Jim Taylor: What’s driving the ASX this week

Here are the main factors driving the ASX this week according to portfolio manager JIM TAYLOR. Reported by investment specialist Jonathan Choong

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RECENT themes continue, with equity market rotation out of the best performers, weakness in the speculative end of the investment landscape (eg Bitcoin), and ongoing effects of policy uncertainty under Trump 2.0.

The S&P/ASX 300 fell -1.3% while the S&P 500 was off -1.0%.

KPMG chief economist Diane Swonk probably summed it up best. “We’re all sitting here trying to filter through the noise to the economic reality,” she said. “But the noise itself has its own economic consequences.”

Last week perhaps saw some early indications of this economic impact across both the consumer and business segments in the US.

• On the consumer side we saw very weak sentiment measures, spending data and a tick up in jobless claims.
• On the business front we have seen capex intentions slipping and a surge in imports as businesses look to front-run tariffs set to commence from March 4th.

The net effect was a big rally in bonds – with US ten-year yields dropping 23bps to 4.19% – which reflects increased uncertainty around growth rather than a material change in rate cut expectations.

For their part, the Fed has kept a consistent line about rates remaining on hold until some of the policy settings become clearer, but still with the prospects of some cuts at the back-end of the year.

Notwithstanding all the macro noise, the second of the two main weeks of Australian reporting season was the key driver of moves within the local market.

There were plenty of hits and misses, with increased levels of volatility around results driving some big moves within the market.

We are seeing companies place a greater focus on the language used in their releases, given the influence of systematic strategies that use earnings releases as an input.

The savage reaction to earnings misses is also driving corporate Australia to be much more proactive in cost-cutting to support earnings. They are also more constructive on share buybacks as a mechanism to support the stock in increasingly volatile times.

Macro and policy Australia

Headline January consumer price index (CPI) inflation came in at -0.2% month-on-month and up 2.5% year on year, the latter unchanged from December and a touch below consensus expectations of 2.6%.

Seasonally adjusted, it ticked up 2.7%.

The RBA’s preferred trimmed-mean measure rose from 2.7% year-on-year in December to 2.8% in January. The reading excluding volatile items was 2.9% year-on-year, up from 2.7% in December.

An increase in inflation in food (+3.3%) and clothing (+2.1%) were major contributors. So too was a reduction in the effect of electricity (-11.5% versus -17.5% in December as some subsidies start to roll off.

Key housing-related categories such as rents (+0.3% month-on-month) and new dwelling prices (-0.1% month-on-month) are showing further disinflation, which is a good sign for the Q1 CPI print.

Both the headline and trimmed-mean year-on-year CPI rates are within the RBA’s 2-3% band – as are the majority of items in the CPI basket, although the latter ratio has flat-lined in recent months.

Macro and policy US – policy uncertainty manifesting in the data

Fedspeak

The Federal Reserve Bank of Atlanta’s President Raphael Bostic said the Fed should hold interest rates where they are, at a level that continues to put downward pressure on inflation. This is in contrast to his comments a week ago when he said that another two cuts would be appropriate.

Jeffrey Schmid, President of the Kansas City Fed, noted that inflation has been just recently at a 40-year high and that “now is not the time to let down our guard,” saying that inflation risks have to be balanced with growth concerns.

February Conference Board data

February’s Conference Board consumer confidence index fell to 98.3 from 105.3 in January. This was well below consensus expectations of 102.5 and was the weakest reading since August 2021.

Consumer confidence appears to have fallen sharply in the face of threats to impose large tariffs and to slash federal spending and employment.

The Conference Board expectations index – which is most relevant for spending growth – weakened to an eight-month low of 72.9 and is consistent with year-over-year growth in real consumption of about 2%, down markedly from 4.2% in Q4 2024.

The weakness of confidence strongly suggests that recent rapid growth in spending on durable goods mostly reflects households pre-empting tariffs.

The Fed keeps a keen eye on the Conference Board consumer inflation expectations series and may have been concerned by a further increase in median one-year ahead inflation expectations, from 4.2% in January to 4.8% in February. This is well above the 4.3% average reading from the years 2000 to 2019.

Mean inflation expectations leapt to 6.0%, from 5.2%, indicating that some individuals now expect extremely high inflation.

The key risk is contagion from these expectations into wage setting outcomes. The weakening environment for labour probably provides some weight against this – but it will be very closely watched over the next six-to-twelve months.

In this vein, the proportion of people saying that jobs are plentiful fell to 33.4% in February, from 33.9% in January, while the share saying they are hard to get increased to 16.3%, from 14.5%.

In addition, the proportion of people expecting fewer jobs to be available in twelve month’s time exceeded those expecting more jobs by 8 percentage points, the joint-largest gap since November 2013.

Other data

Real consumption expenditures fell by 0.5% in January, much weaker than the -0.1% expected. The drop was driven by the reduction in vehicle purchases, post the surge in people buying replacement autos following recent hurricanes.

