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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LAST week was a big one for economic data and US company reporting, amped up by the Federal Open Market Committee’s (FOMC) meeting and Chairman Powell’s press conference. 

US reporting season is tracking in-line with historical trends, and the results from five of the “Magnificent Seven” which reported were generally well received – with a strong showing from Meta crowning the week of results. 

US economic data was all largely as expected and supportive of the soft-landing scenario, until the monster Non-Farm Payroll print on Friday night potentially put paid to the notion of a March rate cut.  

Powell had strongly indicated at the FOMC press conference that a March cut had not been the Fed’s base case.  

Commodities were generally weaker and oil gave back all of the gains from the previous week. 

The week’s upshot is that expectations around the extent of rate cuts in CY2024 now look more appropriately centred. 

The S&P/ASX 300 rose 1.82% while the S&P 500 gained 1.34%.

Interest rates

The Fed removed the previous reference to “any additional policy firming that may be appropriate” from its statement. 

Instead, it noted that it will “carefully assess incoming data, the evolving outlook, and the balance of risks” in determining adjustments to the interest rate. 

In addition, Powell noted that he didn’t think it likely that the Fed could reach a required level of confidence by March to cut rates at that time.   

The market is now focused on the May 24 meeting for a potential first cut.  

This gives the Fed the opportunity to see three additional PCE, CPI, PPI and employment data, as well as the first quarter employment cost index (ECI).   

Elsewhere, the Bank of England voted 6-3 to keep rates steady as expected; there were two votes for a hike and one for a cut. 

US economic data

It was a big week for labour-market data.  

JOLTS 

The JOLTS job opening data rose to 9,026k in December.  

This was above the upwardly revised 8,925k openings in November and ahead of the 8,750k expected by consensus. 

Importantly, the JOLTS quit rate held steady at 2.2%.  

This is regarded as a key lead on the employment cost index (ECI), which is the Fed’s preferred measure of wage growth and suggested moderation here. 

ADP employment 

The ADP employment report delivered 107k increase in private payrolls, which was well below the 150k expected by consensus. 

ECI 

The ECI rose 0.9% quarter-on-quarter for Q4 2023, down from 1.1% in Q3 and versus consensus expectations of 1.0%. This is the smallest increase since December 2019. 

Wage gains slowed to 0.9% from 1.2% in Q3, while the year-on-year rate fell to 4.3% down from 4.6% in Q3 and from the high point of 5.2% in Q2 2022.   

While hawks on the FOMC are possibly looking for a reading below 4%, the annualised increase in Q4 came in at 3.8% while a drop in the quits rate over recent months bodes well for further slowing ahead.  

Initial jobless claims 

Initial jobless claims rose to 224k from 215k, and ahead of the 212k expected by consensus. 

Data around layoffs suggests that jobless claims could head toward 250k in the next few months.  

This is still low by historical standards during an employment slowdown, but is something that the Fed may have their eye on.  

During the week, we also had UPS and PayPal – among others – announcing up to 10% in workforce reductions. 

Non-farm payrolls 

The market had been generally happy with the jobs data through the week.  

Then came the hammer blow from non-farm payrolls, which rose 353k in January – almost twice the consensus expectation of 185k.  

Net previous revisions were also up 126k. 

The headline payroll gain comprises 317K private and 36K government jobs, and gains were broadly spread across the economy. 

The unemployment rate was unchanged at 3.7%, which was just below consensus.  

The available work force has been growing because of migration. 

Average hourly earnings rose 0.6%, versus 0.3% expected, however, this data series is not as reliable as the ECI which is favoured by the Fed.  

The market’s reaction was initially negative on concerns that a firm labour market could push out expected rate cuts.  

However, several analysts noted that Powell had stressed in his press conference that the Fed was not looking for a fall in employment as a pre-condition for rate cuts. 

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Australia

Consumer price index (CPI) 

The December quarter CPI came in weaker than expected. 

Headline CPI rose 0.59% for the quarter (versus 0.80% expected) and 4.05% year-on-year.  

This is 45 basis points below the RBA’s forecast made in November. 

The trimmed mean inflation rose 0.78% for the quarter, also weaker than the 0.9% consensus expectation.  

This measure was 4.18% year-on-year and 3.12% at an annualised quarterly rate. 

The result was explained by strong pressure on electricity prices from ongoing subsidies, as well as greater disinflation from tradable goods. 

Strong disinflationary pressure on core goods is increasingly offsetting relative resilience in core services pricing. 

Retail sales  

Retail trade fell 2.7% for the month-on-month in December, worse than the expected -1.7% and reversing the 1.6% gain in November.  

There were material seasonal adjustments to the December figure, without which this figure would have been a 5.3% month-on-month decline. 

Weakness was broad-based across states and led by non-food spending.  

Clothing and soft goods fell 5.7%, household goods was down 8.5%, and department stores were 8.1% lower.  Eating out fell 1.1% month-on-month, while spending on food rose 0.1%.

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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