What do weak growth and strong market returns in China mean for investors? Here’s an explanation from Pendal’s Global Emerging Markets Opportunities team

• Tech and dollar diversification drive China interest
• Weak economic indicators contrast with strong equity returns
• Find out about Pendal Global Emerging Markets Opportunities fund

THE relationship between economic growth and equity market performance is not a simple one.

Sometimes strong growth goes with weak market returns, and sometimes vice versa.

China is an interesting case in point.

The economy is not in crisis, but growth is weak. For example, rail-freight volume growth was negative in the year to August and property sales were down 7%.

Despite this, returns have been strong with MSCI China index up 43.1% (in USD).

A number of factors are driving this, including the ongoing success of China’s heavyweight technology companies in attracting investors.

China has also emerged as the main beneficiary of global investors and governments seeking to diversify their exposure to the US dollar.

On the trade side, geopolitical friction with the US and expanded use of financial sanctions have encouraged many economies to expand the use of the renminbi.

The share of China’s trade invoiced in its own currency has more than doubled since 2019. More than half of cross-border receipts are now settled in renminbi, up from less than 1% in 2010.

Belt and Road Initiative partners in Asia are increasingly using renminbi for trade and investment financing.

At the same time, swap lines extended by the People’s Bank of China to more than 30 central banks around the world provide a liquidity safety net that rivals the IMF in scale.

Borrowing trends show a similar evolution.

Since the West started sanctioning Russia in 2022, Chinese banks have shifted most of their overseas lending from dollars into renminbi, tripling the outstanding stock of renminbi-denominated loans.

Sovereign issuance has followed.

Hungary, Russia and others have issued RMB-denominated onshore “panda” bonds, while “dim sum” RMB bond issuance in Hong Kong has surpassed its previous peaks.

This is creating a deeper pool of offshore renminbi assets for investors, who are attracted by record-low funding costs and a desire to diversify away from dollar assets.

Hong Kong sits at the centre of this transition.

Some three-quarters of offshore renminbi trading is conducted there.

The Hong Kong stock exchange has surged back to the top of global equity IPO rankings, with more than 200 companies in the listing pipeline.

Capital flows from the mainland through the Stock Connect scheme are driving record trading volumes, with the total value traded through the Hong Kong exchange in the third quarter of 2025 up 150% on a year earlier.

The result is that diversification away from the US dollar is not creating global financial fragmentation – rather it is channelling more activity into China’s orbit, anchored by the renminbi and mediated through Hong Kong.

In the Pendal Global Emerging Markets Opportunities Fund portfolio we remain defensively positioned regarding China’s economy, but hold exposure to Chinese technology companies and to the Hong Kong capital markets industry.

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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 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

AT THIS point the market expects the US government shutdown to last two weeks, taking about 20bps out of Q4 GDP growth, and not affecting the outlook for two more Fed rate cuts in 2025.

In combination with the run-up to the Chinese Mid-Autumn festival, this has made for a quieter time on the macro front, with limited economic data releases.

Last week US bond yields fell, reversing the previous week’s move, while oil prices dropped sharply (Brent crude -8%).

This combination supported risk assets with gains in equities (S&P 500 +1.1%), gold (+2.8%), and copper (+7.3%), while bitcoin (+13.2%) reached a new all-time high of more than US$125k.

This all highlights the ample level of liquidity and appetite for risk.

The Australian market was particularly strong, with the S&P/ASX 300 gaining 2.3%, led by gold and copper stocks.

Financials (+3%) and Health Care (+4.8%) did well, while small caps also continued to perform (S&P/ASX Small Ordinaries +4%).

US macro and policy

With no US payroll data due to the government shutdown, the market looked for other sources of insight.

September payroll data from Automated Data Processing was softer at -32k jobs, reinforcing a perception that employment growth has stalled, which in turn supports the case for a 25bp October rate cut.

Lay-off data from Challenger remains benign, indicating there is not a rapid deterioration in jobs market and therefore no need for a 50bp cut.

The issue remains the lack of hiring, which is at cycle lows.

The September US ISM manufacturing survey, a sentiment indicator, was one of the few data releases for the week.

• The manufacturing index was at 49.1, versus 49.0 expected. The production sub-component was better than expected, while the new orders were weaker. Hiring intentions improved off a low base but continue to signal a weak labour market.
• The services component fell by two to 50, versus 51.7 expected, but remains in the range it has been for months.
• New orders reversed their August spike back to 50.4.
• The employment component did improve +0.7 to 47.2, however this remains consistent with a weaker labour market, albeit this has not been a good lead indicator in this cycle.

In aggregate, survey data continues to indicate that while growth in the US remains sluggish, it is not yet at a tipping point.

