Pendal: What’s driving Aussie equities this week?

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

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DESPITE higher bond yields and a constant stream of tariff proclamations, the US and Australian equity markets have reached all-time highs.

Reporting season has started in the US, with most companies beating consensus – though both company guidance and analyst expectations had been massaged down since Liberation Day.

A 7% fall in the trade-weighted US dollar index in 2025 should help US earnings, as 28% of S&P 500 revenues are from offshore – lifting earnings-per-share (EPS) by 2-3% in aggregate.

Global equity fund manager positioning is “all in”, with cash levels sitting at a close to a record low of 3.9%, investor sentiment at five-month high and recession expectations at a five-month low.

Macro data was mostly supportive in the US, with stronger retail sales, a drop in weekly initial jobless claims, a slightly higher Consumer Price Index (CPI) – with some signs of tariff price pressures – and a flat Producer Price Index (PPI).

In Australia, we saw softer employment data and a 25bp interest rate cut is now fully priced in for the RBA’s August meeting.

It was a big week for alternative assets.

Bitcoin overtook the Hong Kong dollar to become the seventh-largest traded currency globally. The Trump administration is preparing to open the US 401k retirement market to crypto currency investments, gold and private equity. This lifted private equity firms Blackstone and Brookfield.

The S&P 500 gained 0.6% and the S&P/ASX 300 was up 2.1% for the week.

The rebound in equities since early April reflects, to some extent, a bet that President Trump won’t follow through on his tariff threats.

Paradoxically, the market’s resilience may encourage Trump to push forward (or harder) on tariffs, which could be bad news for equities in both the US and Europe.

US macro and policy

CPI

US Headline CPI rose 2.7% year-on-year (YoY) in June, up from 2.4% in May and ahead of the 2.6% consensus expectation. The Core measure rose 2.9% YoY, up from 2.8% in May, but a touch behind the 3.0% expected in consensus.

The uptick in inflation was largely driven by heavily imported goods like toys, clothes, audio equipment, shoes and sporting goods. This suggests an impact from tariffs.

There are concerns that the CPI will pick up from here, as prices have possibly been depressed by the running-down of inventories built up prior to tariffs taking effect. The weaker US dollar may also feed through to higher inflation.

On a positive note, the University of Michigan Sentiment Survey showed long term inflationary expectations fell 40bp to 3.6%.

Other data

• The PPI for final demand was unchanged in June. Prices for final demand goods advanced 0.3%, and the index for final demand services decreased 0.1%.
• Retail sales rose more than expected in June (up 0.6% versus 0.1% consensus), buoyed by strong demand for cars and clothing as tariffs begin to take hold. Though, it should be noted that this follows two consecutive months of spending declines – a 0.1% pullback in April and a 0.9% slowdown in May.
• Initial weekly unemployment claims were down 7,000 last week to 221,000 – their lowest reading since the end of March. Year on year claims were down 7.9%, however, continuing claims rose by 4.8%.

Housing data – softness reflects a global trend

New housing starts are running at 1.32 million in June, with home builders cutting prices at the highest rate in three years.

Builder confidence in the market for single-family homes continues to bounce along the bottom at 33 on the National Association of Home Builders (NAHB)/Wells Fargo Housing market index, which has been in negative territory for fifteen straight months.

Housing units under construction were down another 6,000 to 1.361 million annualised – this is the lowest level in four years and down 20.6% from their peak.

First home buyers now account for 25% of purchases, down from 50% in 2010. This slows the down the chain of activity associated with people “trading up” properties. High house prices and mortgage rates (currently 6.75%) are the main impediment.

We also note that student loan repayments resume from May 2025. Roughly 45 million Americans have student loans, with an average balance of US$41,600. Repayments can impact spending in other areas.

Interest rates

Better-than-expected macro data and resilient GDP growth means the market is pricing no chance of rate cut when the FOMC meet on 29 July.

The next fully priced cut has been pushed out to October, with less than 50bps of cuts priced in for the remainder of 2025.

The market is also mindful of the Fed wanting to see how tariffs and a weaker US dollar feed into inflation.

However, last week, sitting Fed Governor Christopher Waller gave a speech entitled “The Case for Cutting Now”. Like Trump, Waller argues that we should be cutting rates now as tariffs only cause temporary inflation, growth is soft relative to long run potential, and labour market risks are rising.

The Trump Administration’s desire to see lower rates stems in part from the need to refinance the roughly $9.2 trillion of US government debt expected to mature in 2025 at the lowest rates they can. That’s about 25% of the total $36.2 trillion federal debt outstanding.

