Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams
- Broader equity markets have been weak
- Market technicals don’t yet signal a more material selloff
- Find out about Pendal Focus Australian Share fund
- Tune in: register to watch Crispin’s Beyond the Numbers webinar
THERE has been some concern that the pace of policy actions in the US is creating uncertainty and deferring decisions among businesses and consumers.
This was reinforced by slight weakness in the University of Michigan Consumer Confidence Survey and the US Purchasing Manager’s Index (PMI) last week, as well as guidance from Walmart, which was 8% below consensus expectations.
Walmart pointed to currency headwinds, some pressure from mix shift as consumers “trade down” to cheaper items, and “geopolitical uncertainties” (also code for tariffs). The stock fell 9%.
Broader equity markets were also weaker, though there was no specific catalyst. The S&P 500 fell 1.6% and the S&P/ASX 300 was off 2.8%.
There was interesting rotation within the market, with a big unwind in momentum stocks such as Apollo (-7%), Citi (-6%), Goldman Sachs (-5%), Tesla (-18%) and Palantir (-15%) late in week.
The US Dollar is the other signal to watch; there is a building view that we may have seen the peak in the Dollar Trade-Weighted Index (DXY) for now and have reached “peak US exceptionalism”.
Market technicals look reasonable and are not yet signalling a more material selloff.
Liquidity also remains good, so our current read is that this is more consolidation and rotation as the earnings growth between growth and value converges.
This view is also reinforced by credit spreads remaining tight, as well as strong performance in European (Euro Stoxx 50 up 4% month-to-date) and Asian stock markets (Hang Seng up 16% and KOSPI up 5% month-to-date).
This would be consistent with a turn in the USD.
Australia saw its first rate cut (25 basis points (bps) to 4.1%) since November 2020, ending a 33-month up-cycle. However, the RBA’s message was that the market was too optimistic in expecting three cuts this year.
That hawkish message meant the cut offered no support to the market, while a series of disappointing updates from the banks helped drive the ASX lower.
We have had just over 50% of companies by number reporting.
So far, the results are okay, with nothing suggesting any particular thematic issue. Stock-specifics are the main drivers of reaction.
We also saw M&A activity with the CoStar bid for Domain (DHG).
Australia
The RBA cut its benchmark rate 25bps to 4.1%, the first change since November 2023.
This was seen as a hawkish cut, as the RBA Governor talked down the prospect of further cuts in the next few months – specifically noting that the market’s expectation for three rate cuts in 2025 looks unrealistic.
Governor Bullock did note that the policy was restrictive – though we observe that most corporate trends suggest the underlying economic environment is marginally improving.
When asked about the catalyst for another cut, Governor Bullock noted that she is looking for:
- reduced concerns on an upside surprise in inflation
- easing in wages growth
- disinflation in services
- a sustained reduction in housing inflation
- improvement in the supply side.
The market only marginally shifted down expectations for future rate cuts.
The updated RBA inflation outlook envisages inflation falling into its target range earlier than before, but the expected trough in inflation is now higher at 2.7% versus 2.5% previously.
The forecast for inflation in December 2026 was also increased 20bps.
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US
There was not much in the way of data last week.
Minutes from the Federal Reserve’s most recent meeting reinforced a more cautious outlook for rate cuts.
The University of Michigan Consumer Confidence Survey deteriorated, with the Headline index falling to 64.7 from 71.7 in January.
The consumer expectations component, which is most relevant for spending growth, fell from 69.5 to 64.0.
We do note that the survey measures responses by political affiliation and that the fall has been driven by Democrat and Independent voters, while Republican voters were unchanged.
This survey may signal a weaker consumer, but we wouldn’t read too much into it at this point as other surveys we follow are showing some signs of improvement in February.
Flash PMIs for February were slightly soft. Manufacturing was better at 51.6 versus 51.2 in January, however, Services fell to 49.7 from 52.9.
Overall, the composite PMI fell to a 17-month low.
We may potentially be seeing the impact of Federal job cuts and concerns on tariffs affecting sentiment and deferring employment decisions.
Markets
We saw a material selloff in the US late last week, triggered by Walmart’s guidance being below market, and reinforced by softer consumer confidence data. But the price actions seemed too severe to be explained away by just that, suggesting positioning has become very crowded.
We are seeing selling in tech and consumer discretionary with rotation into cyclicals.
The overall market has been resilient despite all the noise on tariffs, DeepSeek and higher CPI.