US Government shutdown

To summarise the stand-off, Republicans say they proposed a clean extension of government spending authority with no strings attached, which runs to the middle of November.

Democrats say a clean extension isn’t good enough, because health subsidies are set to expire at the end of the year, while the premiums affected are announced November 1. This is the last opportunity to resolve that issue, the Dems say.

In addition, they see a risk that any bipartisan spending deal – of the type Congress typically relies on to get these Bills done – can be undone by the Republicans, either because the Trump Administration doesn’t end up spending the money, or the Rescissions process which means the president can submit spending cuts to Congress that can be implemented with a simple majority.

The resolution is believed to be some commitment from Trump regarding health policy and potentially some form of subsidies.

The market is remaining reasonably sanguine as the political battle plays out. Consensus expects a two-week shut-down, with October 15 a pressure point. This is when payments to the military are due, and history indicates governments want to avoid defaulting on this.

A two-week shutdown would have a minimal effect on growth, but reinforces the likelihood of a Fed cut.

US growth outlook

Our view remains that the US economy begins to re-accelerate in Q2 2026, on the back of the fiscal stimulus from the Big Budget Bill (which is expected to contribute about 0.9% to growth in 2026 plus rate cuts.

Consumption is set to slow from the recent strong pace – probably driven by a greater wealth effect than economists expected – but should remain reasonably supportive of growth.

Investment spending – particularly AI-related – will also slow, but again provides a base level of support for the economy.

Japan

The Liberal Democratic party’s leadership race was won by Sanae Takaichi, who will become Japan’s first female PM.

Her skew is expected to be towards growth, more fiscal stimulus and dovish monetary policy.

The Bank of Japan may defer a potential October rate hike as they get clarity on policy direction and hold back in case a snap election is called.

Markets

Liquidity is one of the four factors we are watching to see if the market can sustain current levels. The others are growth, long-end bonds and AI.

Liquidity barometers continue to look supportive for markets. ETF flows are picking up, Bitcoin reached new all-time highs and we are entering a seasonally strong period.

AI bellwether stock Nvidia is creeping to new highs after a three-month consolidation.

The S&P 500 has seen a fall in the proportion of stocks above 200-day moving average and at 20-day highs, which suggests there is some loss of momentum near term.

The most meaningful move in the US market last week was in health care, which has materially lagged the overall market on concerns relating to pricing and tariffs.

The sector has fallen from about 16% of the S&P 500 in early 2020 to under 9%, converging on the weighting for the industrials sector and only just above the market cap of Nvidia.

It bounced and outperformed on the announcement of an indicative deal between Pfizer and the Trump administration relating to tariffs.

The key component relates to the risk of a most favoured national (MFN) clause, which could force pharma companies to realign pricing in US with other developed markets, reducing their margins.

The proposal limits any MFN to Medicaid, which already has lower prices and at less than 10% of the market is relatively small in scope.

There was also a commitment to price new products in line across developed markets and to invest more into US.

This move helped the Australian health care sector, which rose 4.8%. The tariff issues here are different in nature given most ASX-listed companies are not pure pharma stocks, but it highlights the impact of sentiment on sector performance.

Health care has lagged the S&P/ASX 300 by 26% in 2025. A significant part of this is CSL, driven in part by the US health care sector de-rating, though Ramsay Health Care, Cochlear and Sonic Health Care have also underperformed.

We also saw good performance from financials, helped by the prospect of fewer rate cuts which supports bank margins and insurers’ investment income.

Resources were strong (+1.8%) led by gold stocks with Northern Star (NST) up 7.3% and Evolution Mining (EVN) +6.8%. Copper names such as Sandfire Resources (SFR, +9.5%) also did well.

Small caps also continued their outperformance.

Part of this is index composition with gold a much larger weighting. However it also reflects higher beta names in the index with stocks like Droneshield (DRO, +52.3%) and Zip (ZIP, +10.3%) continuing to re-rate and Eagers Automotive (APE, +19.4%) benefitting from an accretive deal.

Defensive sectors such as utilities (-0.5%) and consumer staples (-0.1%) lagged, as did energy (-2.0%) on the fall in oil.

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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  

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

• Find out about Pendal Focus Australian Share Fund

FATIGUE and rotation dominated markets last week.

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

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

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

However, fundamentals and liquidity appear to remain strong.

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

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

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

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

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

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

US macro and policy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tariffs

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

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

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

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

Fedspeak

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

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

Both stressed that lowering inflation remained the main priority.

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

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

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

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

He warned there was no risk-free path forward.

