A shift in focus from inflation to employment hints at a likely rate cut in September. Pendal’s head of income strategies AMY XIE PATRICK explains

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SINCE December 2018, we’ve known Fed chair Jay Powell is not afraid to pivot.

Back then the Fed hiking cycle was forced to an abrupt halt when the US economy came under the strain of the first round of Trump’s trade tariffs.

By the following October, the Fed had cut rates by 75 percentage points to 1.75%.

Powell’s latest comments at last weekend’s Fed’s annual gathering in Jackson Hole, Wyoming, may prove to be another example.

In his speech, Powell acknowledged downside risks to employment, suggested further easing from the current “restrictive” policy stance may be appropriate and – for the first time in months – did not make this conditional on the inflation outlook.

Since these remarks, the US bond market has priced in an 85% chance of a cut at the next Federal Open Market Committee meeting in September.

This would take the upper bound of the Fed Funds target rate to 4.25%.

Sceptics view the move as Jay Powell bending to political pressure from President Trump.

The chart below suggests the Fed ought to be getting a little more worried.

US hiring and firing: NFIB Hiring Intentions and Initial Jobless Claims

Source: Bloomberg

The purple line shows the hiring intentions of US businesses, according to a monthly survey by the National Federation of Independent Business.

The yellow line is an inverted series of US initial jobless claims – a weekly series to reflect new joblessness.

The long-standing relationship between the purple and yellow lines is clear to see, and intuitive to grasp.

When businesses stop hiring, they eventually have to start firing. And vice versa.

When businesses feel the bottom is in, they stop firing, and then they start hiring.

This relationship seems to have dislocated of late. We need more time to see whether this is an actual dislocation, or one of those blips in the long-run data.

A possible explanation?

Perhaps businesses sense the slowdown and have paused hiring, but burned by the post-Covid labour shortages, are not yet willing to let people go.

A likely rate cut

September will likely bring a rate cut from the Fed.

Pendal’s analysis of the long-term decision-making bias of the Fed leans heavily on market pricing.

In other words, the Fed doesn’t like to surprise or disappoint (unlike some other central banks we know). That analysis also shows how sensitive the Committee is to labour-market dynamics.

If the Fed has now pivoted its focus from inflation to employment, we too should be looking at the best leading indicators for where labour markets are headed.

If you’d like to hear more about what those lead indicators might be, Pendal’s Income & Fixed Interest team would welcome an opportunity to chat.

You can contact us through the client account team here.

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
• Live webinar: Register for Crispin Murray’s bi-annual Beyond The Numbers update on Sep 12

MARKETS are seeing renewed momentum on the back of US Fed Chair Jerome Powell’s dovish message on rates late last week.

This offset earlier weakness, nudging the S&P 500 forward 0.3% while the S&P/ASX 300 gained 0.5%.

Unless there’s a significant strengthening in next week’s labour data, US rates should fall at the September 17 meeting.

US bonds rallied through the curve and the US dollar weakened on the new information.

This is constructive for risk assets and was reflected in a rotation to US small caps, which have been lagging the market.

Sentiment towards AI stocks took a hit from a Massachusetts Institute of Technology report indicating companies can’t deploy it effectively and OpenAI CEO Sam Altman referring to AI “overexcitement”.

The Nvidia result this week will determine whether sentiment recovers.

Australian results season continues to be mildly constructive for the market.

Domestically focused stocks are outperforming. REITs are up on renewed interest in property assets, banks higher on better margins and other stocks such as Seek, Downer and Super Retail all able to deliver good profit outcomes.

Volatility continues with severe negative reactions to results from James Hardie, CSL and Sonic Healthcare.
Markets generally remain constructive with the economy seen as holding up and liquidity supportive with interest rates expected to come down.

US rate expectations

The focus has been on Jay Powell’s Jackson Hole speech, and the signals he would give regarding the potential for a September rate cut.

Last week the market began to fear Powell would be cautious and seek to dampen expectations. This led to the probability of a September rate cut dropping into the 60% range.

But Powell struck a dovish tone and markets latched onto his remark that “with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance”.

The key signal is the Fed does need to see another weak employment data point to act, because they see policy settings as restrictive while risks on inflation and employment are balanced.

Powell dropped references to the labour market as “solid” and noted that a slowdown in payroll growth was “much larger than assessed” in the July meeting.

He also flagged that labour demand and supply had weakened together. While there was limited evidence of labour market slack, this was “an outcome we want to avoid”.

The RBA cites this view as well: once the labour market tips over it can gather momentum and this can create a structural issue as extended periods of unemployment see people fall out of the labour market.

Powell noted the inflationary effects of tariffs would “accumulate over coming months” and there was a risk it became protracted. But he also said second-round effects created by wages did “not seem likely”.

He has left himself an out should next week’s payroll data shows a dramatic firming of the labour market, but this is a low probability.

The washout is that the market is now pricing in around a 90% chance of a rate cut in September.

Powell appeared be sending a soft signal that the next rate moves may be limited (ie perhaps two 25bp total moves rather than a 100bp), partly through his point that the labour market was in balance.

There also appears to be a shift in the longer-term policy; the approach of allowing inflation to overshoot has effectively been dropped.

It is somewhat irrelevant what Powell thinks about rates medium term though, since he will have stepped down as Chair.

The pressure on the Fed from the Trump Administration continues to build. Fed governor Lisa Cook faces calls from the President to resign over allegations she had been misleading on a mortgage application form.

This adds to speculation that the Fed will move a lot more dovish next year.

This may help drive short-end yields lower, but could also lead to a steepening of the yield curve as the long end begins to question the inflation target commitment.

The market is expecting four rate cuts by June next year.

AI sentiment shift

The other key thematic issue last week was a negative shift in AI sentiment. This was due to:

1. An MIT report that found 95% of AI pilot programs in companies are not hitting performance targets. This was because AI tools were too generic and did not adapt to workflows established in the corporate environment.
2. Sam Altman from Open AI said: “Are we in a phase where AI investors as a whole are overexcited about AI? My opinion is yes.” We note he followed that up by saying: “Is AI the most important thing to happen in a very long time? My opinion is also yes.” Nevertheless, this adds to the weight of AI-bubble calls from the likes of Ray Dalio and Alibaba co-founder Joe Tsai.
3. Meta was reported to have instigated a hiring freeze on AI developers. This comes after a months-long hiring binge, including poaching three people from OpenAI on rumoured packages of US$100 million over four years.
4. There was talk that Nvidia had asked Taiwanese multinational Foxconn – which makes chip components – to suspend work on the H20 chip, which is specifically made for Chinese customers, due to a lack of demand.

This news also came on the back of a disappointing release of ChatGPT5 and Meta’s Llama 4.

Given the strength of AI names – eg Nvidia is up 80% from April lows and 40% over 12 months – the sector is vulnerable to consolidation.

The issues raised are real ones, and the question for our portfolios is the implications for data centre providers such as NextDC and Goodman Group.

As always there is nuance, such as:

1. Our conversations with management teams suggest that applying AI is problematic for organisations. One of the biggest challenges is access to data and whether this is set up in way which can be utilised. Many companies need to resolve this, requiring investment and further migration to the cloud. So this may not have a bearing on datacentre demand.
2. The bubble talk is inevitable, given some of the valuations being applied to private companies and the salaries being offered to attract staff. Much of this speculative activity has not translated into domestic data centre providers, with Goodman’s stock flat on twelve months and NextDC down. We continue to expect material contract announcements to underpin good growth for these companies.

Our final observation is that in the US market large-cap mutual funds and hedge funds are still materially underweight the technology sector.

