Jim Taylor: What’s driving the ASX this week?

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

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POSITIVE developments on US-China trade and a decent US reporting season helped support a continued rebound in equities last week.

US Treasury Secretary Scott Bessant noted last week that it was up to Beijing to de-escalate the trade situation.

By Friday there were signals from China which the market interpreted as a slight softening of its stance and a willingness to negotiate and calm the rhetoric.

Quarterly reporting in the US has been generally robust so far.

There are some pockets of weakness – such as low-end consumer exposures in airlines and in McDonalds – and a number of companies withdrawing FY25 guidance, including General Motors and the airline companies.

However positive commentary from Meta and Microsoft on AI and demand for data centre capacity reignited the tech space – prompting a direct follow-through in Australian tech.

Last week’s US economic data fortified the equity market rebound. The flipside is that there wasn’t really anything that could justify the Fed doing anything with rates in the near-term.

The consensus now expects no rate cut in May and less than a 50 per cent chance of a cut in June – down from about 70 per cent four weeks ago.

There are now about 80bps of rate cuts priced in this year.

US bonds sold off a touch, with 10-year Treasury yields rising 5 bps to 4.31%. This needs to be closer to 4%, but still-reasonable economic data is working against them.

Elsewhere, commodities and resource stocks lagged last week, in what was otherwise a sea of green. The S&P 500 rose 2.9%, the NASDAQ gained 3.4% and the S&P/ASX 300 moved ahead 3.4%.

Finally, the Trumpian politics “ripple effect” that we saw in the Canadian elections were replicated in the Australian federal election over the weekend.

Australia macro and policy

The key takeaway from last week’s Q1 consumer price index (CPI) is that the current data does not include any areas of great concern and that categories which have been sticky – such as rent and construction costs – are heading in the right direction.

The key risk to watch is whether tariffs result in an inflationary pulse.

The headline CPI increased 0.9% quarter-on-quarter (qoq) in Q1 2025, versus consensus expectations of 0.8%.

It rose 2.4% year-on-year (yoy) – the same as in the December quarter – slightly ahead of the 2.3% consensus expectation.

Higher prices for food (+1.2% qoq), fuel (+1.9% qoq) and utilities (+8.2% qoq) drove the quarterly uplift.

The jump in utilities reflects electricity prices rising 16.3% as households deplete subsidies. This equates to a 30bp bump in the headline CPI.

Other large contributors include rents (+1.2% qoq, +5.5%yoy) and education (+5.2% qoq, +5.7% yoy).

The number of index categories annualising more than 2.5% quarterly growth has fallen below the long-term average over just under 50%, having peaked at 80%.

Goods inflation ticked up to 1.3%, from 0.8% the previous quarter, but this still remains relatively low.

Services inflation rose 0.4% qoq which is the slowest pace since Q3 CY21. It is at 3.35% yoy, down from 4.2% in the December quarter.

Overall construction costs have now been in deflation for the last two consecutive quarters, driven mainly by Melbourne and – to a lesser extent – Sydney.

Elsewhere, nominal retail sales were up 0.3% month-on-month (mom) and +4.3% yoy. This was a touch weaker than expected, with consensus expectations at +0.4% mom. Sales excluding food were broadly flat for the second consecutive month.

Retail volumes also came in weaker than expected and were flat for the quarter, after stronger activity in 4Q25.

US macro and policy

Consumer expectations are at new lows. But recent backward-looking data (such as earnings) are resilient and relatively real-time data is not signalling a dramatic fall-off in consumer activity.

This suggests consumers are very worried about the effect tariffs might have on prices, real income and the jobs market. However they are not taking significant actions at this stage to reign in activity and shore up their financial positions.

Consumer expectations

The Conference Board consumer confidence index plunged from 92.9 in March to 86.0 in April, below consensus expectations of 88.0.

The Conference Board expectations index has fallen to levels not seen since the GFC.

The release also signals weaker perceptions about the labour market; the proportion of people saying that jobs are currently plentiful fell from 33.6% to 31.7%, while the share saying they are hard to get rose from 16.1% to 16.6%.

Consumer spending

On the other hand, consumer spending in March was resilient, with real consumption rising 0.7% versus 0.5% consensus expectations. Nominal personal income increased by 0.5%, slightly above the consensus, 0.4%.

This suggests that consumers may be willing to continue spending until the tariff damage is actually incurred.

Healthy spending growth was broad-based across both goods and services.

Real spending on goods rose by 1.3% as people bought durable goods – especially cars – before tariffs lift prices.

But spending on services also increased, by a decent 0.4%.

Near-real time indicators of spending such as restaurants and hotels data also do not suggest much of a slowdown from March to April, despite the increased level of gloominess.

Q1 GDP

GDP fell at an annualised rate of -0.3% in Q1 CY 25, marginally below consensus expectations of -0.2%.

The contraction was driven by an unprecedented surge in imports ahead of tariffs.

Adjusting for the Imports component, it is clear that the economy was slowing modestly.

Consumer spending on services rose by 2.4% in the quarter which is the smallest increase since Q3 2023.

Private fixed investment was also relatively soft, with residential investment and non-residential investment up only 1.3% and 0.4% respectively.

Investment in industrial production and software was stronger, rising 4.1% for the quarter, but the year-on-year rate is 1.8%, down from 2.6% in Q4 and the weakest since 2018.