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

Oil and energy

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

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

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

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

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

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

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

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

Australia macro and policy

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

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

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

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

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

Labour data

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

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

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

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

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

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

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

Markets

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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About Crispin Murray and Pendal Focus Australian Share Fund

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

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

Find out more about Pendal Focus Australian Share Fund here.  

Contact a Pendal key account manager here.

Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.

Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 14 years of its 18-year history (after fees), across a range of market conditions. Find out more about Pendal Focus Australian Share Fund here.

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

Contact a Pendal key account manager here

What does today’s jump in inflation mean for investors? Pendal’s head of government bond strategies TIM HEXT explains

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THE narrative driving the Reserve Bank and markets this year is that well behaved inflation allows cash rates to slowly move back to neutral.

The exact timing and speed, and indeed where neutral is, would be set against the backdrop of the other key RBA objective – employment.

The RBA recently updated its year-end inflation forecasts to 3% headline and 2.6% underlying (or “trimmed mean”).

So you might expect today’s monthly CPI numbers – 3% headline and 2.6% underlying –to be greeted with a shoulder shrug.

The numbers are volatile but all seems on track.

Monthly CPI indicator

However, detail in the report has unsettled some and caused upward revisions to third-quarter CPI estimates.

These numbers are released at the end of October.

Reason to doubt key inflation components

We have flagged for some time our scepticism around several key inflation components.

The main one was new dwelling costs, which had been been flatlining this year.

These make up 8% of CPI and now appear to be moving up again, possibly back above 3% annually. This alone could add 0.2% to overall trimmed mean.

The ending of electricity subsidies is pushing headline inflation higher, but of course these get trimmed as they did when pushing prices lower.

However, second round impacts of higher prices will be caught across several items which will not be trimmed.

Where we’re headed

What does this mean for year end?

When the RBA sits down on November 4 – despite downsizing from 11 to eight meetings they have sadly retained the Melbourne Cup day meeting – the board will have just received these Q3 CPI numbers. They will also release a new set of forecasts.

We expect Q3 headline CPI to be 1% headline and 0.8% trimmed mean.

Some market forecasts have moved as high as 1% trimmed mean after today’s numbers. Others are as low as 0.6%.

The first six months of this year saw 1.6% headline and 1.3% trimmed mean.

We now expect 1.5% for both headline and underlying in the second half.

If we are right the RBA will likely have to revise its forecasts up – we expect by 0.1 or 0.2%.

I think 0.1% would leave a November rate cut door open. But a 0.2% higher revision would be a harder sell for cutting rates.

What does it mean medium term?

Over the medium term, inflation should settle down in the 2.5% to 3% range, something we have expected for a long time.

This wouldn’t rule cash-rate moves in or out. Rather it would fall to employment markets to determine whether higher or lower rates were needed.

Overall we still expect a November rate cut, but we are patiently waiting for some decent entry levels to reflect the risk/reward.

Markets after today have moved the odds down to around 50 per cent, which is beginning to look interesting.

The RBA would like to give the consumer some more encouragement into Christmas.

They will have to wait till the Q3 CPI numbers to see if inflation allows it.

 

If you’d like to hear more about how Pendal’s Income & Fixed Interest team is positioning for this environment, please contact us through our accounts team

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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.

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

• Find out about Crispin Murray’s Pendal Focus Australian Share Fund

EQUITY markets continue to defy traditional September seasonal weakness.

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

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

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

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

Treasury yields moved higher from recent lows after the decision.

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

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

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

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

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

US macro and policy

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

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

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

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

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

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

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

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

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

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

US rates

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

Composition of the committee created significant attention before the meeting.

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

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

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

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

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

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

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

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

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

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

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

Australia

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

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

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

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

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

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

The government plans to achieve this target via:

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

China

Data showed weakness across the board in August activity.

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

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

The property downturn continues, with prices falling further.

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

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

New Zealand

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

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

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

Canada

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

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

Japan

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

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

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

Markets

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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About Rajinder Singh and Pendal’s responsible investing strategies

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

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

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

Part of Perpetual Group, Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management. Responsible investing leader Regnan is now also part of Perpetual Group.

Contact a Pendal key account manager here

Historically high valuations don’t mean markets cannot keep going up. CRISPIN MURRAY explains what’s driving markets – and the risks to watch for

• Large parts of US market not excessively over-valued
• Potential risks: stagflation, retail slowdown, fading AI theme
• Find out about Pendal Focus Australian Share fund
• Watch Crispin Murray’s new Beyond The Numbers bi-annual ASX outlook

EQUITY markets are trading at historical highs – but can continue grinding higher if key risks facing the US economy remain contained, says Pendal’s head of equities Crispin Murray in a new webinar.

In the US, the S&P 500 is trading at about 23 times earnings, while the NASDAQ is around 28 times.