Tariffs

The US Federal Circuit Court is soon due to rule on the Trump Administration’s appeal against the Court of International Trade’s ruling that tariffs imposed under the International Emergency Economic Powers Act (IEEPA) were not legal.

Experts believe the ruling will be upheld and therefore this will go to the Supreme Court.
The market appears ambivalent about this, though there may be some risk to long bond yields as there is a complexity surrounding whether money already raised needs to be refunded, which would aa pressure to the fiscal position.

We also note that inbound containers to the Port of Los Angeles, which collapsed a few months ago, has also rebounded. This suggests trade flows are normalising, so we do not to expect any disruption to supply.

Markets

Powell’s dovish message fuelled US markets to new highs on Friday, led by airlines, homebuilders, banks and consumer discretionary stocks – all rate-sensitive sectors – while consumer staples, insurers and healthcare lagged.

We note the US small cap Russell 2000 index rose 4% on Friday.

It has lagged the larger-cap indices and is more leveraged to domestic stocks, highlighting how the market sees these rates cuts as underpinning growth rather than being reactive to a more significant slowdown.

As explained last week, the technicals for markets remain supportive. Japan continues to make new highs and China – another lagging market – is breaking out of a 10-year range.

Australia

We are roughly 80% of the way through earnings season with some key bellwethers yet to report – notably the supermarkets, Wesfarmers, Qantas, Medibank Private, Scentre Group and Wisetech.

Volatility remains as high as we have ever seen in terms of stock-price reaction on the day of the result.

This, we believe, is creating some significant distortions in terms of value.

It highlights the growing importance of management’s role in setting their cost of capital.

Those who communicate well, are predictable and earn the trust of the market command substantial “sleep-at-night” premiums over other companies – even where the earnings growth is lower.

We see this in the divergence in price/earnings ratio between Wesfarmers and CSL, which reached extremes last week on a poorly-communicated CSL result.

CSL is now rated the same as Westpac.

The former is expected to deliver ~22% EPS growth pa over the next two years, while Westpac is expected to grow EPS 1%.

This reflects how earnings momentum, flow and narrative drives prices in the short term.

Themes to highlight from last week include:

1. Banks performed strongly as both Westpac and National Australia Bank delivered positive surprises on margins.
2. Consumer discretionary also performed well with Super Retail Group beating expectations on performance and outlook.
3. Domestic businesses are holding up better despite subdued economic conditions. Seek is seeing improved performance in Australia driven by yield and Downer is improving its margins.
4. Most US-exposed industrials continue to struggle with BlueScope Steel, Reliance Worldwide and James Hardie disappointing last week. The exception here was Brambles, which disappointed on revenue but was able to make up for this with lower costs and provisions.
5. Traditional REITs outperformed as they talk to improving valuations and a pickup in interest in property assets.
6. Other rate sensitive defensives such as Transurban and The Lottery Corporation also outperformed as the market rotated to predictable domestic stocks with some rate leverage.

 

With a week to go the revisions signal is similar to the last few years, with a skew to positive revisions. Some 28% of companies have beaten EPS by 5% or more, while 20% have missed.

Breaking down the P&L, margins – rather than sales – are performing better than expectations.

Only 13% of companies beat revenue expectations, while 11% missed. But 32% beat margin expectations while 20% missed.

This reinforces the view that companies are remaining cautious on investing and hiring given uncertainty in the global economic outlook and the difficulty in investing in Australia.

From a sector perspective global cyclical is the worse sector, with 13% seeing consensus FY26 EPS upgrades of 5% or more and 44% seeing downgrades of greater than 5%.

Growth is the best sector, with 25% EPS upgrades of 5% or more and 19% downgrades.

The ASX performance month-to-date has been led by discretionary stocks, driven by rate cuts, and materials on the improved outlook for certain commodities.

Healthcare is lagging and growth is also underperforming despite the decent earnings revisions.

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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. 

Find out more about Pendal Focus Australian Share Fund  

Contact a Pendal key account manager

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
• Live webinar: Register for Crispin Murray’s bi-annual Beyond The Numbers update on Sep 12

MARKETS continue to grind higher last week in a relatively quiet macro period, exacerbated by the northern hemisphere holiday season.

The most recent Recent US inflation data was okay.

The consumer price index (CPI) was slightly better than many expected and the producer price index (PPI) was a bit worse. But there is no evidence yet of tariffs having a larger impact than expected.

The US economy looks to be in better shape than some feared post the July payrolls shock, with survey data and retail sales indicating growth around 1.5% over the next few months.

US earnings season has played out and has been supportive for the market as well.

Market technicals are positive and suggest a continued up-trend, although systematic net long positioning is back close to its high.

The main near-term risk to markets would be a correction triggered by better US payroll data on 4th September, which could hose down rate cut expectations.

Australia got the interest rate cut all expected last week. Employment data was fine and Commonwealth Bank’s customer data released as part of its FY25 result indicated improving spending patterns.

The trends were generally constructive from the first genuinely busy week of reporting season. Commonwealth Bank was a little cautious on the margin outlook, but Westpac surprised on the upside, so that supported the overall banking sector.

Domestic insurers assuaged concerns over margins. Consumer-sensitive stocks saw solid trends continue. The main disappointments were in industrial sectors, with conditions in Victoria even softer than expected.

The S&P 500 gained 1% for the week, while the S&P/ASX 300 was up 1.6%.

Our current thoughts on markets

1. The US equity market remains in an up-trend driven by healthy earnings growth, economic resilience, the prospect of rate cuts and supportive technicals. While valuations are full and there may be some consolidation through the seasonally tougher period from late-August through September, any market fall is likely to be a short-term correction.

2. Despite the weak July US employment data, we do not believe the US economy has reached a tipping point and runs the risk of recession. Real time data suggest the economy is holding up reasonably well.

3. The largest threat to markets is if US inflation surprises to the upside as a resilient economy leads to greater tariff pass-through, which leads the Fed to believe they need to slow the economy more and therefore do not deliver on the 75bp of rate cuts the market is expecting by either January or March next year.

4. China’s anti-involution policy will be a slow-burn, selectively helping restore margins in over-supplied industries, but constrained by the need to manage economic growth. This should lead to a relatively benign commodity outlook, but no squeeze higher.

5. The Australian economy remains sluggish but should slowly accelerate as rate cuts flow through into consumption and investment. Low/no productivity growth may constrain the RBA’s ability to cut and extend their timeline. Corporate earnings should be able to deliver on moderate growth in this environment, underpinning the equity market.

Key macro issues for markets

We are watching four key macro issues, looking at each in turn:

1) US inflation trends and the impact of tariffs.
In the last week there were some relevant signals on US inflation which were okay in aggregate.

A benign July CPI print reinforced confidence in a September rate cut.

• While Core CPI rose a relatively high 0.32% month-on-month – the highest rate since January – to 3.1% year-on-year, this was anticipated and suggests the flow through of tariffs so far is in line with expectations.
• Headline CPI was +0.2% month-on-month and 2.7% year-on-year.
• The larger price rises were in categories such as tools hardware, children’s apparel and footwear which were likely related to tariffs.
• Core goods inflation was +0.3% month-on-month, boosted by used car and truck prices, which is less likely related to tariffs.
• Core services was inflated by airfares and dental. which had both been soft recently.

However the positive vibe on inflation was partly offset by the higher PPI data at the end of the week.

• Core PPI was +0.9% month-on-month, the highest since March 2022.
• However there are suggestions of distortion by the trade services component which inferred a large rise in distributor’s gross profit margins, which is unlikely. This component is often subject to material subsequent negative revisions.
• All the components of PPI which feed into the Fed’s favoured PCE deflator were benign and the component most likely tied to tariffs – durable goods – rose 0.3%. This is in line with July and below May’s 0.5% increase.