Breadth has deteriorated, which suggests less fire power for the market to rise, but this has not fallen to concerning levels (63% of S&P 500 stocks are above their 200-day moving average).
Sentiment indicators such as futures positioning, put/call ratios and bull/bear ratios are relatively balanced now, which is an improvement from the extended positions at the start of the year.
ETF flows remain strong and in their 90th percentile versus history, but are narrowly focused into specific sectors.
Credit spreads are still low and now correcting, which is supportive for equities and highlights that liquidity is fine and there are no fears building around economic deterioration.
There is lots of focus on regarding the US Dollar and talk of a “Mar-a-Lago Accord” – akin to the Plaza Accord from the 1980s – designed to weaken the dollar to help support growth.
This would support liquidity and be broadly positive for markets.
It is clearly apparent that the Yen is strengthening.
Japanese economic growth and inflation data has improved, and this may be correlated with some of the other momentum trades as the Yen has been a funding source.
It also may be a signal that the US 10-year bond yield may be heading lower – there has been strong correlation between them and the Yen in recent years.
From a portfolio perspective, it is important to watch market rotation as an emerging theme, as momentum and growth stocks have been such big market drivers in the last 15 months.
Regions outside the US are beginning to perform better, and lead indicators on European growth are improving (e.g. performance of cyclical versus defensive stocks).
There are also signs of life in China, where the two-year bond yield has begun to move higher.
There has also been a large run in Chinese tech names, triggered first by DeepSeek and subsequently President Xi having a public meeting with key tech entrepreneurs.
There is a view this could be a catalyst for improved sentiment in China.
The key “Two Sessions” annual policy meeting of the National People’s Congress and Chinese People’s Political Consultative Conference will be closely watched in the first week of March.
We remain positive on overall on the market’s direction.
However, the rotation is giving us confidence that we may see some of the more extreme valuation premiums that have characterised the market in the last 12 months unwind.
Australian equities
The S&P/ASX 300 was down 2.8%, due to a combination of the broader global selloff, the hawkish statement from the RBA, negative earnings updates from the banks, an overhang from the Goodman Group capital raise, and a portfolio basket-trade selling Australia.
Financials (-6.9%) – specifically banks (-9.4%) – was the weakest sector as margins trends were worse than expected at National Australia Bank, Westpac, and Bendigo & Adelaide Bank.
Given their extended valuations, this triggered a selloff in the sector – similar to that seen during the late September Chinese stimulus and the August Yen carry trade unwind.
This was more fundamentally driven, with margin trends worse than expected and slightly lower capital ratios, which will limit the degree of capital returns.
The Commonwealth Bank buyback kicks in this week, which may put a floor under the sector short term.
Industrials (-3.3%) was also weak, which is partly tied to the RBA statement.
We are just over the halfway mark of company reporting and earnings beats and misses thus far suggest a benign earnings season.
About Crispin Murray and the 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 a global investment management business focused on delivering superior investment returns for our clients through active management.
Labour data key for RBA | ASX gold stocks shine | India facing down-cycle risk | Webinar, on demand
We have updated and reissued the Product Disclosure Statements (PDSs) for the Pendal Global Emerging Markets Opportunities Fund (the Fund) effective on and from Thursday, 20 February 2025.
The following is a summary of the key changes reflected in the PDS for the Fund.
Labour, environmental, social and ethical considerations
We have clarified that the investment manager of the Fund, J O Hambro Capital Management Limited (JOHCM), does not have a predetermined view of the environmental, social (including labour standards), corporate governance and ethical factors (ESG factors), but they do assess ESG factors in their investment process and portfolio construction to the extent JOHCM deems those considerations to be material to the financial performance of an investment.
Updates to significant risks disclosure
The Fund’s investment strategy involves specific risks.
We have updated the significant risks disclosure applicable to the Fund to ensure that our disclosure continues to align with the nature and risk profile of the Fund and the current economic and operating environment.
Updates to ongoing annual fees and costs disclosure
The estimated ongoing annual fees and costs for the Fund has been updated to reflect financial year 2024 fees and costs. These include changes to estimated management costs and estimated transaction costs.
We now also disclose the maximum management fee and performance fee we are entitled to charge under the Fund’s constitution.
Updates to restrictions on withdrawals
We have updated the disclosure on restrictions on withdrawal to align closer to what is in the Fund’s constitution.