“That’s right at the high end of those historic ranges,” says Murray in his latest Beyond The Numbers bi-annual ASX outlook.

“It means markets are vulnerable if there is a dramatic change – whether it’s earnings or the economy.”

That said, valuations are not uniform across the market.

Excluding the five-biggest names reduces the S&P 500’s PE to about 21 times – still high, but not extreme – while an equal‑weighted S&P 500 sits closer to 17 times, near historical averages, says Murray.

“That’s telling you that a large part of this US market is not excessively valued, and it’s very much a concentration in those tech-related names.”

Meanwhile Australian shares powered 11 per cent higher over the six months to September, despite dipping into correction territory during that period as growth and liquidity outweighed policy uncertainty.

(Scroll down for Crispin’s take on ASX reporting season.)

“It’s certainly been a roller coaster … that just highlights how the market is not particularly efficient in pricing,” says Murray.

“At Pendal, we believe you make money by anticipating change and taking advantage of a market that has become very focused on the short term.”

The risks to watch

Risks to the current market rating include:

• The looming threat of stagflation driven by policy headwinds
• Market concerns about US fiscal sustainability
• A risk that the AI boom fades
• Any potential removal of liquidity if retail flows slow or corporations reduce stock buy-backs

US government policy is at the core of the challenges.

Lower immigration is curbing population growth – a key driver of GDP – while tariffs are feeding through to prices, with roughly 40 per cent of their impact already visible in consumer prices, says Murray.

Meanwhile, monetary policy remains very tight.

“What that means is the outlook for the economy is quite different today than where it was at the beginning of this year.

“Looking into the fourth quarter, US growth is set to be below 1 per cent, inflation heading towards 4 per cent.

“It does look a lot like stagflation – and clearly, if we did have that tipping point in the economy, earnings go down, and the market won’t sustain its current multiple.”

Positive drivers remain in place

Still, that scenario appears unlikely.

“Corporate profitability continues to be good,” points out Murray.

“This is important, because it means companies still have the ability to invest, and it also means that they’re less likely to undertake substantial job-cutting programs.

“There’s been enormous growth in the data centre and the power area of the economy – and that is helping prop up growth.

“Consumers have seen their net worth rising dramatically over the last few years, and that’s estimated to support growth by between half and 1 per cent.

“And the final issue, which I think is probably the most important for now, is that the policy environment – which has been negative – is turning more constructive for growth.

“Five rate cuts are priced into the market, fiscal stimulus from the budget Bill next year is estimated to be close to 1 per cent positive, and clearly the US has been set up to the electoral cycle and ensuring the economy is in good shape ahead of the mid-terms.

“So, we don’t think we do cross that tipping point, but it’s clearly a major risk.”

Lessons from ASX reporting season

In Australia, several themes stood out in the recent full-year ASX earnings season, including high levels of post-result volatility.

Somewhat unusually, the best-performing sectors during reporting season were not correlated to earnings.

Resources stocks were buoyed by optimism around China, while gold stocks lifted on concerns about government financing and central bank buying.

On the negative side, earnings were a driver of underperformance – led by building materials and steel where ASX companies with exposure to the US suffered weakening demand.

“Overall, earnings revisions weren’t that exciting but when you dig down into it, most of the negatives were quite stock specific.

“It was companies that were not necessarily executing as well as they should [or] those exposed to the US.

“Outside of those names, though, most companies were either reasonably comfortable with the outlook or actually quite positive.

“So generally speaking, I think the outlook for earnings is stable to slightly positive as a result of what we saw in that earnings season.

“We still get mid-single-digit earnings growth, which means returns aren’t exciting in Australia, but we still get a reasonable outcome.”

Data centres a good way to play AI

One question on investors’ minds is the prospect of the AI boom continuing.

“There is scepticism that the money being spent is not generating a return – and it’s something we’re watching carefully,” Murray says.

“But one thing I’ll emphasise is that the spend is real – and the people who are investing have the money.

“These hyper scalers – Amazon, Google, Microsoft, Meta and Oracle – have the financing to spend this money, and they believe they are getting a return.

“Consumers are also increasingly using these products.”

Murray says the world has a shortage of “compute” – an industry term for the processing power, memory and storage needed to perform calculations and run applications – and this is an opportunity for Australia and particularly local data centres.

“One of the challenges with investing and building data centres in Australia is access to land, access to capability, getting planning approval and getting power access.

“These things mean that there is a structural under-supply of capacity in Australia, and the companies that can deliver it are very well positioned.

“We still believe the market underestimates the confluence of not just AI demand, but the requirement for companies to move to the cloud to enable themselves to take part in utilising AI to run their businesses better.”