The conclusion is there is not anything in the current inflation data to derail a September rate cut.

It is also worth noting that the tariff revenues are beginning to flow through and ran at an annualised pace of $332bn in July. This indicates tariffs are being applied and we are now in the key phase of assessing the impact on inflation. We note that $300b equates to ~1% of US GDP.

2) US economic growth momentum

US growth signals have been more positive since the shock of July’s payroll data – and may constrain rate cuts.

Evercore ISI survey data has been collected for decades and is a decent real time indicator of the economy. It is suggesting that while growth was subdued in April through June, it is improving now.

The broader Evercore IS company survey is near a 12-month high. The surveys diffusion index – a signal of whether individual surveys are either improving or deteriorating – is also improving.

The data suggests the industrial side of the economy is struggling but that the consumer holding up okay.

This was reinforced by positive US retail sales data. Headline retail sales rose 0.5% in July, helped by motor vehicles and parts, while June was revised up to +0.9% from +0.6%.

Control retail sales (the preferred core measure) were up +0.5%, versus 0.4% expected, while also seeing positive June revisions.

Real consumption, measured by three-month-on-three month growth, looks to be settling into a 1.0 to 1.5% annualised range, which is in line with GDP forecasts. 

 

This is the sweet spot — low enough to allow rate cuts, but not too weak to lead to job declines.

The market remains very focused on the payrolls data due 4th September and also fed Chair Powell’s Jackson Hole speech next Friday.

3) Chinese policy initiatives

We saw some softer data for July. Industrial production growth fell to 5.7% year-on-year, from 6.8%, while retail sales rose 3.7% from 4.8% in June. Both these results were below consensus expectations.

Fixed asset investment fell -5.2% year-on-year, versus consensus expectations of +2.1%. This was the lowest level since the early Covid period.

This may reflect the impact of the anti-involution campaign and, given China’s on-going economic fragility, suggests Beijing will need to be careful as to how aggressively it applies these policies.

All this indicates a softer H2 CY2025 for China after the economy proved more resilient than expected in H1 – and indicates we will see more incremental stimulus measures

4) Australian economic growth momentum

The Australian economic outlook looks reasonable

The RBA cut rates 25bp to 3.6% as expected, with the RBA’s forecast for trimmed mean inflation of 2.5% in December 2027 probably suggesting they share the market’s view that rates fall in November and February, with another potential cut in May 2026.

They did cut their long-term productivity forecast from 1.0% to 0.7% – this is not low enough to constrain them yet on rates. However, the reality is productivity growth is 0% and may be an issue if growth reaccelerates, as it would indicate it flows through to inflation sooner.

July employment data was in-line with expectations, but better than June with employed people growing +0.25% month-on-month and unemployment falling from 4.3% to 4.2%.

• The three-month average is soft at 8k having been running at 30k and year-on-year job growth is 1.8%, versus a 2.0% long-term average.
• The underutilisation rate, which is a broader measure of slack in the economy, also fell to 10.1% from 10.3% and remains well below the long term average of 12.7%.

All this suggests the labour market is still quite tight and will encourage the RBA to remain measured. The final signal worth noting was the CBA customer data released with their earnings report, which indicates a clear improvement in discretionary spending saving in younger demographics, which is supportive signal for the economy and retail demand.

Markets

Summer holidays in northern hemisphere means market activity remains quite subdued.

In this environment — and given the positive earnings backdrop and benign macro — equity markets continue to grind higher.

US remains in good shape technically. While the mega-cap stocks have led the S&P 500, the “average” stock is still seeing tailwinds and the index is not at “overbought” levels.

The wash-up from earnings season was positive and this has reasonable breadth across sectors.

The median technology stock saw 15% EPS growth in Q2 2026, but the median financial stock was not far behind at 14%.

All sectors were positive on this measure except materials (0%), consumer staples (-3%) and energy (-13%).

So while valuations are high, they are supported by earnings momentum.

Having delivered 11% earnings in Q2 2026 (and 8% for the median stock), consensus expects 7% year-on-year EPS growth for the S&P 500 in Q3 and Q4 2026.

While the Mag 7 has been the dominant driver of earnings and revisions the dispersion to the rest of the market is set to narrow.

In Q2 the Mag 7 saw 26% EPS growth versus 7% average for the remaining S&P 493. Consensus has this at 14% and 5% respectively for Q3.

We are also seeing other global markets perform well. In Japan, the TOPIX has broken out to new highs, with decent breadth — 84% of stocks are trading above their 200-day moving average.

Australia has also hit new highs, with the resource sector no longer acting as a drag on the index.

Elsewhere, the US dollar has failed to rally and remains near its lows, oil prices remain subdued and the US 10-year bond yield is at the lower end of its recent range. All of this is helpful for equity markets.

The main risk to markets near term is a firmer payrolls data which may take some of the excitement on US rate cuts out of the market and send bond yields higher.

Australian reporting season

The theme of recent reporting seasons — both domestic and offshore — has been amplified reactions on the day of a company’s result. This continues, reflecting the impact of systematic and quant strategies.

Key themes last week were:

1. A rotation in banks away from CBA – and notably towards Westpac, reflecting better margin trends from the latter and conservative guidance from the former.
2. Reassurance that domestic insurance margins will hold up – despite premium growth slowing – due to a disciplined market structure (helped by consolidation) and benefits of reinsurance.
3. Positive anecdotes from the likes of JB Hi-Fi, Temple & Webster and Baby Bunting of continued resilience in the consumer and growth into FY26.
4. Industrials facing a tougher environment, particularly those exposed to southern states (eg SGH) or the US consumer (eg Amcor, Treasury Wine). We note that signs of stabilisation at Orora led to strong bounce in the stock, reflecting the discounts being applied to some of these companies.
5. A contrast of fortunes in domestic energy market stocks; Origin Energy is doing fine, while the cost of replacing coal with batteries is hitting AGL Energy’s P&L.

Beijing’s anti-involution theme had its first tangible manifestation with the suspension of a significant lithium mine in China, boosting lithium stocks.

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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. 

Find out more about Pendal Focus Australian Share Fund  

Contact a Pendal key account manager

Despite ongoing tariff uncertainty, Pendal’s Global Emerging Markets Opportunities team remains positive on the outlook for Brazil

• Brazil hits by steep US tariffs
• Pendal’s EM team remains positive despite the headlines
• Find out about Pendal Global Emerging Markets Opportunities fund

IN EARLY August the US imposed sweeping new tariffs on dozens of countries.

Brazil received a special mention from President Trump, with an additional 40 per cent tariff taking the total to 50 per cent for most Brazilian imports.

The new measures were far above the initial 10 per cent tariff level imposed in April under the “Liberation Day” framework.

The sudden escalation surprised financial markets and raised concerns about broader geopolitical motives.

These tariffs are not about trade imbalances.

The US has run a trade surplus with Brazil for 18 consecutive years, including $US6.8 billion in 2024 – its fourth biggest bilateral surplus.

The real trigger is political. Brazil’s former president Jair Bolsonaro is under house arrest and faces charges of leading a coup attempt to overturn his 2022 election loss.

President Trump has publicly condemned the trial as a “witch hunt” and tied the tariff hike directly to Bolsonaro’s legal troubles, describing it as retaliation against political persecution.

Limited impact

Despite the headline figure, some sizeable exemptions will limit the impact on Brazil’s exports.

Civil aircraft, fertilisers, pig iron and orange juice are excluded from the full 50 per cent rate. Mining exports, which make up a large share of Brazil’s trade with the US, are also largely protected.

Analysts estimate the effective tariff rate will be closer to 30 per cent.

Brazil’s commodity-heavy export profile also affords some protection.