Nominal personal incomes rose 0.9%, well ahead of consensus expectations of 0.4%. However this was driven by government transfers, an effect not expected to be sustained.

The Core PCE deflator rose 0.3% in January, as expected. This reduced the annual inflation rate to 2.6%, which is down from 2.9% in December and is the lowest since March 2021.

The trend here is your friend – with expectations that the path of decline toward 2% is reasonably entrenched, save for the huge caveat being how the tariffs play out.

If China gets an additional 10% and the 25% tariffs on Canada and Mexico hold then it probably impacts Core PCE by about 0.5% and keeps the number in the mid-to-high 2.0% to 3.0% range.

Elsewhere, the NFIB measure of capex intentions has seen a pullback, suggesting businesses are increasingly nervous around tariffs and inflation and reining in spending intentions.

On the employment front, weekly initial jobless claims rose to 242K, up from 220K and above the 221k consensus. Continuing claims fell to 1,862K from 1,867K, slightly below the consensus of 1,871K.

Higher jobless claims appears the result of extreme weather rather than the efforts of DOGE.

Washington, Virginia, Maryland have around 5% of the US population but 20% of the Federal government workforce and the data from these regions were marginally (~2k) above recent data points.

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Total Federal government-dependent employment – excluding military and postal workers – probably stands at about 9.5 million workers, which is about 6% of total payrolls.

Finally, we note that the net trade balance is going to be a very large drag on US growth amid a pre-tariff surge in imports.

The goods trade deficit surged to US$153.3bn in January, miles ahead of December’s US$122.0bn deficit – which had itself been a record – and well above the US$116.6bn consensus expected.

Exports rose by 2.0% – so the blow-out is entirely the outcome of an 11.9% surge in imports.

All the major import categories rose, but around two-thirds of the surge resulted from a 32.7% increase in industrial supplies. That category is almost 70% above its October level.

This is showing up in the Atlanta Fed GDPNow measure, where expectations of Q1 GDP growth plunged from 2.3% on 19 February to -1.5% on 28 February as a result of the net export and personal consumption expenditures data.

Macro and policy rest of the world

There are reports that China is planning to inject at least US$55 billion into three of its biggest banks.

This could apparently be completed as soon as June and builds on the stimulus package unveiled in 2024.

In Europe, France is destroying its industrial base with over taxation, according to Michelin CEO Florent Menegaux.

“You’re economically killing your country when you’re imposing taxes much higher than in other countries,” he said. “Right now, the direct and indirect taxation in France is the highest in Europe. Don’t expect corporations to be able to swallow that all the time”.

Higher taxes and the drop in auto demand across Europe has forced Michelin to shut down three plants in Germany, two in France and one in Poland.

Producing in Europe is twice as expensive as in Asia. “We have to re-adapt our industrial footprint in Europe to export less because it’s not economical,” said Menegaux.

In Germany, the energy regulator is proposing a plan to require around four hundred manufacturers to adjust their operations to match real-time wind and solar supply, in order to keep the grid stable and prevent price spikes.

The plan would force companies to ramp down production during periods without wind or sunshine, and run at full throttle on breezy, bright days, which could help keep a lid on prices but would further add to company cost of production.

Reporting season

The number of companies seeing upgrades versus downgrades for out-years was pretty evenly split.

As a result of revisions, around 1% has been taken from both consensus FY25 and FY26 overall ASX200 profit expectations. Year-on-year EPS growth for the market now sits at -0.7% for FY25, then accelerating to +8.0% for FY26.

The downgrade skew was disproportionately driven by lower-than-expected earnings being factored into some larger-cap names in the Energy, Banks, Health Care and Tech sectors.

There was a step-up in stock price volatility in response to earnings results over recent periods. 40% of stocks that reported moved by more than 5% either way – a level not seen since the second half of FY2019 and well ahead of the ~25% average over reporting seasons going back to FY2007.

This is also reflected in a new high for the ratio of a stock’s earnings day move versus its thirty-day average daily move. This hit 5x, versus an average of 3x in reporting seasons back to FY2007.

Ultimately the ratio of beats to misses remained just in positive territory. 26% of companies beat consensus EPS expectations by 5% or more, versus 24% that missed.

The ASX 100 performed better than the Small Ordinaries in this regard. 23% of ASX 100 companies beat consensus EPS expectations by 5% or more – and 17% missed – while 28% of Small Industrials beat but 28% also missed. 35% of ASX 100 Resources beat and 24% missed, while 23% of Small Resources beat and 38% missed.

Dividends provided decent support; 26% of companies beat DPS by 5% or more, versus 20% that missed.

Changes to guidance were balanced. 15% of ASX 100 companies upgraded guidance, while 15% also downgraded. In Small Industrials, 12% upgraded and 12% downgraded.

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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