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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

Bond markets are reflecting a narrowing gap between developed and emerging market fundamentals. That could mean opportunity, argues Pendal’s Global Emerging Markets Opportunities team

• Historically narrow gap between emerging and developed market fundamentals
• Bond markets are paying attention
• Find out about Pendal Global Emerging Markets Opportunities fund

EMERGING markets are thought of as the riskier end of the equity asset class.

This risk is perceived to come from a variety of interlinked causes:

• Weaker governance and more volatile politics
• Lower economic resilience
• More extreme economic and financial cycles

Certainly the history of the asset class is one of booms and busts, while emerging debt markets have an unenviable history of defaults.

Looking at the world in 2025, though, we think the gap between the fundamentals of developed markets end emerging markets is historically narrow – perhaps narrower than it has ever been.

Developed markets face tighter conditions

The UK, where we are based, is seeing long bond yields gap higher in the face of chronically slow economic growth and a yawning fiscal deficit.

Real disposable income has grown at an annualised rate of only 0.6% since 2008. Despite extremely loose monetary and fiscal policy, GDP growth for 2025 is forecast at only 1.2%.

France is about to lose its third prime minister in 18 months, with no political consensus on how to address excess government debt (currently 114% of GDP) and a large fiscal deficit.

In Japan, inflation has eased pressure on government debt in the short term, but national finances remain extremely strained in the big picture.

The US, of course, is the ultimate developed market from a currency point of view.

But the inflationary effects of tariffs and doubts about the government’s commitment to inflation targeting monetary policy are also stressing markets.

The pattern across major developed markets is one of long bond yields pushing higher even as growth expectations deteriorate.

Bond investors are watching EMs

Meanwhile, many emerging markets have either lower growth and inflation, or higher growth and inflation but with a clear commitment to inflation targeting.

Bond investors are paying attention.

The JP Morgan EMBI Global index of USD-denominated emerging market government bonds is trading at its lowest spread over developed market bonds since 2013.

Borrowers are also reacting. Some more-indebted frontier markets are seeking to refinance USD denominated debt into Chinese RMB to take advantage of lower yields.

Equity investors, meanwhile, are taking a different view.

The 12-month forward price/earnings ratio of MSCI World (the developed markets equity index) has expanded to 21.6x, while MSCI EM Index is priced at only 14.3x.

This EM valuation discount of 33.9% is well below the long-term historical average discount of about 20%.

This is despite the IMF’s GDP growth forecasts for the G7 falling to the lowest non-crisis level since 2002.

What it means for investors

As a team of EM investors with experience going back to the 1990s, we are very aware of the international and domestic political and policy risks in emerging markets.

The last year we saw a coup attempt in Korea, military conflict between India and Pakistan, challenging headlines everywhere around tariffs and trade, and the court-ordered removal of a prime minister in Thailand after less than a year in office.

Still, we believe the political and governance risk gap between emerging and developed markets is narrower than at any time we have seen.

Bond markets are paying attention.

Equity markets are not yet.

We remain very positive on the outlook for emerging market equities.

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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 JACK GABB. Reported by head investment specialist Chris Adams

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

US inflation data and soft employment figures are amplifying expectations for rate cuts and supporting equity markets.

Bullish statements from software giant Oracle on demand for cloud-based services helped drive US indices to a record high last Thursday, before a slight easing.

The S&P 500 ended up 1.6% for the week, while the NASDAQ gained 2.1%.

Chinese equities – and the yuan – continued to rally with the Hang Seng up 4%. Japan’s Nikkei rose 4.1%.

European equities were quieter. The Euro Stoxx 50 gained 1.4% as the European Central Bank held rates steady. An easing cycle appears over for now.

Australian equities were also muted, with the S&P/ASX 300 gaining 0.1%.

Bonds rallied – particularly at the long end – with the key US 10-year falling briefly below 4%. That helped drive US mortgage rates lower.

However it’s worth recalling parallels with 2024.

Back then the 10-year yield hit a low point on September 16 – the eve of a Fed rate-cut decision.

(The Fed will announce its latest rates decision this week, early Thursday morning Australian time).

US macro and policy

Markets are fully pricing in a 25bp cut this week.

Another two-to-three consecutive cuts are also expected – despite current policy settings arguably providing little in the way of restrictive policy.

The Fed argues neutral rates are lower, but financial flows are rampant and consumer spending data belies perceived weakness in the jobs market.

Implied rates for December hit their lowest level since May and now sit at 3.629% versus 3.772% this time last week.

Softer jobs data drove the change, while inflation data was regarded as tame.

Six-month Treasury notes are now at 3.83% – 50 basis points below current implied rates. However a repeat of 2024’s 50-point September cut is seen as unlikely.