Key exports such as food, hydrocarbon fuels and other raw materials can generally be redirected to other end markets, while demand and pricing remain strong.

This reduces the risk of lasting economic disruption from US tariffs.

The Brazilian government research agency IPEA projects only a 0.01% decline in GDP and a 0.03% drop in total exports from the tariffs.

Meanwhile, Brazil president Luiz Inacio Lula da Silva this week unveiled an aid package for tariff-affected companies, including credit lines for exporters and government subsidies.

Good news for China

Geopolitically, China stands to benefit from the fallout.

China has been Brazil’s largest trading partner since 2009 and has invested more than $US73 billion in its infrastructure, energy, and agribusiness.

The recent announcement of a Brazilian tax advisory office in Beijing – one of only five globally – signals a deepening strategic relationship.

As US ties fray, Brazil’s pivot to China opens new opportunities for trade, investment, and institutional cooperation.

Lula in a strong position

Domestically, the tariffs have strengthened Lula’s political position.

A recent poll shows him leading all likely opponents in the 2026 presidential election, including Bolsonaro and his wife Michelle, who might stand.

Close ties between the Bolsonaros and President Trump are increasingly seen as liabilities in Brazil, especially amid allegations of collusion to provoke the tariff hike.

Lula has framed the tariffs as an attack on Brazilian sovereignty, reinforcing his narrative of independence and national resilience.

What it means for investors

We remain positive on the outlook for Brazil and Brazilian equities.

With a relatively strong economy, attractive valuations and the support of a weaker US dollar, Brazilian equities and the Brazilian real have both performed well this year.

We see the conditions for this to continue, irrespective of challenging headlines regarding trade tariffs.

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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 aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

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

• Find out about Pendal Focus Australian Share Fund

THE startling US jobs data from 1 August continues to set the tone for markets.

Large revisions to non-farm payroll data for previous months saw the three-month average monthly private sector jobs growth drop from ~150k to ~50k.

The resulting seasonally adjusted annual rate (SAAR) growth in private jobs of 1% versus the previous three months is a level rarely seen outside of times that the economy is either entering or exiting recession.

The market reacted quickly, shifting from a 37% to a 90% implied chance of a US rate cut in September. There is now an implied 57bps of cuts for the remainder of 2025, versus 40bps prior to the jobs release. 

This reflects the view that the US Federal Reserve will react to the material shift in recession risk that the jobs data revision embodies. Two Fed members – Mary Daly and Neel Kashkari – pivoted dovishly in their rhetoric in repose to the data.

Unease about recent Treasury auctions probably limited the benefit of the more dovish Fed positioning over the course of the week.

The combination of an increased chance of near-term rate cuts and a US reporting season coming in well above prior market estimates – and demonstrating the AI theme remains intact – saw equity markets heading back to all-time highs.

The S&P 500 gained 2.4% and the S&P/ASX 300 gained 1.7%.

Under the surface, dispersion of returns has been very significant, the spread of good and bad results has normalised, and volatility on results day (for poor results) is at new highs.

If the current setting of sub-par growth and inflation upside risk remains then we can expect a continuation of quality factor outperformance, though the extent may be limited by the current valuation premium.

Elsewhere, European Central Bank President Christine Lagarde flagged that EU rates “are in a good position”, suggesting a reasonably high bar for further cuts in the face of expectations that inflation will enter undershoot territory in 2H25.

The Bank of England required an historic second round of voting to achieve the 5-4 result required to cut rates 25bps.

This week is data-heavy in the US, with July CPI on Tuesday.

Goods prices will be under scrutiny amid expectations for tariffs to start having a more meaningful impact. The PPI will be out on Thursday, while retail sales for July and preliminary University of Michigan sentiment for August cap off the week on Friday.

US Federal Reserve

President Trump announced that he would nominate Stephen Miran, a former hedge fund executive turned top economic adviser, to fill the temporary vacancy on the Fed Board of Governors caused by the resignation of Adriana Kugler. 

Kugler’s term was due to end in January 2026.

Miran’s main focus has been on the overvaluation of the US dollar as a result of its role as the global reserve currency. The US dollar trade-weighted index fell 1.0% for the week.

Miran has also previously expressed a preference for shortening Fed member terms and allowing the President more scope for firing incumbents. He has also promoted the pro-growth and deflationary aspects of tariffs.

Christopher Waller is firming in the betting as the next Fed Chair, with a 29% chance versus 9% for Kevin Hassett and 6% for Kevin Warsh, though it appears a few more names have been added to the list of potential candidates over the last week or so.

San Francisco Fed President Daly took a turn towards the more dovish Fed faction of Waller and Michelle Bowman.

Daly noted that it could take six months to find out whether tariffs will push up inflation persistently, but that while she was “willing” to leave rates on hold last week, the slowing labour market sees her increasingly uncomfortable about making that same decision in upcoming meetings.

Minneapolis Fed President Kashkari followed suit, noting that “the economy is slowing, and that means in the near term it may become appropriate to start adjusting.” He stated that two quarter-percentage-point rate cuts by the end of the year would be reasonable.

 

Macro and policy US

When the Fed held rates steady in July, part of Chair Jay Powell’s justification was that employment data remained solid, based on the June report showing the three-month average monthly addition of 150,000 jobs.

Three days later, that 150,000 jobs was revised down to circa 50,000 – suggesting the situation is not so solid.

Over the last five months the Bureau of Labor Statistics has revised nearly 600k jobs away.

Post-revisions, US private employment has increased only 52k per month over the past three months, with gains stalling outside the health and education sectors. Government jobs actually fell 16K per month over this period.

Private payroll growth is now below 1% SAAR over the past three months. Since 1970, that has only been seen three times outside of periods leading into or out of recession – in 1995, in 2005 and this time last year.

This downshift in labour demand does not suggest we are seeing a slide into recession. There is still evidence of labour hoarding and credit conditions remain benign. But a stall speed alert has been sounded.

Given a heightened sensitivity to recession risk, the July labour market report is likely to have had a significant impact on the Fed’s thinking.

Elsewhere, initial jobless claims rose to 226K in the week ending 2 August, up from 219K and slightly above the consensus expectation of 222K. 

Initial claims have been within a range of 210-to-250K for the last year. However, a couple of leading indicators suggest we may return to the top end of that range soon.

First, labour firm Challenger, Gray and Christmas’s July measure of job cut announcements, excluding federal government, was 13% above its 2024 average. 

Also, the Cleveland Fed estimates that the number of layoffs notified in June WARN filings was 24% above the 2024 average.

Continuing jobless claims increased to 1,974k in the week ending 26 July, up from 1,936K the week before.

This is the highest level in four years and is further evidence that payrolls are rising below the pace required to keep the unemployment rate steady.

The current level suggests a roughly 0.2pp increase in the unemployment rate, which was reported as 4.2% just over a week ago.

This, alongside other indicators consistent with higher joblessness, suggest the unemployment rate will rise in coming months and may exceed the FOMC’s end-year forecast of 4.5%.

Macro and policy Australia

The focus this week will be the RBA’s August Monetary Policy decision – due on Tuesday – and the accompanying Statement on Monetary Policy.

The market overwhelmingly expects the RBA to cut the cash rate by 25bps to 3.60% in a unanimous decision.

We will also see updates on the labour market and wage growth.

Markets

US 2Q25 reporting season

With 90% of S&P 500 companies having reported, fears of a post-Liberation Day earnings rout have been squashed.

The blended earnings growth rate for Q2 S&P 500 EPS currently stands at 11.8%, well above the 4.9% expected at the end of the quarter.

Thus far 81% of companies have beaten consensus EPS expectations, versus a five-year average of 78%.

The blended revenue growth rate is 6.6% and 81% of companies have surpassed consensus sales expectations, better than five-year average of 70%.

