Oliver Renton: What’s driving Aussie equities this week?

Here are the main factors driving the ASX this week, according to portfolio manager OLIVER RENTON. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share Fund

FATIGUE and rotation dominated markets last week.

The S&P 500 fell 0.3% while the S&P/ASX 300 ended 0.2% higher. Bond yields ticked up slightly, gold was up 2.8% and oil gained 5.2%.

Equity valuations are close to dot-com bubble levels, causing some discomfort for investors.

Historically, the latter half of September is also the weakest period for markets.

However, fundamentals and liquidity appear to remain strong.

In Australia, there was sharp sector rotation. Resources and energy outperformed, while healthcare and interest rate-sensitive stocks lagged.

Weak employment data initially increased expectations of a September rate cut, but these were promptly reversed following stronger August inflation figures.

US economic data was mixed, with most releases unremarkable. Notable exceptions such as new home sales were dismissed as outliers.

The economy shows modest improvement, with slightly higher inflation. Tariffs and trade issues resurfaced, particularly affecting healthcare and kitchen sectors.

Limited details left markets interpreting official communications and social media updates. Fed speak continued to be bifurcated.

Looking forward, the cadence in news flow is starting to increase as the new financial year progresses and AGM season approaches.

US macro and policy

The flash composite PMI – a leading economic indicator which provides an early estimate of the private sector’s economic health – fell to 53.6, below the consensus of 54.

Services PMI dropped to 54.5 and manufacturing PMI decreased to 53 – both slightly below consensus.

Despite the slight decline, the composite PMI’s Q3 average of 54.4 still signals moderate economic growth.

Improved financial conditions, reduced tariff uncertainty and tax clarity from the “One Big Beautiful Bill Act” have driven the recent uptick.

However other indicators such as regional Fed surveys and the ISM services index – a key indicator of the health of the US services sector – suggest limited improvement.

Recent economic data shows 2Q GDP was revised up to 3.8% versus an expected 3.3%.

Consumer spending (headline Personal Consumption Expenditures or PCE) was also revised higher to 2.5% compared to the previous estimate of 1.6%.

The GDP Price Index rose 2.1% and the Core PCE Price Index increased 2.6% quarter-on-quarter higher than the 2.5% consensus.

Although revisions to earlier data indicate stronger consumer spending, broader services spending is still lagging, only up 2.6% which is in line with its average pace last year.

Real spending on goods only grew at a 1.8% annualised pace which is well below the roughly 4% average pace in 2024, likely conveying the impact of tariffs.

The goods trade deficit narrowed to $85.5 billion in August from $102.8 billion. Wholesale inventories fell 0.2%, and retail inventories were flat.

Durable goods orders rose 2.9%, mainly due to aircraft orders, but core orders also improved, suggesting some easing of tariff-related uncertainty.

New home sales surged to 800k in August, up from 664k in July, exceeding forecasts.

However, this 20.5% monthly jump was regarded as an anomaly, given the historical month-on-month volatility and that the underlying trend in new home sales has been weaker this year. The market largely ignored this data point as an outlier.

US mortgage demand surged 29.7% last week as Fed rate cuts began. Refinance applications jumped 58% in one week to levels not seen since the 2020 pandemic.

Initial jobless claims fell to 218k for the week ending 20 September, and continuing claims dropped to 1.93 million.

State-level claims appeared reliable after recent errors were corrected, but seasonality and calm weather may have suppressed claims data, possibly overstating labour market strength.

To summarise the slew of economic data released last week into one line – the economy’s momentum looks strong in Q3 but is unlikely to last and spur a sustained rebound.

Tariffs

President Trump unveiled a fresh round of tariffs – 100% on branded drugs, 25% on heavy trucks, 50% on kitchen cabinets and vanities and 30% on upholstered furniture – citing a surge of imports.

The 100% tariff on branded pharmaceuticals will apply to all imports unless a manufacturer has begun US production.

This was announced in tandem with a US Commerce Department national security investigation into imports of PPE, medical devices, robotics, and industrial machinery.

As it stands more generally, only about one-third of tariff impacts have been reflected in consumer prices.

Fedspeak

Markets monitored a flurry of Fed commentary for directional clarity. But the messaging instead highlighted a continued bifurcated tone.

St Louis Fed president Alberto Musalem and Atlanta Fed president Raphael Bostic said last week’s quarter-point rate cut was appropriate to address rising unemployment.

Both stressed that lowering inflation remained the main priority.

Fed governor Stephen Miran argued that tariffs, immigration restrictions and tax policy had reduced the neutral interest rate, suggesting rates should be much lower to avoid economic harm.

The Fed’s Michelle Bowman cautioned that policymakers risked falling behind and must act quickly to cut rates as the labour market weakens.