Inflation data

The producer price index (PPI) was lower than expectation, but the core consumer price index (CPI) accelerated to +0.35% in August (+4.2% annualised). Year-on-year core CPI rose to 3.1%.

Markets focused more on the job revisions. But by itself the CPI print does not appear to support a cut, let alone three-to-four in quick succession. 

That leaves a risk of a repeat of 2024 when the Fed cut by 100 points and inflation expectations jumped.

The 10-year yield subsequently rose by 118 points, sending mortgage rates higher.

That risk is arguably amplified this year by perceptions of Fed independence, with a cut potentially interpreted as politically driven.

In good news for the Fed, the PPI (and jobs) data was weak. 

PPI Final Demand fell to -0.12% month-on-month, versus +0.3% expected and 0.7% prior. Within that, services (which dominate the index) fell 0.16%.

By itself, the data is supportive of a cut. But data has tended to yo-yo and September or October’s print seems likely to see pricing rebound higher.

While the data does not measure import pricing (hence not tariffs directly), PPI for finished core good rose to 0.3% (3.8% annualised).

Jobs data

Besides CPI and PPI data, the labour market provided the key economic data of the week.

Initial jobless claims were a touch higher (263k versus 235k expected and 237k prior), but payrolls for the 12 months to March were revised down 911k.

This was well above most estimates and not far from the feared 1 million mark.

To put this in context, the monthly data estimated job growth of 2.35m over the 12-month period, an average of 196k/month. The reality was 1.44m, or 120k/month.

This is still ‘preliminary’ – the final monthly accounting isn’t due until February next year.

Based on what happened in February this year, the final revisions will again be revised materially – but to a less negative position.

All in all, it isn’t exactly confidence-inspiring. 

Other data

Other economic data was limited.

The University of Michigan sentiment index did weaken/miss at 55.4, versus 58 expected and 58.2 prior.

Five-to-ten-year inflation expectations also rose to 3.9% from 3.5% prior (3.4% expected), which isn’t likely to be the message from the Fed on Thursday morning (Australian time).

Tariffs

For those keeping score (and revisions and volatility aside) the PPI and jobs data count for the doves at the Fed, while the CPI arguably counts against.

Outside of political interference, the other key consideration is the potential loss of tariffs once the Supreme Court rules (tariffs are supposedly the exclusive purview of Congress) – albeit hearings will run through to November.

Monthly tariff receipts are now running at $US30 billion, versus $7 billion before April.

This is a significant amount. It materially reduces the amount of debt issuance that needs to be absorbed, which is important given US debt levels.

To put it in context, over ten years the tariffs are worth over $US3 trillion of debt and potentially significantly more.  US Treasury boss Scott Bessent says $750 billion to $1 trillion could be collected by June 2026.

A large chunk (though not all) of the tariffs are subject to a Supreme Court review, which is due before the end of the year.

To quote one commentator: “lose the case and Treasuries will throw a fit”.

Australia macro and policy

There was little meaningful Australian economic data last week with rate expectations largely unchanged ahead of a Reserve Bank meeting later this month.

Markets are pricing in a 12% chance of a cut. November is odds-on to deliver the only additional cut we see this year. 

We did get some survey data on consumer confidence which showed a 3.1% drop versus August – mostly on expectations around unemployment and future economic conditions.

However, the latest CommBank Household Spending Insights data continues to show strong spending. The index was up 0.3% in August (versus +0.7% in July and +0.5% in May and June).

Spending growth has been consistently positive since the RBA began cutting in February.

China

Total financial flows passed the value of goods and services in China for the first time last week – a historic moment.

Financial account flows have grown rapidly over the past five years, driven by loosening of capital controls.

But the shift is arguably more impressive given China has also continued to dominate trade in global goods.

While it still lags developed economies such as the US and Japan (where the ratio is more like 10-15 to 1) the move is illustrative of the growing importance of the yuan.

It also serves as an important reminder of Beijing’s goal of globalising its currency.

Illustrative of this was the recent discussion by the People’s Bank of China to create a better mechanism for issuing sovereign debt overseas.

This would help feed growing demand for alternatives to US Treasuries and arguably add to pressure on long-dated yields.

Nearer term, the yuan has continued to strengthen relative to the USD.

With US rate cuts looming, and the Trump Administration happy to see the currency weaken, the likely direction of travel is for further strength.

That’s good news for commodities and the AUD.

Elsewhere it was relatively quiet on the economic front outside of a slight improvement in deflation trends.

August PPI landed at -2.9% year-on-year versus -3.6% in July.

While prices remain negative, the improvement was seen as a sign that anti-involution policies are having an impact.