Additional information on how to apply for direct investors
We have provided additional information for non-advised investors (investors without a financial adviser) investing directly in the Fund who may also be required to complete a series of questions as part of their online Application, to assist us in understanding whether they are likely to be within the target market for the Fund.
Updates to our complaints handling process
We have provided additional details about our complaints handling process and the Australian Financial Complaints Authority.
We have updated and reissued the Product Disclosure Statement (PDS) for the Pendal Sustainable Australian Fixed Interest Fund (the Fund) effective on and from Thursday, 20 February 2025.
The following is a summary of the key changes reflected in the PDS for the Fund.
Labour, environmental, social and ethical (ESG) considerations
We have enhanced our ESG disclosure to describe the Fund’s sustainability objective, the sustainable themes Pendal focuses on when managing the Fund, the sustainability assessment employed by the Fund and the benefits associated with the Fund’s approach to ESG.
The way the Fund is managed has not changed.
Exclusionary Screens
We have clarified, the Fund’s exclusionary screens are not applied to government securities, semi-government securities, supranational securities, cash or derivatives. And that the use of derivatives may result in the Fund having indirect exposure to the excluded companies or issuers.
Updates to significant risks disclosure
The Fund’s investment strategy involves specific risks.
We have updated the significant risks disclosure applicable to the Fund to ensure that our disclosure continues to align with the nature and risk profile of the Fund and the current economic and operating environment.
Updates to ongoing annual fees and costs disclosure
The estimated ongoing annual fees and costs for the Fund have been updated to reflect financial year 2024 fees and costs. These include changes to estimated management costs and estimated transaction costs.
We now also disclose the maximum management fee we are entitled to charge under the Fund’s constitution.
Updates to restrictions on withdrawals
We have updated the disclosure on restrictions on withdrawals to align closer to what is in the Fund’s constitution.
Additional information on how to apply for direct investors
We have provided additional information for non-advised investors (i.e. investors without a financial adviser) investing directly in the Fund who may also be required to complete a series of questions as part of their online Application, to assist us in understanding whether they are likely to be within the target market for the Fund.
Updates to our complaints handling process
We have provided additional details about our complaints handling process and the Australian Financial Complaints Authority.
This document has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332 AFSL 431426 and the information is current as at the date of this document. It is general information only and is not intended to provide you with financial advice or take into account your personal objectives, financial situation or needs. You should consider whether the information is suitable for your circumstances and we recommend that you seek professional advice.
The product disclosure statement (PDS) for the Pendal Sustainable Australian Fixed Interest Fund (ARSN 612 664 730) (Fund) is issued by PFSL. PFSL is the responsible entity of, and issuer of units in, the Fund. You should consider the PDS before deciding whether to acquire, dispose, or hold units in the Fund. The PDS and Target Market Determination for the Fund can be obtained by visiting www.pendalgroup.com.
To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Neither PFSL nor any company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of the Fund or the return of an investor’s capital. All investing involves risk including the possible loss of principal.
We have updated and reissued the Product Disclosure Statement (PDS) for the Pendal MicroCap Opportunities Fund (the Fund) effective on and from Thursday, 20 February 2025.
The following is a summary of the key changes reflected in the PDS for the Fund.
Updates to significant risks disclosure
The Fund’s investment strategy involves specific risks.
We have updated the significant risks disclosure applicable to the Fund to ensure that our disclosure continues to align with the nature and risk profile of the Fund and the current economic and operating environment.
Updates to ongoing annual fees and costs disclosure
The estimated ongoing annual fees and costs for the Fund have been updated to reflect financial year 2024 fees and costs. These include changes to estimated management costs and estimated transaction costs.
We now also disclose the maximum performance fee and management fee we are entitled to charge under the Fund’s constitution.
Updates to restrictions on withdrawals
We have updated the disclosure on restrictions on withdrawals to align closer to what is in the Fund’s constitution.
Additional information on how to apply for direct investors
We have provided additional information for non-advised investors (i.e. investors without a financial adviser) investing directly in the Fund.
If you are a non-advised investor investing directly in the Fund, you will need to request an Application Form by completing a form at www.pendalgroup.com. An issuer representation will contact you, and you will be required to complete a series of questions to assist us in understanding whether you are likely to be within the target market for the Fund. An Application Form will only be issued if you are assessed as being likely to be in the target market for the Fund,
Updates to our complaints handling process
We have provided additional details about our complaints handling process and the Australian Financial Complaints Authority.
We have updated and reissued the Product Disclosure Statement (PDS) for the Pendal Horizon Sustainable Australian Share Fund (the Fund) effective on and from Thursday, 20 February 2025.
