows, but perceptions around the broader economy and the housing market have seen something of a rebound.

China macro

Beijing is grappling with a deflationary problem, which bodes poorly for growth.

Its CPI was flat at 0% year-on-year for June — the lowest print since February 2021.

The PPI is deflationary, running at -5.4% year-on-year versus -4.6% in May.

This suggests already-weak domestic demand continues to soften. Services consumption is recovering, albeit slowly, while housing demand remains subdued.

There were some signs of life in credit.

Aggregate financing — a broad measure of total credit — was CNY 4.2 trillion higher in June, versus CNY 3.1 trillion expected.

There were CNY 3.02 trillion in new loans. This should eventually feed through to increased new activity.

Deputy Governor Liu Guoqiang of the People’s Bank of China (PBOC) sought to calm concerns over the economy.

The bank retained “ample policy room to deal with unexpected challenges and changes”, he said. There was a need “to be patient and confident in the economy’s continued and steady growth”.

There are also signs Beijing is easing pressure on China’s tech sector. The PBOC noted that most of the issues at Ant Group and Tencent had been dealt with.

Earnings expectations

As we move into US quarterly reporting season, the market is expecting a 7.1% year-on-year decline in earnings for the second quarter of 2023.

This is slightly worse than the -7% expected on June 30.

If this transpires, it would be the biggest quarterly earnings decline since Q2 2020, when earnings fell 31.6%.

It would also be the third straight quarter of declining earnings.

So far 6% of S&P 500 companies have reported, with 80% delivering a positive EPS surprise and 63% a positive revenue surprise.

JP Morgan, Citigroup, Wells Fargo and Delta Airlines kicked off the season with decent results.

Leading into the Australian reporting season in August, the market is expecting 0.7% aggregate EPS growth for FY23. This is down from more than 10% a year ago.

Banks are expected to deliver 15.1% EPS growth on the back of higher margins, though this is expected to fall 5.3% in FY24 as those tailwinds recede.

Resources are the drag, with expected EPS down 17.4% in FY23.

Industrials (excluding resources, banks and listed property trusts) are expected to see 19.5% EPS growth for FY23.

Markets

A perceived end to the US hiking cycle saw technology-related stocks go on a tear last week.

The S&P 500 is now 3% higher than when the Fed started hiking rates in March 2022.

In Australia the IT sector rose 6.25%, led by Square (SQ2, +15.54%).

Materials (+5.76%) were also strong despite ongoing Chinese economic weakness. Part of this was strength in the gold miners on a weaker US dollar.

Evolution Mining (EVN, +17.08%) was the best performer in the ASX 100. Generally stronger commodity prices also buoyed Alumina (AWC, +9.33%) and South32 (S32, +7.63%).

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About Jim Taylor and Pendal Focus Australian Share Fund

Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.

Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 14 years of its 18-year history (after fees), across a range of market conditions. Find out more about Pendal Focus Australian Share Fund here.

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