Core CPI also rose to 0.9% (from 0.8%), the highest level since 2024.

Positively, last week Beijing also began plans to tackle the significant backlog of debts owed to the private sector by local government.

Up to 1 trillion yuan (US$140 billion) will potentially be earmarked in the first phase of a longer-term initiative.

Commodities

While energy stocks fell, it was a better week for oil, with Brent Crude +2.3% despite US Commodity Futures Trading Commission data showing the smallest long oil market position since 2010.

Gold also posted 1.6% gains on USD weakness – a trend that looks set to continue.

The PBOC also announced plans to ease licensing rules for gold imports and exports, potentially flagging further purchases.

In lithium, spodumene fell 5.5% on reports a large CATL lepidolite mine in China may restart sooner than expected. CATL reportedly held an internal mobilisation meeting on restarting, triggering a decline in spodumene prices back to c.$800/t.

Uncertainty remains regarding the outcome of the current lepidolite resource audit, due for completion end September. Pricing has now given back half of its recent rally.

Iron ore fell 1.1%, but pricing has so far proved resilient to typical seasonal weakness.

China steel production and exports remain strong while iron ore inventories are flat. USD weakness/RMB strength also helps.

There has been a pick-up in steel inventory and a recent decline in steel margins.

But iron ore is likely to remain rangebound while uncertainty persists regarding anti-involution policies and potential steel cuts.

Markets

Flows and AI remain supportive

Interest rates aside, two key trends continue to support equities: market flows and growth in AI.

On the former, in the US 1% of GDP is being directed into index funds every month, “regardless of valuations, sentiment or macro”.

That (along with strong consumer spending) appears incongruent with restrictive Fed policy.

AI also remains a key foundation for markets.

Tech is now more than a third of the S&P 500. That’s akin to the financial sector on the ASX.

Tech led gains last week in the US with headline AI-infrastructure agreements reshaping cloud compute dynamics.

Oracle was key, surging to a record following an incredibly bullish outlook for its cloud business.

Its deal with OpenAI to supply some 4.5GW of computing capacity beginning in 2027 is expected to require $300 billion of computing power over five years.

That took Oracle’s forward book to $455 billion, up $317 billion. Its market cap was up US$170 billion for the week.

Cloud Infrastructure revenue is now forecast to grow from US$18 billion in 2026 to US$144 billion by 2030. That was way in excess of sell-side estimates.

Meanwhile Microsoft struck a major contract with Dutch data centre company Nebius  –potentially worth $20 billion over five years – to secure graphics processing units (GPU) capacity.

The utilities sector was not far behind tech, with increasing power demand from AI a growing tailwind.

Data centre power demand was estimated at 1.5% of global electricity demand in 2024.

By 2030, its share is forecast to double. In the US, demand is forecast to grow by 130% (at least).

Australian equities were flat last week, but under the surface there were big gains for gold, tech and property.

On the negative side, lithium and energy stocks fell.

 

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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 here

Conditions look good for both bonds and equities right now, but one asset class should come out ahead. AMY XIE PATRICK explains

• Learn more about Pendal’s income and fixed interest capability
• Find out about Amy Xie Patrick’s Pendal Monthly Income Plus fund

US two-year bond yields have slipped from 3.95% to 3.54% since the start of August.

Over the same period, the S&P 500 clocked multiple new highs.

On the surface, that feels like a contradiction. Aren’t bonds supposed to rally when growth looks shaky, and equities move ahead when conditions are strong?

The story I’m hearing goes like this: softer labour market data plus Jay Powell’s Jackson Hole nod toward prioritising jobs over inflation equals imminent Fed cuts.

Bonds markets like this, because lower rates usually lifts bond prices. Equities like it because lower rates boost valuations.

Goldilocks achieved.

But if history teaches us anything, it’s that labour markets rarely weaken just enough to ease inflation pressures while staying benign (see figure 1 below).

Once unemployment inflects up, it usually keeps going.

If that’s the case, then one side of this rally is wrong. Either labour weakness proves more serious than equities are willing to admit, or not serious enough to justify the bond market’s enthusiasm for a rapid return to neutral.

Figure 1: Is this time different? US unemployment rate (%)

Here’s where I think the narrative misses a beat: it’s not just about jobs – it’s about tariffs.

This week’s US Producer Price Index (PPI) data surprised to the downside.

Companies hit by tariffs are swallowing the cost instead of passing it through to customers (see figure 2). That’s why inflation has stayed tame enough for bonds to rally.

Figure 2: US producers report higher costs through the ISM survey but aren’t passing it on US ISM prices index and US producer price index

Normally, margin compression would spell bad news for equities.