The following is a summary of the key changes reflected in the PDS for the Fund.
Labour, environmental, social and ethical (ESG) considerations
We have enhanced our ESG disclosure to describe the Fund’s sustainability objective, the sustainable themes Pendal focuses on when managing the Fund and the sustainability assessment framework employed by the Fund.
The way the Fund is managed has not changed because of the enhancements in sustainability disclosure.
Exclusionary Screens
We have taken this opportunity to review the Fund’s exclusionary screens to assure they align with investors’ expectations. Effective 20 February 2025, the Fund will implement an exclusionary screen for companies that directly engage in live animal export.
We have also clarified the Fund’s exclusionary screens are not applied to cash or derivatives and the use of derivatives may result in the Fund having indirect exposure to the excluded companies or issuers.
Updates to significant risks disclosure
The Fund’s investment strategy involves specific risks.
We have updated the significant risks disclosure applicable to the Fund to ensure that our disclosure continues to align with the nature and risk profile of the Fund and the current economic and operating environment.
Updates to ongoing annual fees and costs disclosure
The estimated ongoing annual fees and costs for the Fund have been updated to reflect financial year 2024 fees and costs. These include changes to estimated management costs and estimated transaction costs.
We now also disclose the maximum management fee we are entitled to charge under the Fund’s constitution.
Updates to restrictions on withdrawals
We have updated the disclosure on restrictions on withdrawals to align closer to what is in the Fund’s constitution.
Additional information on how to apply for direct investors
We have provided additional information for non-advised investors (i.e. investors without a financial adviser) investing directly in the Fund who may also be required to complete a series of questions as part of their online Application, to assist us in understanding whether they are likely to be within the target market for the Fund.
Updates to our complaints handling process
We have provided additional details about our complaints handling process and the Australian Financial Complaints Authority.
Local investors appear to be driving renewed interest in China stocks, argues Pendal’s SAMIR MEHTA
Chinese companies are buying back shares
Valuations are cheap
Find out more about Pendal Asian Share Fund
WHEN asked about President Trump’s first few weeks in office, David Axelrod – former adviser to Barack Obama – said: “I think he will get credit in the short term for being a whirling dervish of activity. The question is, what does that activity produce?”
The Whirling Dervishes, according to Wikipedia, are most famously associated with the Mevlevi Order of Sufism – a mystical branch of Islam, which emphasises inner spirituality and direct personal experience of the Divine, often using poetry, music, and bodily movement as pathways to God.
Ironies abound.
I am fully aware that commenting on geopolitics is above my pay grade. We stock-pickers normally eschew commenting on macroeconomics or geopolitics.
But the investment landscape has changed since the 2008 Global Financial Crisis — and continues to rapidly evolve — so we need to adapt our process, even if at the margins.
Most of us were forced to incorporate the effects of actions by central banks or government-directed economic policies or geopolitical convulsions. There are pivotal moments when these factors (rather than specific stock attributes) influence – and even alter – investing landscapes.
Since President Trump’s inauguration, the flurry of executive actions and foreign policy initiatives are nothing less than spectacular.
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Pendal Asian Share Fund
The Paris Agreement on climate change and principles of ESG are now by the wayside.
Free trade and globalisation are fettered by tariffs and transactional diplomacy.
Speeches by US vice-president JD Vance and defence secretary Pete Hegseth have rudely shaken European complacency.
Now President Trump has escalated a war of words with Ukraine’s President Volodymyr Zelensky, calling him a “dictator” and deepening a rift between the two leaders.
Europe is being dragged by the scruff of its proverbial neck from adolescence into adulthood. In fact, Europe might be weaned away from US security guarantees.
Trump even talked about inviting Russia back into the G8. Suddenly, Russia might be investible again.
And China, perceived as the arch-enemy, is no longer so different from allies like Canada and Mexico.
That begs the question: will the US Government tear up the restrictions of investing in Russia and China?
I wouldn’t bet on it, but then again, I wouldn’t have expected Europe’s current plight either.
Change of heart for China?
Meanwhile, Chinese President Xi met with private sector executives, including Jack Ma (who was famously cut down to size in November 2021) and Liang Wenfeng (the founder of DeepSeek).
Optics matter in China. Is this a change in heart by President Xi towards technology and the private sector? Or is it that state-directed spending on projects of national importance (chips and AI) have failed to deliver?