In aggregate, companies which are beating expectations are doing so by 8.4%, which is better than the 6.3% average over the last four quarters, but below the five-year average of 9.1%.

Companies are reporting sales that are 2.4% above expectations, which is better than both the 0.9% one-year positive surprise rate and the five-year average of 2.1%.

56% of companies raised their full-year EPS guidance, versus a long-term average of 46%.

Looking at year-to-date returns from the S&P 500, the market cap-weighted return has been 9.5%, but the median S&P 500 stock has only returned 3% and remains 12% off its 52-week high.

At the top end of the distribution, a basket of AI-exposed equities has returned 26%, among the strongest of any investment theme. The market has also rewarded themes such as cyclicals outperforming defensives and large caps outperforming small caps.

There has been divergence within themes. Among defensives, for example, the AI-exposed Utilities sector has done well while Health Care has lagged. Within cyclicals, commodity-exposed sectors like Energy and Materials have lagged other areas like Industrials.

 

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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.

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

Here are the main factors driving the ASX this week, according to Pendal investment analyst JACK GABB. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund
• Watch now: Crispin Murray’s bi-annual Beyond The Numbers ASX outlook

IT was a macro-heavy week, with the Federal Reserve’s expected decision to hold rates steady taking centre stage, while a subsequent data print revealed cracks in the labour market.

The bulk of US reporting season continued, with US tech stock earnings mostly exceeding expectations, further underpinning the push into AI.

It was also a big week for tariffs, with the overall rate now at 18% and implementation now being delayed to 7 August.

In Australia, CPI came in lower and cemented expectations for a rate cut on 12 August.

In China, the July Politburo meeting was muted, with potential stimulus measures deferred.

As a result, the S&P/ASX 300 fell slightly by 0.01% for the week, faring better than the S&P 500’s 2.34% decline.

US macro and policy

It was a big week on the macro front, with the Fed meeting front and centre. Rates were kept on hold, as expected, but commentary from Powell was interpreted as less dovish.

That initially drove down September rate cut expectations from 68% to 43%, before weaker-than-expected labour market data on Friday drove a sharp reversal back to 87%.

But bad news is good news for equities, as the expectation of a September cut is now well above 90%.

On outlook, there was little change to the FOMC statement and no change to forward guidance. In the press conference, Chairman Powell said that the economy “is not performing as though restrictive policy is holding it back inappropriately”.

He also mentioned the labour market is in balance (but with downside risk), inflation remains above target, and we are only at the early stages of tariff pass-through to inflation.

In summary, maintaining “modestly restrictive” policy “seems appropriate” for now, in his view.

Unfortunately, that view was immediately challenged by Friday’s labour market data. July payrolls were 73k versus expectations of 104k. More importantly, May and June saw large downward revisions (125k and 133k, respectively).

The unemployment rate, which Powell is more focused on than NFPs (non-farm payrolls), also ticked up to 4.25% from 4.12%. Most other data also came in weaker, which combined to drive September rate cut expectations sharply higher. The dollar also partially reversed its recent rebound.

The credibility of recent data came under scrutiny by President Trump, firing the head of the Bureau of Labor Statistics hours after its release. “Important numbers like this must be fair and accurate; they can’t be manipulated for political purposes,” Trump stated.

While this change is unlikely to have a significant impact, Trump has another opportunity with the Federal Reserve. Governor Kugler, who missed the July meeting, announced her resignation six months ahead of schedule.

This vacancy is seen as potentially accelerating the selection of the next Chair, with the appointee possibly acting as a shadow Chair until Powell’s term ends next year. This view is reinforced by Trump’s continued criticism of Powell over past weeks.

According to Polymarket odds, Kevin Warsh is the leading candidate for the next Chair, followed by Kevin Hassett and Chris Waller.

Whoever it ends up to be, the addition is likely to add to pressure to cut given the two dissenters at the July meeting are Trump appointees.

Interestingly it was also the first double dissent since 1993.

In other economic news, US GDP saw a beat, although the data was significantly influenced by fluctuations in net exports due to tariffs which reversed the trend seen in Q1.

Tariffs

With the labour market showing some cracks, inflation remains the primary obstacle to a September cut, with two CPI prints due between now and the next FED meeting.

Tariff outcomes are crucial in the near term, as the current CPI composition has shifted towards goods and insurance rather than services.

Last week, Trump announced an updated list of reciprocal tariffs, with the overall rate expected to land at 18%, up from 2% at the start of the year and closer to 30% on Liberation Day.

The US market has largely shrugged off new measures, particularly given subsequent adjustments. Even Powell noted that tariff effects on inflation might be short-lived as “one-time base effects”.

However, with worsening jobs data and signs of a spending slowdown, the potential impact of tariffs cannot be ignored.

One challenge for the Fed is the lag between when tariffs are agreed and when they show up in goods prices. According to Powell, most tariffs are currently being paid upstream by companies rather than consumers.

This is unlikely to last however as based on Fed surveys, companies will eventually pass on the additional costs, meaning the full impact on consumers is yet to be seen. Budget tax cuts may help, partially funded by $30bn per month in tariff collections, but it is unclear if this will be sufficient.

It is also worth noting the risk that if/when the Fed next cuts rates, mortgage rates may not fall as Bloomberg has highlighted during last year’s cuts.

US reporting season

Outside of macro data it was a big week for US earnings, particularly within the tech sector.

We are now two-thirds of the way through Q2 reporting season with over 80% of companies having reported a positive EPS surprise. Year-on-year earnings growth is also averaging over 10%.

Despite the generally strong results, the S&P 500 finished down over 2%, with only the utilities and communications sector posting gains.

The overall drop in the S&P masked reporting beats by AI bellwether stocks Microsoft and Meta:

• Microsoft beat expectations with EPS of $3.65 vs. $3.37 expected and projected next year’s capex to exceed $100bn, a 14% increase year-over-year.
• Meta also exceeded expectations, driven by ad growth and AI, forecasting 2026 capex at $97bn vs. $68bn in 2025.
• Amazon’s results were less impressive, but the company is increasing spending, citing the early stages of AI development. The CEO emphasised the need to build capacity to meet customer needs and highlighted electricity supply as a constraint for expanding cloud services.

Outside of tech, the earnings were more mixed:

• UPS missed earnings and withdrew FY guidance amid macro uncertainty, with Q2 volumes falling 7.3% to 16.6 million packages – worse than Q1.

• United Health continued to struggle with rising medical costs. This trend prompting Trump to ask 17 major pharmaceutical companies to slash prescription drug prices to match those overseas. Companies have until September 29^th to respond.
• Southwest Airlines lowered FY profit guidance to $0.6-0.8bn from $1.7bn at the start of the year. However, domestic leisure travel stabilised in Q2, though business travel remains down due to government spending cuts.

This tale of two markets was underscored by the underperformance of the Russell 2000 which was down -4.2%.

While the AI narrative appears on firm footing, consumer and tariff exposed sectors appear more fragile. As such a two-tier market appears likely to persist for some time.

Commodities

Moving to commodities, materials was the weakest sector, reversing much of the previous week’s gains.

Energy was the one bright spot, with LNG benefiting from pledges to buy more from the US as part of trade deal negotiations.

Oil also gained, but over the weekend, OPEC+ agreed to a 548k barrels per day increase in September. This move appears aimed at reclaiming market share but likely adds to a forecast global surplus later this year.

Most metals retreated, with copper on Comex seeing the most dramatic fall after Trump reversed tariffs on refined products, which constitute the vast majority of copper imports.

Lithium also saw a sharp reversal of recent gains, with equities following suit. Speculation around material supply interruption in China has, thus far, not been substantiated.