About $6.5 trillion matured in the first half of the year, and an additional $2.7 trillion is scheduled to mature in the second half. Looking ahead to 2026, another $7.6 trillion is set to mature.

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Tariff update

President Trump said he reached a deal with Indonesia that will see goods from the latter face a 19% tariff, while US exports will not be taxed.

Nvidia received assurances that the US government would allow it to export some chips to China, a move that could generate billions of dollars in revenue. This was seen as a necessity for a China/US tariff deal.

Treasury Secretary Scott Bessent said talks between the US and China are in a “very good place” ahead of an expected meeting in coming weeks. He suggested the deadline for a US-China tariff truce is flexible, telling market participants not to worry about 12 August.

Alcoa, the largest US aluminium producer, said tariffs on imports from Canada cost it US$115 million in the second quarter. The company redirected Canadian-produced aluminium to customers outside the US to mitigate additional tariff costs.

Australia macro and policy

A softer employment print dominated last week. June saw 2k jobs growth, versus 20k expected, lifting the unemployment rate by 20bp to 4.3% YoY – a three-and-a-half-year high.  

Employment growth has slowed to 1.3% in six-month annualised terms, down from growth of 2.8% in 2024. 

Hours worked declined by 0.9% and youth unemployment was up 90bp to 10.4%.

This saw expectations of an August interest rate cut shift from 90% to 100%.

The ANZ-Roy Morgan Weekly Consumer Confidence Index has languished below the neutral 100 mark for more than three years, the longest and deepest stretch this century. It last reached positive territory in March 2022, just before the Albanese government was elected.

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China macro and policy

China’s GDP growth came in at 5.2% in 2Q25, slowing from 5.4% in 1Q25. However, nominal GDP – which accounts for price changes – grew only 3.9%, which is the lowest rate (outside the pandemic) since the quarterly data began in 1993.

The GDP deflator, a measure of economy-wide prices, extended the longest streak of declines on record.

The problems in China are overcapacity and a weak consumer as real estate continues to implode.

Property prices are in freefall and private surveys are much worse.

China home prices fell at the fastest pace in eight months in June, with prices for new homes down 0.27% and secondary down 0.61%, which was reflected in profit warnings from property developers China Vanke and Poly Global. Vanke is seeking to extend its bank loans by as much as ten years.

Chinese steel production in Q2 2025 is likely to hit the lowest level since 2018. But despite the dramatic drop in production, iron ore imports have remained extremely strong, surging above the five-year average.

China Mineral Resources are using prices below US$100/tonne to build a vast official iron ore stockpile – in line with the same policy for nickel, lithium, cobalt and copper.

Japan macro and policy

Japanese 10-year government bond (JGB) yields finished the week at 1.59% – the highest level since 2008 – with concerns about fiscal spending ahead of an upper house election as Japanese parties discuss consumption tax cuts given real wages have fallen 2.9% year-on-year. 

Yields on the 30-year JGB also rose to a record high of 3.21%, while Japan’s 20-year government bond yields spiked to their highest level since 1999.

Rising bond yields in Japan, the US, Germany and France reflect the uncomfortable truth that no politician wants to cut spending or raise taxes – and bond markets are getting nervous.

Markets

US reporting season has started, with most companies beating consensus.

However, both company guidance and analyst expectations had been massaged down since Liberation Day.

Banks and brokers always kick off each earnings season and we had strong results from Goldmans and Morgan Stanley, helped by higher trading/advisory fees driven by tariff-related volatility.

Netflix 2Q25 EPS and revenue and FY25 outlook were higher than expectations, driven by solid advertising, membership growth, and pricing benefiting from a lower US dollar given more than 50% of its revenue coming from overseas.

In terms of positioning and risk appetite, the latest Bank of America Fund Manager Survey reveals investor sentiment is the most bullish since February 2025, risk appetite has risen, and cash levels are low.

The markets are feeling a little extended, but “all-time highs” are quite bullish, so we could very well see rotation rather than retreat.

Australian equities got a lift from a softer employment print raising expectations of rate cuts.

We saw continued rotation into Tech (+5.4%), Health Care (+4.7%) and AREITs (+2.7%) at the expense of Resources (+1.8%).

In the banking sector, the RBA released a consultation paper and draft standard on removing card surcharges for consumers and limiting interchange fees paid by businesses.

The latter will impact the banks, with the RBA estimating an $880m reduction in interchange fees across the system. If 75% of this impact is felt by the major banks, it would reduce earnings by 1-2%. However, banks will likely respond by increasing card fees and/or reducing card reward programs.