Ironically, China’s lead in AI was established by the founder of a hedge fund without much help from the government at all.
A stealth bull market in China has crept up on us. In my opinion, local Chinese investors will most likely drive this market.
Bond yields are close to 1%, there is some stability in the property markets, and deflation might have temporarily plateaued.
Sporadic stimulus measures are helping at the margin. Now, scores of companies are trading with dividend yields north of 5%, with business models that are only marginally cyclical.
Loads of companies are buying back shares and valuations are still cheap.
From here, it seems all signs point to revisiting Asian equities as an asset class.
About Samir Mehta and Pendal Asian Share Fund
Samir manages Pendal’s Asian Share Fund, an actively managed portfolio of Asian shares excluding Japan and Australia. Samir is a senior fund manager at UK-based J O Hambro, which is part of Perpetual Group.
Pendal Asian Share Fund aims to provide a return (before fees, costs and taxes) that exceeds the MSCI AC Asia ex Japan (Standard) Index (Net Dividends) in AUD over the medium-to-long term.
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About Pendal
Pendal, part of Perpetual Group, is a global investment management business focused on delivering superior investment returns for our clients through active management.
Pendal’s emerging markets team explores the latest developments in India and explains why the team remains underweight in the region
- High risk of India shifting into a down-cycle
- Pendal remains heavily underweight India in emerging markets portfolio
- Find out more about Pendal Global Emerging Markets Opportunities Fund
MOST emerging markets — particularly those with weaker export bases and greater dependence on external capital flows — go through multi-year positive and negative cycles.
In the up-cycle, incoming capital flows strengthen the currency and depress bond yields, facilitating lower policy interest rates. This drives growth, attracting more capital inflows.
In the down-cycle, outgoing capital flows weaken the currency and raise bond yields, driving policy interest rates higher. This weakens growth and encourages greater capital outflows.
There are many factors to consider in these cycles. But a core component is that in the upcycle, central banks do not need to defend the exchange rate.
India cuts rates, but currency remains weak
In February, the Reserve Bank of India cut its benchmark “repo rate” by 0.25 percentage points to 6.25%, marking the first policy interest rate cut in nearly five years.
(Repo stands for “repurchase agreement” and refers to the cost of borrowing. When banks need money they can sell government securities to the RBI with an agreement to repurchase them at a future date. The repo rate is the interest rate the banks pay on this transaction.)
The RBI’s move signalled a shift towards supporting economic growth amid declining inflation, which stood at 4.3% in January.
However, the decision came against a backdrop of geopolitical tensions, global monetary policy divergence, and volatile financial markets.
India’s appointment of a growth-focused governor, Sanjay Malhotra, was seen as a sign of prioritising expansion over inflation control.
But concerns remained regarding the exchange rate.
The Indian Rupee experienced significant volatility, reaching an all-time low of 87.95 against the US dollar before rallying in mid-February due to aggressive intervention by the RBI.
The RBI reportedly sold around $US6 billion of foreign exchange reserves to stabilise the currency, which gave the Rupee a one-day lift.
But foreign investors have continued withdrawing from domestic markets, with net sales amounting to nearly $10 billion so far this year.
Policy-easing by the RBI has encouraged speculative pressure on the Rupee, making it one of the EM universe’s weakest-performing currencies this year.
This contrasts with currencies such as the Brazilian Real, Colombian and Chilean Pesos and South African Rand, which have all strengthened against the US dollar this year.
Decline in foreign exchange reserves raises concerns
The RBI’s intervention raised another major concern: the decline in India’s foreign exchange reserves.
Reserves fell from a peak of $700 billion in September to about $631 billion by the end of January.
This depletion raises concerns about India’s ability to manage external shocks in the face of capital outflows, rising import costs, and weakening investor sentiment.
The broader economic outlook suggests slowing growth.
India’s GDP growth fell to 5.4% in the September quarter – a seven-quarter low and well below initial RBI estimates.
Weak consumer demand, sluggish private investment, and reduced government spending have contributed to the downturn.
Inflation peaked at 6.2% in October 2024 (driven by rising food prices), but lower interest rates may not be sufficient to revive growth without stronger demand.
Risk of a down-cycle
India is not yet definitively in a down-cycle.
The bond yield curve has barely moved, for example, and currency weakness is not yet driving higher forward inflation expectations.
However, the local-currency equity index peaked at about the same time as foreign exchange reserves, and a poor fourth quarter for equities has been followed by further weakness.