China

China equities ended the week lower, with the key July Politburo meeting offering little new information. 

Rather, it emphasised the implementation of existing policies, which arguably reflects the fact that growth YTD has exceeded the official target and US-China tariff risks have reduced.

The so-called ‘involution-style’ competition did not attract much comment, with official guidelines deferred to later in the year. However, subsequent releases quoted Xi as vowing to “break involution,” indicating that policies to reverse deflation are likely to continue.

As a case in point, we saw announcements from Meituan and Alibaba aiming to curb disorderly price competition and GCL Technology to shut a third of its solar-related production capacity during the week.

There was no boost to real estate, which was a slight surprise given weakness has re-emerged since April. The commentary there was centred on delivery of high-quality urban renewal programmes, which the market believes are unlikely to deliver meaningful change.

Overall, the meeting contained few surprises, with the shift towards structural rebalancing (anti-involution; boosting consumption) still in progress. As such, expectations for additional stimulus are likely pushed back to late Q3/early Q4, coinciding with the 4th Plenum in October where the next five-year plan with be detailed. 

Similarly, expectations for additional rate cuts have been delayed, with the Politburo statement removing the April meeting’s wording about cutting policy rates and reserve requirement ratios at the appropriate time.

This has been interpreted as pushing the timing of additional cuts to Q4 when growth pressures are expected to re-emerge, which could see the resource sector remain stagnant until then.

Backing up the wait-and-see approach is a likely further delay in the implementation of US-China tariffs, with a meeting in Stockholm agreeing a 90-day delay (to mid-November), albeit this remains subject to Trump approval.

The risk here is that there could be degradation over August/September – similar to 2024. Factory output remains weak with manufacturing PMI down 49.3 in July from 49.7 in June, and port traffic is coming off highs – potentially indicating an end to front-loading ahead of tariffs.

Property also remains weak, with China’s top 100 developers seeing their combined value of new home sales dropping 24% year-over-year in July. Sales also fell 38% from June.

Australia

Domestically, the main news was the softer than expected CPI, leading to a ~100% chance of a 25bps cut later this month and over two cuts by November, up from the start of the week.

Q2 CPI printed at 2.1% year-on-year vs. 2.2% expected and 2.4% prior. June CPI was 1.9% year-on-year vs. 2.1% expected.

Quarter-on-quarter CPI was 0.7% vs. 0.8% expected and 0.9% prior. Tobacco added 2% due to biannual indexation which was last applied 1 March, with alcohol and tobacco comprising 6.58% of the CPI weight.

Support for a cut this month looks more assured after the Reserve Bank deputy governor noted the previous shock decision should be viewed as an unusual occurrence. He also said cash rate decisions should be predictable and in line with market expectations.

Australian equities ended largely flat with the S&P/ASX 300 returning -0.01%, reversing the sector moves from the previous week.

The strength in Consumer Discretionary (+2.4%), Industrials (+1.5%), and Financials (+1.5%) offset the weaker Energy (-1.9%) and Materials (-4.0%).

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About Jack Gabb and Pendal Focus Australian Share Fund

Jack is an investment analyst with Pendal’s Australian equities team. He has more than 14 years of industry experience across European, Canadian and Australian markets.

Prior to joining Pendal, Jack worked at Bank of America Merrill Lynch where he co-led the firm’s research coverage of Australian mining companies.

Pendal’s Focus Australian Share Fund has an 18-year track record across varying market conditions. It features our highest conviction ideas and drives alpha from stock insight over style or thematic exposures.

The fund is led by Pendal’s head of equities, Crispin Murray. Crispin has more than 27 years of investment experience and leads one of the largest equities teams in Australia.

Pendal is a 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  

Contact a Pendal key account manager

 

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Tariffs will show up either in inflation or corporate earnings — but the implications are starkly different for portfolio decisions, argues Pendal’s head of income strategies AMY XIE PATRICK

• Three straight quarters of falling earnings growth in the US
• Key watchpoints: contract-roll offs, earnings revisions, China’s Politburo meeting
• Find out about Amy Xie Patrick’s Pendal Monthly Income Plus fund

TARIFFS will show up either in inflation or corporate earnings — but the implications are starkly different for portfolio decisions.

Despite higher input costs from new tariffs, US consumer inflation has barely budged.

The reason? Contract lags in supply chains and Chinese producers absorbing the pain. The first offset may not last — but markets have yet to price in what happens if they do.

That’s why Pendal has already booked profits and dialled down risk in our income strategies, including trimming equity allocations.

With market optimism still running high, the risk-reward is less compelling, so we’re keeping our powder  dry for better entry points.

Tariffs and inflation: the missing pass-through

Since Donald Trump’s “Liberation Day” in APril, tariff pass-through into US CPI has been far weaker than most expected.

Historically, US inflation surprises and actual inflation have moved together (see the graph below). This time, they’ve diverged sharply.

Where are the tariffs?

Purchasing manager surveys show input prices rising (see below)  — a sign that tariffs are indeed biting at the producer level.

Normally, higher input costs push up consumer prices. This time, the relationship has broken down.

Feeling the pressure: Purchasing managers on input prices & US CPI

One likely reason: existing contract prices in supply chains. Sellers may want to raise prices, and buyers may be willing to accept them, but until contracts reset, pass-through to CPI is limited.

This delay won’t last forever.

When contracts roll off, either producers absorb the cost hit or they pass it on. Either way, corporate earnings are at risk.

While the current earnings season for the S&P 500 has been solid, the trend is heading down: three straight quarters of falling earnings growth, as you can see in the graph below.

The market has yet to price-in the “pinch”

China’s ‘anti-involution’ policy: a structural challenge

It turns out Chinese producers have been absorbing a lot of the pain, and since before Trump’s election odds were sealed in 2024.

China’s Producer Price Index (PPI) has diverged from commodity prices, suggesting heavy discounting even as input costs rise, as you can see below.

Heavy discounting

This points to a bigger structural problem: overcapacity.

In solar panels, China’s supply is more than twice global demand. In EV batteries, supply exceeds demand by 30 per cent — figures highlighted in a recent Morgan Stanley report.

Beijing’s “anti-involution” policy — essentially, a campaign to stop companies from undercutting each other — faces an uphill battle when too much capacity is chasing too little demand.

(Involution refers to a state of intense, often unproductive competition that leads to diminishing returns and economic stagnation.)

As China struggles with deflationary forces, the US may continue to see muted effects from tariffs in CPI.

Bottom line for portfolios

Whether tariffs show up in US CPI — and for how long — matters for both bonds and equities.

If bonds fear a more serious inflation problem, it also won’t be good news for equities.

On the other hand, if US corporates fail to pass tariffs on for whatever reason and margins become compressed, the near-term implication would be a pull-back in equity markets.

After all, analysts have maintained expectations for earnings growth to accelerate in coming quarters.

Key watchpoints include contract-roll offs, earnings revisions and China’s upcoming Politburo meeting.

Here are the main factors driving the ASX this week according to Pendal investment analyst ANTHONY MORAN. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund

NEWS on trade deals, combined with a strong reporting season so far, is seeing US equities hit fresh highs.

The S&P 500 gained 1.5% last week and is up 9.4% for the year.

Domestically, the S&P/ASX 300 shed 1% in a week dominated by a rotation into resources, which were up 2.7%.

Macro news was very light with greater focus on US reporting season and modest moves in bond yields. US 10-year Treasury yields fell 4bps to 4.38%.

Bulk commodities and metal prices were generally stronger on positive China newsflow. Iron ore rose 1.4% and copper 3.3%, though oil eased back, with Brent crude down 1.2% to US$68.44.