Treasury secretary Scott Bessent criticised Fed chair Jerome Powell for not signalling rate cuts. Bessent called for rates to be lowered by 100-150 basis points before year-end.

Powell described the current situation as challenging, noting that inflation risks were tilted upward and employment risks were to the downside.

He warned there was no risk-free path forward.

Fed official Austan Goolsbee also expressed discomfort with aggressive rate cuts, saying inflation remained above target and was worsening.

Oil and energy

Oil rose 2.2% after four consecutive days of declines, driven by concerns over Russian supply disruptions.

NATO announced it would use all available options, including military measures, to defend against further Russian airspace incursions.

US Secretary of State Marco Rubio reaffirmed America’s commitment to NATO, while Russia considered a diesel export ban for some companies following new Ukrainian drone attacks on Russian oil refineries and pipeline facilities.

Canada’s prime minister called for western allies to impose secondary sanctions on Russia to increase pressure on President Putin.

Elsewhere, Iraq and Turkey reached an agreement that could resume crude exports from Kurdistan after a two-year pause related to a payment dispute, potentially returning 230k barrels per day to the market.

The energy sector gained, with crude climbing 2.5% after US Department of Energy data showed a 607k barrel inventory draw, compared to expectations for 232k.

In China, President Xi announced plans to cut greenhouse gas emissions by 7-10% by 2035.

Xi outlined targets for non-fossil energy to make up over 30% of consumption and for wind and solar power capacity to reach 3.6 billion kW, six times the 2020 level.

Australia macro and policy

Headline inflation was stronger than expected, rising 3% year-on-year. This increase reflected broad-based strength in underlying inflation, not just volatile items.

Services and key categories such as dining, household and media services, and housing contributed to the increase.

The trimmed mean for Q3 is estimated at 0.9% quarter-on-quarter, above the RBA’s earlier 0.63% forecast.

Markets are now pricing in no more RBA rate cuts this year.

RBA governor Michele Bullock believes the upside in inflation is broadly in line with expectations, suggesting inflation will settle around the midpoint of the target band.

Labour data

The Australian labour market softened in August, with employment falling 5.4k compared to a 26.5k increase in July and well below consensus expectations for a 21k gain.

The weakness was driven by a 40.9k drop in full-time jobs. A 35.5k rise in part-time roles was not enough to offset the decline.

The participation rate edged down to 66.8% from 67% in July.

The unemployment rate remained steady at 4.2% for the third consecutive month, in line with consensus and just below the RBA’s 4.3% forecast for the year.

Underemployment improved slightly to 5.7% in August from 5.8% in July.

Job vacancies, based on ABS data, fell 2.7% in the three months to August, consistent with the gradual rise in the unemployment rate. Monthly job ad data indicate vacancies should stabilise in the near term.

Labour market turnover remained low in the August quarter, likely constraining wages growth. However, the proportion of employees expecting to change jobs in the coming year is returning to more normal levels.

Markets

There were not a lot of headline market moves this week, but many tangible shifts occurring beneath the surface.

The ASX300 sector breakdown revealed notable rotation: IT, consumer discretionary, financials, industrials, and staples all falling around 1%.

Healthcare continued its poor run, down 2.7%, and REITs slipped 2.4%.

Staples and IT have underperformed the index this calendar year, with healthcare lagging further.

Energy improved this week but remains behind the index year-to-date. Resources led with a 5.9% gain, up 20% for the year versus the index’s 10% rise.

The top ASX100 performers for the week were dominated by resources including gold, while healthcare, rate sensitives and financial names were among the bottom performers.

Micro-caps were higher with the S&P/ASX Emerging Companies Index gaining 4.2%.

The S&P/ASX Small Ordinaries was also up 0.8%, driven by a 5.4% rise in small resources, while the small industrials declined 1.1%.

US and Australian bond yields rates rose, with the Australian 10-year up 14bps.

Oil gained 5.2% after year-to-date declines. Copper had a strong week due to supply disruptions.

Gold remained resilient, up 44% this year and on track for its second-best yearly gain ever.

While the US indices appeared fatigued most global indices posted modest gains for the week.

There were also a number of interesting observations of note this week:

• Although September is typically a poor performing month, when US central bank cut interest rates with no recession, markets often post a gain.
• So far we are seeing this playing out with the S&P 500 going 37 trading sessions without a drop of at least 1%. This is the longest streak in the year; with the record over the last five years being 53 days.
• The Russell 2000 also joined its larger cap index peers, reaching a fresh all time high after four years.
• The next 12 months of estimated S&P 500 operating margins are at cycle highs, indicating companies are achieving more with less. This supports robust corporate earnings despite recent job data revisions, making widespread labour market deterioration unlikely.

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About Crispin Murray and Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Find out more about Pendal Focus Australian Share Fund here.  

Contact a Pendal key account manager here.

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.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Contact a Pendal key account manager here