We believe most Indian assets are too expensive to provide a backstop to weakness and the risk of an extended down-cycle is high.
We remain heavily underweight India in our portfolio and defensively positioned where we do have exposure.
About Pendal Global Emerging Markets Opportunities Fund
James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.
The fund’s top-down allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.
James, Paul and Ada are senior fund managers at UK-based J O Hambro, which is part of Perpetual Group.
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams
- Find out about Pendal Focus Australian Share fund
- Tune in: register to watch Crispin’s Beyond the Numbers webinar
A decent US earnings season, bond-yield resilience in the face of higher inflation and continued positive retail investor flows are supporting equity markets.
The S&P 500 gained 1.5% last week, while the S&P/ASX 300 was up 0.5%.
There was limited new developments on tariffs, but we did see building expectations of a potential Ukraine deal post Trump’s unilateral call with Putin.
This remains a complex issue, and even if something was to happen, it will take time.
The market’s breadth is narrowing, which is a concern. Seasonals also turn less favourable from here. However, the underlying liquidity environment appears supportive.
The market has also held up in the face of the first wave of negative headlines on tariffs and there is no evidence of a technical breakdown.
So overall, we believe the market remains in a gradual up-trend.
Australian reporting season has swung into action. Overall, the results so far suggest the economy is holding up – with some small positive signs, notably from Commonwealth Bank and JB Hi-Fi.
Victoria remains the standout weakest state, but everywhere else is performing well.
There are some early signs that some of the higher P/E names are not delivering sufficient upside surprise to sustain their outperformance.
US inflation and economy watch
The key focus for the US economy is the interplay between policy growth and inflation, and how that will affect interest rates this year.
The case for a June rate cut from the Fed relies on Core Personal Consumption Expenditures (PCE) growth being below 2.5%, employment not being too hot, and policy (i.e. tariffs and deportations) not being worse than is currently expected.
Last week’s CPI data for January was poor. In summary:
- Headline CPI was up 0.47% month-on-month versus 0.30% expected. It was 3.0% year-on-year versus 2.9% expected.
- Core CPI was 0.45% month-on-month versus 0.3% expected, and 3.26% year-on-year versus 3.1% expected.
Higher numbers for used cars and airfares drove the surprise – combined, they added 8 basis points (bps) to Core CPI. Communications and insurance prices were also higher, having been soft in recent months.
The market’s initial reaction was negative, with bond yields backing up 10bps. However, the reaction moderated through the week and bonds recovered because:
- There is a belief that the seasonal adjustments fail to take fully into consideration the concentration of annual price increase put through in January – that is, it overstates inflation now, then understates it later in the year. Higher communications and insurance prices indicate this.
- Some of the beat was driven by “volatile” components (e.g. used cars and airfares), which are not included in the Core PCE – the Fed’s favoured inflation measure. Used car prices appear to be moderating already, based off auction data.
- Federal Reserve Chair Jerome Powell’s comments, which signalled he was taking a muted reaction to the data point.
- Other measures of inflation look to be easing.
- The Producer Price Index (PPI) and import price data was okay – and the combination of these and CPI allows the market to market an accurate estimate of the core PCE data. Using this, the Core PCE is forecast to come in at 0.26-0.29% month-on-month (implying 2.5% to 2.6% year-on-year) versus 2.81% in December and closing in on the Fed’s target inflation of 2.5%. Consensus has Core PCE falling to 2.5% by midyear.
The market is pricing in a 40% chance of a June cut and 50% by July’s meeting. The current implied probabilities for year’s end are 22% no cut, 39% one cut and 39% of two-or-more cuts.date, breaking through technical resistance levels.
Pendal Focus Australian Share Fund
Now rated at the highest level by Lonsec, Morningstar and Zenith
US retail sales – implies the US consumer may be softening
January’s headline retail sales came in at -0.9% versus -0.3% expected (-0.4% versus +0.3% expected, excluding autos).
Again, the market is not reading this as a fundamental shift in trend given some mitigating factors:
- cold weather and the LA fires
- strong holiday season sales, which may have been pulled forward
- auto sales affected by low inventories.
It does highlight that the prior 4%+ 3-month-on-3-month annualised run rate in consumer spending was not sustainable and we may be falling back to around a 2% run rate.
This slowing consumer also affected the Atlanta Fed’s GDPNow Q1 2025 outlook, dragging it from 2.9% on 7 February to 2.3% on 14 February. This is now back in the consensus range.
Tariff watch
There were limited new signals last week from the US.