Jobs data

Economic data is generally getting a bit more opaque, a view evidenced by April payrolls which rose 177k, well ahead of the 138k expected by consensus.

This probably reflects a mini surge in hiring activity ahead of the April tariffs, with unseasonal strength in warehousing and transport. But it is too early to reflect the immediate near-term uncertainty from the tariffs in this data set.

There was broad-based strength across most employment categories. The healthcare and government sectors – which have been driving strength in employment over the last twelve months – have stepped down modestly.

There were -58k net revisions to the previous two months, while the unemployment rate was unchanged at 4.2%, meeting consensus, and average hourly earnings rose by 0.2%, a bit below the consensus, 0.3%.

 

Initial jobless claims rose to 241k in the week ending April 26, from 223K the previous week and above the consensus expectation of 223K.

In the last two weeks the real-time employment data is showing signs of weakness, indicating that jobless claims will trend up over coming weeks.

Data from employment website Indeed shows total job postings on April 25 were down 6% over the previous seven days and down 1% from April 2.

At the same time, outplacement firm Challenger, Gray & Christmas’s measure of layoff announcements rose 63% year-over-year-over-year in April.

As a result it seems likely that initial claims may be up around 250K by June.

JOLTS job openings fell to 7,192K in March, from a revised-down 7,480K in February and below the 7,500k expected by consensus.

Public sector job openings have fallen 36k (or 27%) in-line with the Trump administrations hiring freeze.

Policy uncertainty has been the primary driver of the ~230k drop in private sector job openings with particular weakness in the transportation, warehousing and utilities sectors. The post-election job openings bounce has now been totally reversed.

The private sector quits rate was steady at 2.3% in March which is in line with last year’s average.

Falls in consumer confidence and job postings could very well see reduced movement between jobs soon.

Finally, the Employment Cost Index (ECI) rose 0.9% in Q1, in line with the consensus. Year-over-year growth slowed to 3.6% in Q1 CY25, from 3.8% in the December quarter, but is expected to stabilise at this level if the first quarter run-rate is sustained.

China macro and policy

On Friday China’s Commerce Ministry said that Beijing “is currently evaluating” repeated comments and messages from U.S. officials that “expressed their willingness to negotiate with China on tariffs.”

The market took this as a positive development in the ongoing trade spat.

China’s official purchasing managers’ index (PMI) fell to 49.0 in April versus 50.5 in March versus consensus of 49.8. This is the lowest reading since December 2023.

Tariffs are being felt in order volumes for Chinese companies. Goldman Sachs estimates that order volumes are down more than 50% on pre-tariff levels in April for many categories including white goods, appliances, construction machinery and some smartphones and PCs.

Exports orders to the US in some categories such as furniture, white goods and appliances, solar inverters and modules and pet treats are being fulfilled almost entirely by countries other than China.

Markets

Investors seem to be buying the dip in the US. Retail investors bought ~US$40bn in ETFs and stocks in April, surpassing March, which was already a historical record.

US earnings

The blended earnings growth rate for Q1 S&P 500 EPS currently stands at 12.8%, well ahead of the consensus expectation of 7.2% as at the end of March.

The blended revenue growth rate is 4.8%.

Of the 72% of S&P 500 companies that have reported for Q1, 76% have beaten consensus EPS expectations, a touch below the 77% one-year and five-year averages of 77%.

62% have surpassed consensus sales expectations, which is better than the 61% one-year average but below the five-year average of 69%.

In aggregate, companies are reporting earnings that are 8.6% above expectations, better than the ten-year average of 6.9% but below the five-year average of 8.8%.

In terms of notable stocks:

• Meta was up after strong advertising demand saw it beat revenue estimates. It lifted its 2025 capex plans to between USD64bn and USD72bn from “as much as USD65bn”. CEO Mark Zuckerberg said that “The pace of progress across the industry and the opportunities ahead for us are staggering. I want to make sure that we’re working aggressively and efficiently, and I also want to make sure that we are building out the leading infrastructure and teams.” Most of the capex is going towards supporting the core business, such as supplying the computer power for ads, rather than generative AI development. The CFO said the spending was to more rapidly ready data centre capacity to support AI efforts. It reported revenues of USD42.31bn for the quarter, beating the USD41.4bn that had been expected. The midpoint of the FY25 capex guidance is 37% of FY25 Sales.
• Microsoft also jumped after the company reported stronger than expected growth in its Azure cloud computing business, with revenue up 33% in the quarter, exceeding estimates of 29.7%. AI contributed 16 percentage points of the growth, up from 13 points in Q4. It said the real outperformance was in the non-AI cloud business, with the improvement in AI simply from bringing forward its delivery to some customers. Capital expenditures were up 53% to USD21.4bn, however the proportion of longer-lived asset expenditures fell to about half of the total. It said that during FY26 capital expenditure will continue to grow but at a slower rate than in the current year, and with more emphasis on shorter lived assets. It now expects to be AI supply-constrained past June “as planned demand is growing a bit faster.” Prior guidance was for demand/supply to normalise around June.
• Apple’s CEO Tim Cook said that a “majority” of iPhones sold in the U.S. during the June quarter would come from India, while “nearly all” of the company’s other devices sold in the U.S. during the period would come from Vietnam. Tariffs are expected to add $900m to the cost base in the June quarter and would be higher in future quarters.

 

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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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