US policy and macro: a relatively quiet week

US housing data was a little softer, with new home sales down 7% year-on-year. They were up 1% month-on-month, but this was 4% below consensus expectations.

Existing home sales were flat year-on-year but down 3% month-on-month, slightly missing consensus expectation of -1%.

This continues a run of soggy housing data, following weaker new housing starts last week. While the data has been weak, a sharp rally in homebuilders earlier last week suggests it has not been as bad as feared.

Inventory for new and existing homes has risen sharply, putting downward pressure on US home prices.

There is now more than four months of supply in existing homes on the market – the highest level in five years. This increased appetite to sell homes is challenged by affordability, suggesting prices have to fall.

Mortgage purchase applications rose 3.5% for the week and the last four weeks are up 20% year-on-year. This offers some hope of a pick-up in home purchasing activity, but purchase applications have been rising for a few months now and this is yet to show up in activity.

Elsewhere, US manufacturing continues to be a bit softer with the Richmond Fed Manufacturing index falling 12 points month-on-month to -20, well below the -2 expected.

The S&P Manufacturing purchasing manager’s index (PMI) fell from 52.9 in June to 49.5 in July, versus 52.7 expected. This was slightly offset by the Services PMI, which rose from 52.9 to 55.2, beating consensus expectations of 53.

On the positive side, Durable Goods orders came in better at +0.2% month-on-month in June – compared to 0.1% expected – and US initial jobless claims fell for a sixth straight week to 217k, from 221k the week before and better than the 226k expected. Continuing claims were relatively flat.

The upshot is that the macro news was largely neutral in effect, with bond yields basically flat for the week. The US economy is slowing into 2H CY2025, but not enough to derail the market.

Trade update

Positive momentum on trade deals drove a large part of strong market sentiment last week.

The big news was a deal with Japan – with a 15% tariff on exports to the US. This saw a 4.3% gain in the Japanese share market.

The US and the EU also reached a deal over the weekend, likewise with a 15% tariff rate. This is important given that roughly 20% of US imports are sourced from the EU.

There is speculation that a Korea deal will shortly follow. Japan and Korea are about 5% of US imports each.

Minor deals with Philippines and Indonesia – with a 19% tariff – were also announced.

Most details of the trade deals are vague, but from what we know it looks like the weighted average effective tariff rates won’t move much versus today’s levels.

In Japan’s case the effective rate post deal actually comes down, as tariffs on autos and auto parts are reduced from 25% to 15%. This is helping reduce the tail risk of higher-than-expected tariffs.

Tariffs and inflation

While effective tariff rates are not worse than feared, it will still increase over the year and the impact on inflation will build.

Goldman Sachs have increased their forecast for the effective tariff rate to 17% by the end of 2027, versus 14% previously.

On the positive side, they also noted that the pass-through of tariffs to consumer prices is tracking lower than the last round of tariffs in 2019. After four months from the earliest tariffs imposed on China in February, they measure the pass-through at around 60%.

Surveys that ask businesses how much they intend to eventually raise prices also indicate a lower pass-through than last time. This is partly due to the exporters absorbing some of the tariff impost and also some being absorbed by US businesses.

Tariff effects came through in the June consumer price index (CPI) – with the notable exception of the autos category – and appear to have now boosted prices by 0.2% cumulatively.

We also note that excluding the effect of tariffs, US inflation is looking softer than expected. The Goldman Sachs view is that the underlying CPI trend is moving down towards 2%, particularly as shelter inflation slows, but the tariff effect will push core personal consumption expenditures (PCE) inflation to 3.3% by the end of 2025, before fading in 2026-27.

Although the US economy has held up pretty well in 1H CY2025, real consumer expenditures have taken a hit and building tariff impacts in 2H are a risk. A key question is to what degree the resolution of uncertainty will offset the tariff burden on consumers.

The direction of interest rates will depend on the Fed’s willingness to look through the effect of tariffs in inflation. This may be assisted by the slowing underlying rate, a lower pass-through of tariffs and jawboning by the government.

A final point on interest rates: tariff revenues are growing rapidly and will rise higher as the year progresses. Against a budget deficit of about $1.3 trillion these receipts are a meaningful offset and may provide some relief for the long end of the bond yield curve.

Australia policy and macro

While Australian mortgage holders have been in the grips of rate cut mania, RBA Governor Michelle Bullock suggested we should be cautious about how far they can cut, given the labour market still shows signs of tightness.

She noted that firms are still reporting significant difficulties in finding labour and the vacancies-to-unemployment ratio is still high. Unit labour costs have also been growing strongly.

The rapid response of Australian house prices to rate cuts won’t help either.

While it is reasonable to expect a couple more rate cuts this year we are mindful that there may not be much scope to cut beyond that.

Europe policy and macro

The ECB kept rates on hold at 2% last week and suggested they are comfortable with current monetary settings and are in “wait and watch mode” noting “the economy has proven resilient” which saw EU bond yields rise. The EU PMI came in line with expectations this week, supporting the ECB’s view, but there was some softer data with consumer confidence in Germany and the UK both declining and UK’s PMI missing expectations.

Markets

Resources rally

Last week saw the strong run for commodity prices and resource equities continue, boosted by further newsflow from China and short covering, although it gave some back on Friday

The scale of the recent rotation into resources and away from financials (which appear to be funding the trade) has been sharp.

However it remains small relative to longer-term underperformance from Resources. This has raised expectations from some parts of the market that there could be a long way to run for the sector.

An example of this thinking is Fortescue (FMG), which hit $27 when iron ore breached US$110/t a year ago. Today, FMG is around $18.

But looking at the longer-term underperformance of Resources versus Financials, we note a series of reversals in recent years which ultimately returned to the negative trend – for example we had a similar scale recovery in September 2024 on stimulus hopes.

There have been a number of factors contributing to this rally, including:

• Over the last four weeks iron ore is up from US$93/t to US$104/t, coking coal up from US$180/t to US$195/t and lithium up from US$8,000/t to US$8,450/t.
• There’s been a plethora of news out of China on the sector:
  • Further detail on capacity rationalisation or “anti-involution” policy – the Chinese Ministry of Industry and Information Technology said that they are targeting “structural adjustment”, “supply optimisation”, and “elimination of obsolete capacity” in industries including steel, base metals, petro-chemicals and construction materials.
  • Hopes of further property stimulus have also been raised, including a property sector summit with President Xi last week.
  • The China Iron and Steel Association held meetings with executives from key steel producers, with participants vowing to step up efforts to curb “involution” and study setting up a new system to curb overcapacity in the sector. We note no steel capacity cuts have materialised yet.
  • Sentiment was further boosted by the announcement Premier Li Qiang launched construction of the US$167bn mega dam in Tibet on the Yarlung Tsangpo River – the actual contribution to metals demand is modest, but has lifted hopes up a broader step up in infrastructure investment.
  • China’s National Energy Agency will require the country’s top coal-producing provinces (accounting for >90% of total production) to conduct inspections on potential overproduction among coal miners, helping sentiment towards coal prices.
  • The lithium price has risen on the back of capacity cuts out of China, with temporary closures due to low prices and licensing issues, with two suppliers being forced to suspend production. There is speculation of broader production suspensions as a result of this licensing issue, but this has been wild at times with stories being reported and retracted within hours. The reality is that the lithium market remains heavily oversupplied with new capacity coming on and long-term price expectations are too high.
  • Chinese authorities are also cracking down on rare earths, vowing ‘zero tolerance’ for the smuggling of strategic minerals and unauthorised transfer of related technology.

Moves have been exaggerated by short covering, with the market having been heavily short in steel and coking coal. Positioning has moved from max short to modest long over the past two-to-three weeks. Chinese hot-rolled coil (HRC) steel prices are up 8% in the last three weeks.