The market focus is on the meaning of “reciprocal tariffs”, with the White House instigating a study on this issue which may not report back till 1 April.
This was taken as a small positive as it is an alternative to “across the board tariffs” and will take time to prepare.
We should still expect other tariff announcements in the next few weeks, with potential targets being critical imports (e.g. pharmaceuticals and semiconductors) to incentivise a shift to domestic supply, and autos which would effectively be targeting Europe.
China appears to have been spared the expected tariffs so far.
There are plans for a meeting between Presidents Trump and Xi, which may help defer this matter, but the issue remains volatile and an increase in the current 10% tariff is still possible.
Australia
The RBA meets on Tuesday and the market continues to price a high probability of a 25bp cut to 4.1%.
Should it cut, the RBA may frame it in cautious terms – a “hawkish cut” – as the risk of a policy mistake is high given that underlying inflation (once adjusted for the one-off subsidies) remains relatively high and the economy seems to be in good shape (with the exception of Victoria).
In this vein, Commonwealth Bank (CBA) updated its customer analysis in last week’s result.
According to the analysis, essential spending is slowing as a result of falling inflation – allowing younger age cohorts to spend more on discretionary items and to start saving again. It also suggests that disposable income is recovering.
The other risk for the RBA is the currency, which is already helping to ease financial conditions and – should it fall further – would add to inflationary pressure.
The last thing the RBA will want to do is look to have eased prematurely and run the risk of needing to reverse course in the future.
Markets
US earnings season is around 80% completed and is positive, with reasonable upgrades, and is on track for 13% year-on-year EPS growth.
While strong, we are now entering a deceleration phase, with consensus bottom-up forecasts suggesting EPS growth drops back to mid-to-high single-digit growth in coming quarters.
However, this is driven by the slowing of Mag7 earnings growth; the rest of the market is expected to accelerate. The remaining 493 companies in the S&P 500 are estimated to have delivered 4% earnings growth in 2024, increasing to 15% in 2025 and 17% in 2026.
We have already seen Mag7 earnings revisions stall.
While the market remains very full value in the US, liquidity remains supportive given the following factors:
- On 21 January, the US hit its debt ceiling and cannot issue net new debt. Instead, it must fund itself by drawing down on the general account, which is effectively QE. This is likely to continue through to midyear. This has meant the market has reloaded with liquidity in the calendar year-to-date.
- US retail ETF flows remain strong. This year has seen three of the largest daily retail ETF inflows on record. Seasonal trends in ETF flows will get less supportive – January and February are typically two of the strongest months – but still remain okay.
- US corporates are now entering their buyback window. Goldman Sachs expects US$1.2T of buybacks this year. The daily flows doubles when window opens from $3b/day to $7b.
Overall, while the market is at high valuations and there are material policy risks, the liquidity that has fuelled it remains supportive.
Australian equities
Industrial and consumer stocks led the market’s small rise last week, mainly as a function of results coming through.
Healthcare was the weakest sector on the back of Cochlear’s downgrade and CSL being softer.
CBA appears to have done enough for now to maintain its high premium, however, other popular names saw muted reactions to decent results – indicating positioning may be getting tired.
Resources have been outperforming this month, up 2.1% versus a 0.5% gain in the S&P/ASX 300. There has been a lot of news flow:
- Tariffs on aluminium and steel (though the aluminium impact has been muted so far, this is going to be inflationary in the US).
- A record gold price.
- Cyclone disruption in iron ore.
- In lithium, volatility continues, with CATL restarting its large lepidolite operation in China – which you can either read as positive in terms of being in response to market demand, or negative in terms of additional supply. The mine previously accounted for about 10% of China supply, or 3-4% of global supply.
- China lending growth was strong in January, which is a constructive lead indicator.
About Crispin Murray and the 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 a global investment management business focused on delivering superior investment returns for our clients through active management.
A gradual rate cut path over 2025 should support economic growth, meaning investors should think carefully about fixed-income positioning. Pendal’s TIM HEXT and ANZ’s ADAM BOYTON explain in a new webinar
- Bonds help protect portfolio returns
- Browse Pendal’s fixed interest funds
- Watch now, on demand: Preparing for rate cuts in a shifting global economy
THE Australian economy is strongly placed as cost-of-living pressures recede and market expectations grow for a lower-rates environment – setting the stage for an economic rebound from last year’s tougher conditions.
