Rajinder Singh: What’s driving Aussie equities this week?

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

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EQUITY markets continue to defy traditional September seasonal weakness.

US equity markets have been particularly strong –  all four major indices (the S&P500, Nasdaq, Dow Jones and Russell 2000) hit all-time highs last Thursday.

US data releases were mixed but not alarming last week, continuing recent trends.

The US Fed’s rate-setting Federal Open Market Committee (FOMC) cut by 0.25 percentage points as expected last week, despite speculation that a new committee composition might affect the outcome.

The Fed statement and Chairman Powell’s comments highlighted concerns about the slowing job market, describing the move as “risk management” with further cuts signalled for this year.

Treasury yields moved higher from recent lows after the decision.

Elsewhere, other economies continue to see domestic weakness now and into the future, encouraging centrals banks to cut rates now or very soon.

Australian equities were a laggard last week. The S&P/ASX 300 dropped 0.9% and underperformed international peers.

However the S&P/ASX Small Ordinaries rose 0.4%, continuing a strong quarter of gains (up 13.6% so far).

The S&P/ASX Midcap 50 also did well, up 1.3% for the week and 9.3% for the quarter to date, versus 4.1% for the S&P/ASX 300.

At a sector level Technology (+1.8%) and Consumer Discretionary (+0.9%) were the outperformers, while Energy (-3.8%) and Resources Health care (-1.7%) were generally weaker.

US macro and policy

US retail numbers look solid with sales up 0.6% in August.

This was above consensus of +0.2% and included +0.2% of net revisions to previous months.

Retail sales – excluding volatile items such as cars, fuel, building and food – climbed 0.7%, also above consensus of +0.4%.

Even allowing for tariff-related pricing impacts coming through, these numbers were above expectations and indicate a resilient US consumer.

Meanwhile, US industrial production data gained 0.1% in August, versus expectations of -0.1%. Manufacturing output rose 0.2%, above expectations of -0.2%.

This continues a trend of the housing sector weakening noticeably compared to most other parts of the economy.

The latest mortgage application data gives some hope of a turnaround though, with a 30% week on week jump. Refinancing was a key driver, given the lowest mortgage rates in more than a year.

Finally, we saw initial jobless claims fall to 231k for the week which was a touch below consensus of 240k. Continuing claims also dropped to 1,920k, below consensus of 1,950k.

Jobless claims data has been volatile recently due to a range of factors. Trends indicate claims are drifting higher, while not deteriorating rapidly across the economy.

Sentiment seems to be deteriorating for some job seekers, however.

US rates

The most important macro event last week was the FOMC decision.

Composition of the committee created significant attention before the meeting.

President Trump’s chosen appointee, Stephen Miran, was freshly sworn in beforehand.

Lisa Cook was also able to participate due to a recent Federal Appeals court temporarily preventing President Trump from firing her.

The Fed ended up cutting interest rates 25bp and signalled two more cuts at the October and December meetings.

Interestingly there was only one dissenting vote – Miran, who voted for a 50bp cut in line with President Trump’s desire to quickly lower rates.

Other FOMC members, including some in the running to replace Fed Chair Powell, voted in line with the Chair. Some Fed observers had expected more dispersion in the results.

The FOMC statement attributed the rate cut to a shift in the balance of risks, noting “job gains have slowed, and the unemployment rate has edged up but remains low” and “the Committee … judges that downside risks to employment have risen”.

The committee removed a previous reference to “the extent and timing” of additional rate cuts in the forward guidance portion of the statement, suggesting less uncertainty about whether the FOMC will continue to lower the rate at future meetings.

Chairman Powell characterised the move as “risk management” and observers took his comments as being cautious and careful not to overcommit, while confirming an ongoing move back towards a lower neutral rate in a timely manner.

The Fed member forecasts for unemployment and inflation were unchanged for this year, but imply more growth this year and next, and slightly higher inflation next year which suggests a slower pass-through of announced tariffs to prices.

The closely-watched “dot plot” of member’s forward expectations showed an incremental step down in the expected Fed funds rate for each of 2025, 2026 and 2027 though no change in the long run rate.

Similarly, the market pricing for the 2026 future Fed rate now implies two cuts for the remainder of 2025 and another two in the first half of 2026.

Australia

Unemployment held steady at 4.2% in August, according to the latest labour force data.