The rally in iron ore prices is surprising given the driver is purported steel capacity cuts. But the thinking is that this could increase steel margins and, in turn, drive higher raw materials prices. In the short term this seems to be playing out as Chinese steel margins have expanded and steel mills are actively restocking iron ore.

However once the restock completes we would expect supply/demand fundamentals to reassert themselves in 2H25 when iron ore supply increases and Chinese steel demand eases due to seasonality and, potentially, capacity cuts.

At some point we should see a positive demand response from looser monetary policy in China with Total Social Financing running at +9% year-on-year, but this is a pretty soft impulse compared to historical stimulus.

When we look at the fundamentals, of which supply/demand in iron ore is a good example, we are cautious about this run for the sector continuing – but recent events may signal the end of the long bear market in resources.

US Reporting Season takeaways

We are in the thick of reporting season in the US. With about 30% of the S&P 500 having reported, the ratio of companies beating expectations in the US is running at 88%. This is the strongest rate since 2Q 2021, but with the S&P up +32% since the April low the market really needs to see these beats.

Earnings beats are being driven by Tech, Financials and Commercial Services; while the ratio is much lower in Materials and Consumer Discretionary.
Beats are driven more by margins than sales, suggesting tariff impacts haven’t hurt much yet.

Some notable results:

• Alphabet (+2%); cloud revenue accelerated from 28% to 32% in 2Q, ahead of expectations. The backlog is up 38%, so growth acceleration should continue, coming from both cloud and AI workloads. Capex is up from $75bn to $85bn and management guided for that number going up in 2026, which is a positive read-through for Data Centres & AI.
• GE Vernova (+15%), which makes energy equipment, beat 2Q expectations and increased guidance for 2025. They saw a 44% increase in orders for gas power equipment, with revenue in their Electrification segment grew +23%. The backlog of equipment orders grew over US$2b from last quarter, with more than 10% growth from Europe, North America and Asia. This company is leveraged to the energy and AI infrastructure spending boom – and is the proverbial store selling shovels in a gold rush.
• The market had little patience for companies seen as tariff losers. General Motors fell over 8% despite a small Q2 EBIT beat and reiterating FY guidance – the market focused on a margin/EBIT miss in North America, where they were hit with ~ US$1.1b impact from tariff costs in Q2 and warned of a further US$3-4b hit this year. In Europe, Nokia fell almost 8% after it cut its operating profit guidance range and warned of a potential €310m hit to the 2025 outlook from FX fluctuations and U.S. tariffs.
• There was a big rally in US homebuilders early in the week after a strong EPS beat by DR Horton (the largest US homebuilder) with closings, margins and new orders not as bad than feared after recent weak commentary on the US housing market. This raised hopes that the worst of the new housing cycle and destocking is now behind the sector.
• Chipotle (-11%) cut its same-store-sales (SSS) forecast for the second time this year, now expecting flat SSS versus low single-digit growth prior. This highlights the challenged environment quick service restaurants (QSR) have been in globally as consumers have dealt with cost of living pressures. However we could be past the worst of it, after a -4% drop in SSS in 1H Chipotle has seen a return to positive comps in July. This drove weakness in the whole QSR sector.
• Airlines were weak. American Airlines (-9.6%) scaled back its earnings outlook with management suggesting Q3 will be tough, with a challenged start in July. Southwest Airlines (-11.2%) lowered FY profit guidance and flagged a US$1b+ hit to pre-tax profit this year from economic turmoil. The key issue was weaker low-end domestic demand.

This week will be big for tech, with Amazon, Apple, Meta and Microsoft all reporting.

Market Positioning

Markets are at elevated levels, but appear justified by the level of earnings beats we are seeing in the US.

One of the notable recent factors in the US has been aggressive buying of cash equities by retail participants – we have seen the longest buying streak (19 days) in the last four years. Sharp increases in speculative trading are a positive short term signal for markets.

Despite strong market performance, investor sentiment remains pretty neutral according to the AAII bull-bear investor sentiment survey.

Market breadth is also improving after a sharp decline post liberation day

The upshot is that despite the strong rally, markets still look well supported by technicals. But given elevated levels, the market needs a strong earnings season to continue, with the upcoming week being a big one for US Tech, and continued trade deal resolution.

With a slightly slowing economy, and consumers to take a hit from tariffs, it will be important to make sure 2H earnings outlooks are reasonable.

Australian market

The Australian market declined during the week, which was a function of the rotation away from Banks (-4.3%) into Resources (+2.7%), with the big unwind in the banks dragging down the indices.

Healthcare (+2.1%) had a good week on the back of the rally in CSL (CSL, +4.1%) – and the US health care sector was also up strongly after being the worst-performing sector year-to-date.

Energy (+3.9%) was boosted by a strong quarterly from Woodside (WDS, +7.4%), lithium stocks were up sharply while REITS (-1.3%) were not helped by the rise in the 2 year bond yield in Australia.

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About Anthony Moran

Anthony Moran is an analyst with over 15 years of experience covering a range of Australian and international sectors. His sector coverage has included Australian Industrials and Energy, Building Materials, Capital Goods, Engineering & Construction, Transport, Telcos, REITs, Utilities and Infrastructure.

He has previously worked as an equity analyst for AllianceBernstein and Macquarie Group, spending a further two years as a management consultant at Port Jackson Partners and two years as an institutional research sales executive with Deutsche Bank.

Anthony is a CFA Charterholder and holds bachelor’s degrees in Commerce and Law from the University of Sydney.

Find out more about Pendal Focus Australian Share Fund  

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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.

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.

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.

 

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June’s unemployment rise should all but seal a June rate cut. Only a massive quarterly inflation surprise at the end of July would stop it, writes Pendal’s head of government bonds TIM HEXT

• Unemployment may drift higher
• But no suggestion of a sharp or rapid rise
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THE unemployment rate jumped to 4.3 % for June – the highest rate since late 2021.

Job growth was a very tepid 2000. Hours worked fell by 0.9%.

In trend terms – which we prefer over the more volatile, seasonally adjusted data – job growth was 22,800 while unemployment rose from 4.1% to 4.2%.

Unemployment, June 2025 (seasonally adjusted vs trend):

Source: Australian Bureau of Statistics

June was a relatively clean month – no elections or weather events – and the Bureau of Statistics offered no one-off excuses for the poor outcome.

The Reserve Bank expected unemployment to end 2025 at 4.3%, having revised it up from 4.2% in May.

Interestingly their forecast at the start of the year was 4.5%,  but they lost patience as results earlier in the year were strong.

Noise or new trend?

The obvious question is whether this is just noise or the start of a new, upwards trend.

Every month one eighth of the survey is rotated as respondents are surveyed over eight months – so there is some impact or noise to consider.

However, as students of statistics will know, since each sample size is 3000 households (24,000 in the survey), the impact should be small.

We won’t get a breakdown by profession until the quarterly numbers, but rapid growth in non-market jobs (mainly education and healthcare) has masked softer market job growth for some time.

There are signs this non-market job growth may be slowing, so unemployment may drift a bit higher into the end of year.

However, forward indicators such as job vacancies and employment indicators in NAB’s monthly business survey, do not suggest a sharp or rapid rise.

August rate cut looks likely

The Reserve Bank next meets on Tuesday, August 12.

Today’s data should all but seal a rate cut – only a massive quarterly inflation surprise at the end of July would stop it.

The Q2 wage data and the next Labour force survey do not come out till after the meeting.

The market has two-and-a-half cuts by year end and a terminal cash rate just above 3%.

We still think bonds are range-bound by this data.

Together with bonds sitting at the cheaper end of the range, we have added some duration to our portfolios. 

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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.

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here

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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.

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