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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THE constructive narrative was unchanged by last week’s US data.

November’s non-farm payrolls and average hourly earnings data — along with surveys of inflation expectations and Job Openings and Labor Turnover (JOLTS) — all told a story of modest slowdown. There was no significant evidence that consumers or businesses were walking off a cliff.

The short end of the US Treasury curve sold off – perhaps reflecting a realisation that the market was a touch over-optimistic on the potential pace of monetary easing.

Ten-year US yields were relatively flat for the week, while yields rose at both the long and short end of the Australian curve.

Oil remained under the pump, with Brent crude down 3.9% for the week and 20.4% lower over the quarter to date. This is starting to translate into some relief at the fuel pumps for consumers. 

Gold pulled back from its highs (down 3.8%) while iron ore rose 3%, and its resilience is likely to persist into Q1 2024.

US equity markets delivered their sixth straight week of positive returns – the best run since November 2019 – though returns were relatively modest in the context of what we have seen over the last couple of months.

The S&P 500 gained 0.24% while the S&P/ASX 300 was up 1.69%.

This week, we have the Fed Open Monetary Committee meeting (December 12-13) as well as the November US CPI report.

On the latter, consensus is looking for a 0.05% month-on-month rise in headline inflation but a steep step-up to 0.3% month-on-month in core inflation.

US macro and policy

October JOLTS came in at 8.73 million versus September’s 9.35 million and consensus expectations of 9.3 million. 

It paints a picture of broad-based slowing in the labour market, but not the plunge some feared given the scale of rate increases. For every employed person, there are now an estimated 1.3 jobs available (down from 1.5).

The largest declines in job openings come from private sectors such as education (down 238,000) and financial services (down 217,000).

The Quits rate remained at 2.3%. (The three-month moving average in the private sector is running at 2.6% and falling).

This has historically provided a strong six-month lead on the direction of private-sector wages and salaries in the US Employment and Cost Index. It suggests growth in the latter should continue to soften.  

November payrolls rose 199,000, which was a touch above consensus of 185,000. This helped by an end to the auto worker strike.

The unemployment rate fell 0.2% to 3.7% versus consensus of 3.9%. This rise was driven more by an increasing workforce rather than more unemployed people.

Average hourly earnings rose 0.4% versus consensus at 0.3%. The three-month annualised rate of 3.4% versus 4% previously seems to be heading in the right direction. 

With commodities, goods and rent inflation all seemingly under control, wages remain one of last areas to address.

The US Federal Reserve is focusing on wages growth, which is the main driver of core non-rent PCE services inflation. Because of low productivity growth in many services, wage growth can quickly change price inflation.

Wage growth between 3% and 3.5% should be enough to see core non-rent PCE services inflation at 2.5% and overall medium-term core PCE inflation at 2%.

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Lower petrol prices and higher stock markets played an important role in the December Michigan consumer sentiment index hitting 69.4 – up from 61.3 in November and ahead of consensus of 62.

In the same survey, one-year inflation expectations fell 1.4% percentage points to 3.1%, which is the largest single drop in a month since Covid.

Meanwhile, expectations over the five to ten-year timeframe also fell from 3.2% to 2.8%. 

This is all good news for the Fed, which closely watches consumer inflation expectations.

RBA leaves rates on hold

As expected, there was no Christmas Grinch from the RBA – with rates unchanged at 4.35%, as expected. 

However, the forward-guidance of data-dependency and the evolving assessment of risks was maintained.

On the labour market, the statement noted that “wages growth is not expected to increase much further and remains consistent with the inflation target, provided productivity growth picks up. Conditions in the labour market also continued to ease gradually, although they remain tight”.

We see some risk to this view. Recent data suggests there may be further persistence in wage growth in contrast to other economies.

The Board will next meet in February, after monthly and quarterly CPI data (due on January 10 and 31 respectively) and labour market updates.

Comments from the RBA’s head of financial stability Andrea Brischetto last week were consistent with the feedback we’ve received from banks: the cohort of borrowers that are under severe financial stress is unexpectedly very small given the magnitude of the rate rises we have seen.

Brischetto’s observations included:

• around 95% of variable-rate owner-occupier borrowers still have spare income after meeting their mortgage payments and essential expenses
• around 5% find their income insufficient to cover their mortgage payments and essential expenses, however, many of these mortgagees do have savings in their mortgage offset and redraw accounts
• this leaves less than 2% of all variable-rate owner-occupier borrowers who have both an income shortfall and low savings buffers, and so could fall into severe financial stress within six months assuming interest rates remain around current levels.

This suggests an aggregate level of the economy is getting through the great variable-rate reset without falling off “the mortgage cliff.”

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The RBA and government’s conduct of monetary policy statement included a key change towards a shift to greater emphasis on the midpoint of the 2-3% inflation target, less emphasis on financial stability, and a requirement of the RBA to provide a more detailed assessment of full employment.

It also outlined changes to improve communications and accountability, such as publishing unattributed votes after each meeting and requiring external Board members to give public speeches.

Australian macro

Third-quarter GDP growth was softer than expected at 0.2% and 2.1% over 12 months.

Due to the increasing cost of living, consumption is growing at its slowest yearly rate since Q1 2021 while the savings ratio dropped to its lowest point since Q4 2007.

There were positive drivers from government expenditure (up 0.2%), investment (up 0.2%) and inventory growth (up 0.4%), which helped offset a drag from net exports (down 0.6%).

Productivity improved, rising 0.9% after a 1.6% fall in Q2. This was in a response to hours worked falling 0.7% (a level that is down 2.1% year-on-year).

Unit labour cost growth slowed to 1.2% for the quarter and is up 6.4% year-on-year, down from 7.4% in Q2.

While high, it is heading in the right direction.

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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