Underlying employment growth was weak (-5k) and overall hours worked showed small-but-positive growth rates.

Most commentators saw this data as containing little to change the RBA’s view of the labour force or economy more generally.

Elsewhere, the federal government announced a long-awaited target to build on previously announced 2030 emissions target.

The new target is a reduction of 62-70% by 2035 from 2005 levels, compared with the 2030 target of 43%.

This is seen to be very ambitious: emissions must fall three times faster in the 2030s compared to the early 2020s to meet the 2035 target.

The government plans to achieve this target via:

• A significant increase in renewables in the electricity sector (solar, wind and battery storage)
• Decarbonisation and electrification of households and transport (heat pumps, sustainable fuels and EVs)
• Tightening of industry emissions via the existing Safeguard Mechanism
• Significant re-vegetation and land use changes to act as a carbon sink for hard-to-abate sectors

China

Data showed weakness across the board in August activity.

Fixed Asset Investment (FAI) declined 6.3% over the year with weakness in both infrastructure and manufacturing. The latter was possibly affected by the anti-involution program.

Retail sales grew 3.4%, though this was influenced by those sectors with significant subsidies and even their contributions have been quick to slow recently.

The property downturn continues, with prices falling further.

More generally on prices, the latest CPI showed that deflation persists, falling 0.4% year on year.

This was driven mainly by food, though weak PPI also showed deflationary forces at work in the economy more generally.

New Zealand

The latest NZ GDP data came in much weaker than expected, with the second quarter showing a 0.9% contraction.

There has been volatility in some of the GDP components of GDP, along with a clear trend to weakness as 2025 progresses.

Observers of the RBNZ are now expecting further cuts at upcoming meetings with some building the case for a substantial 50bps cut.

Canada

The Bank of Canada (BoC) cut its benchmark interest rate by 25bps to 2.5%, continuing its cautious approach amid signs of economic weakness.

With recent second quarter data showing a softer job market and general economic weakness, economists now expect at least one more 0.25% cut in October or December.

Japan

The Bank of Japan (BoJ) decided to keep interest rates at 0.5%, as expected. However two board members unsuccessfully proposed a hike to 0.75%.

With a tight labour market and potential inflationary forces building, the market saw this as a signal of likely near-term rate increases.

The BoJ also delivered a plan to sell its very substantial holdings of risky assets, including ETFs, further reducing its accommodating stance.

Markets

September tends to be a poor-performing month for US equities.

However, it’s been strong month to date, reflecting previous instances of Fed rate cuts outside of recession offsetting seasonality. 

US equities rallied during the week with the S&P500, Nasdaq, Dow Jones and Russell 2000 reaching all-time highs – only the 25th time this has occurred this century.

The key impediment to reaching this milestone earlier had been the Russell 2000, which is a broader index of smaller US companies.

It breached its previous high, set in the post Covid surge four years ago.  Some observers note that this is an indicator that the equity rally is broadening and not just reliant on the Mag 7.

It has been a year since the Fed’s first cut in this cycle.

The S&P 500 performance over that period has been the strongest in the year after a cut since the mid-1990s.

Some, more bullish, commentators are pointing to analogies between the current market and that of the late 90s bull run.

Another support for the market has been the fall in the US dollar this year. Historically, this has seen strong performance across a range of global equity indices.

One market component to watch is the tech sector with the equally-weighted index making new highs and small-cap tech stocks being particularly strong.

The tech sector has the highest percentage of foreign revenue of all US sectors and so, again, the lower US dollar maybe supporting this its rally.

Elsewhere, President Trump called for the SEC to move public listed company reporting from quarterly to semi-annually (like Australia).

This change would not require congressional approval but simply a vote by the SEC where Republicans hold a majority.

If it went ahead, this change might take place in six-to-12 months.

About Rajinder Singh and Pendal’s responsible investing strategies

Rajinder is a portfolio manager with Pendal’s Australian equities team and has more than 18 years of experience in Australian equities. Rajinder manages Pendal sustainable and ethical funds, including Pendal Sustainable Australian Share Fund.

Pendal offers a range of other responsible investing strategies, including:

• Pendal Sustainable Australian Share Fund
• Crispin Murray’s Pendal Horizon Fund
• Pendal Sustainable Australian Fixed Interest Fund
• Pendal Sustainable Balanced Fund
• Regnan Credit Impact Trust
• Regnan Global Equity Impact Solutions Fund

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