That was the message from Pendal’s head of government bond strategies, Tim Hext, and ANZ’s head of Australian economics, Adam Boyton, at a Pendal webinar How to prepare for rate cuts in a shifting global economy.
The webinar took place ahead of this week’s Reserve Bank meeting which is expected to start a rate-cutting cycle.
A second cut is expected within the next six months. But Hext and Boyton see the pace of interest rate reductions as gradual due to underlying economic strength.
“The economy isn’t necessarily screaming out for a rate cut the way you typically see when the Reserve Bank starts easing,” says Boyton.
ANZ expects a second 25-basis-point cut in August. Hext says it could come as soon as May.
“We’re looking for just those two rate cuts,” says Boyton. “The reason being that the economy isn’t collapsing, there are signs of the consumer recovering, the labour market has performed remarkably well over the past 12 months … and inflation has eased more than expected.”
Labour market resilience and RBA caution
One factor behind the RBA’s cautious approach is the remarkable strength of the labour market.
“My best assessment is that full employment in Australia is probably between 3.75 and 4 per cent – so you’re close-ish to it. The most recent published thoughts from the RBA are a bit higher,” says Boyton.
Boyton says employment is being supported by jobs growth in health care, social assistance, public administration, and safety, and there is also evidence that the private sector is picking up as the stage 3 tax cuts wash through.
“This story of a resilient labour market is probably one that will play through for most of this year,” he continues.
“Either way, this is a really interesting cycle. We could end this economic cycle with the peak in the unemployment rate not very far at all away from full employment.
“To me, that says a couple of things – firstly, it’s great news for Australians.
“Secondly, it tells me that this is probably going to be a pretty cautious easing cycle from the Reserve Bank.
“If the unemployment rate is 5 per cent or 6 per cent you can cut much more aggressively, because you’re not going to be stoking inflation with a tight labour market.”
Falling inflation and household incomes
Further buoying the economic outlook is the fall in inflation itself – an often-overlooked factor in the economic outlook that plays an important role supporting household incomes and lifting consumer spending as real-wages improve.
“Inflation is an insidious tax on everyone – you go backwards, even if you get a wage increase, in a period of high inflation,” says Boyton.
“The fact that inflation has come down so much is really helpful for household incomes. Prices aren’t going back to where they were – but what it does mean is the wage increase you get this year isn’t going to be eroded by inflation. That will change the dynamic.”
Productivity challenges and Australia’s economic model
But while the near-term outlook is stable, Australia still faces longer-term headwinds, says Hext.
“We talk about the three Ps – population, productivity, and participation,” says Hext.
“Participation is looking good. Population is looking generally good, as it always does in Australia. But productivity has looked pretty bad for quite some time. It’s been going nowhere for almost a decade.”
Productivity means getting more output from existing resources and has been the key driver of economic growth from the industrial revolution to the IT boom of the 1990s, says Hext.
But the poor recent performance puts Australia in sharp contrast to the US economy, which has seen a very strong 10 per cent lift in productivity over the last seven years.
Hext says part of the explanation for Australia’s poor performance is a drift away from being a US-style, dynamic economy to a more government-centric, European-style economy.
“We’ve made some deliberate choices in the last five years in Australia – partly to strengthen our health care system, the NDIS, education. But there is a productivity cost to that which we’re now bearing the brunt of.
“We hear a lot about US exceptionalism – that term is used for very good reason.”
Investment implications
Hext says investors need to remember that when cash rates come down, floating rate investment returns come down – “it’s a mathematical formula”. That means lower returns on investments like term deposits and cash.
“But with bonds, you’re fixing your return – if you buy something with a yield of 6 per cent, you’re earning that 6 per cent for the life of that security. The comparison to me does look compelling.
“Would you be coming out of other asset classes, like growth assets, at this point in the cycle? I think it’s a bit early for that. Equities look to me quite fully valued, but I don’t see any major sort of trouble brewing there.”
He says bonds can also act as an insurance policy in a portfolio.
“The final thing you’ve got to remember is, as much as Adam and I sit here pontificating about the next 12 months, there’s going to be something coming from left field.
“And what bonds do, by locking in your return, is if there is a crisis that comes that none of us are seeing at the moment, that’s going to provide you insurance as your growth assets collapse.
“The way I like to say it is you’re almost getting free insurance and you’re getting a decent return.
“The two together is quite powerful.”
About Tim Hext and Pendal’s Income & Fixed Interest boutique
Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.
Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
Find out more about Pendal’s fixed interest strategies here
About Pendal
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.