But tariff-sensitive stocks make up just 1% of S&P 500 market cap, 2% of earnings and 4-to-5% of revenues.

In other words, even if some corporates are hurting, it barely dents the index.

That’s the real reason bond and equities can both be in a happy place.

They’re being driven by different forces.

Bonds aren’t “slaves” to equities, and their correlation isn’t programmed to always be negative.

What it means for investors

For investors, the lesson is two-fold.

First, don’t let the surface-level story of “Fed cuts = everything rallies” fool you into thinking bonds and equities are in perfect harmony. They’re not.

Second, don’t over-index on tariffs either.

Both markets are effectively telling us to move on.

What will matter next is how growth and unemployment actually unfold.

It’s hard to see both asset classes continuing to benefit equally from that story.

For now, I’m positioned lightly in both bonds (via duration) and equities/riskier assets.

Dry powder matters more than chasing today’s consensus. When the next shoe drops – whichever side it lands on – that’s when the real opportunity will open up.

If you’d like to hear more, 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 Australian equities this week, according to portfolio manager JIM TAYLOR. Reported by head investment specialist Chris Adams

• Register for Crispin Murray’s bi-annual Beyond The Numbers webinar on Sep 12
• Find out about Pendal Focus Australian Share Fund

US ECONOMIC data continues to reinforce the narrative of a cooling employment environment providing scope for the Fed to keep cutting rates.

This was reflected in a US bond rally over the course of last week, with two-year yields reaching their lowest point in four years.

The market is now largely pricing consecutive cuts for the September, October and December meetings.

The US economy is best described as “slowing slowly”. Pundits have the risk of a recession sitting at about 30 per cent.

Conversely, Australian economic data is slightly hotter than expected, drawing a comment from RBA governor Michele Bullock that a continuation in this vein could see a curtailed rate cutting cycle.

This perspective was more in-line with our views coming out of reporting season: that the domestic economy is performing pretty well and does not require a significant cutting cycle to juice it up.

Elsewhere, the Saudis continue to hold up their end of the “lower is better” oil price deal with Trump.

OPEC+ commentary continues to support increased supply. Traders are jumping on the surplus supply bandwagon, with bullish oil bets at an 18-year low.

The iron ore price continues to hold up well, supported by renewed optimism for China’s prospects.

Equity market returns were subdued globally last week, in line with a historical trend of September as the poorest-returning month of the year.

The S&P 500 gained 0.4% and the S&P/ASX 300 shed 0.7%.

Tariffs

A US court of appeals upheld a lower-court ruling that President Trump’s use of tariffs under the International Emergency Economic Powers Act (IEEPA) was illegal.

This could affect 70 per cent of tariffs now in place. But enforcement has been delayed until mid-October to allows an appeal to the higher-level US Supreme Court.

A Supreme Court decision is not expected before early 2026.

If the original ruling is again upheld, the Trump administration could employ Section 122 of the 1974 Trade Act, which allows the imposition of up to 15% tariffs (versus the current weighted average of 16%) for 150 days.

Beyond that, Trump can look to use sectoral tariffs under Section 232 and 301.

The upshot is it looks likely that some form of tariffs remain in place.

If the IEEPA tariffs are deemed illegal, importers would need to file an action to have those tariffs repaid.

Tariff collection is running at US$370 billion annualised.

Macro and policy US

Consumer confidence

 A key US confidence index dropped nearly 6% in August, driven by respondents with income in the $US50,000 to $100,000 range. Confidence for people with incomes above and below that remains resilient.

This “middle class squeeze” was noted by several companies in dining, retail, fashion and air travel during the recent US reporting season, according to the University of Michigan survey.

The survey reported more US consumers were dialling down spending now, than during the 2022 inflation spike.

More than 70% of those surveyed planned to tighten their budgets for items with large price increases in the year ahead.

Manufacturing

Messages were mixed in the latest survey of purchasing executives at US manufacturing companies.

The ISM manufacturing index rose from 48 in July to 48.7 in August. This was slightly below consensus expectations at 49.

New orders were at the strongest levels since January, whereas manufacturing output dropped back to November 2024 levels and the payrolls component fell, suggesting a sharp near-term fall in manufacturing sector payrolls. 

Labour Data

Labour data continues to point to a cooling US employment market, according to the latest Job Openings and Labor Turnover Survey (JOLT) from the US Bureau of Labor Statistics.

There were 7.18 million US job openings in July, down from 7.36 million in June – with the latter also revised down by 80,000 and below consensus expectations of 7.37 million.

Openings are now about 80,000 above the September 2024 low and – assuming the usual level of revisions – could end up below that for August.

The retail sector was the weakest, probably reflecting an attempt to mitigate the cost impost of tariffs.

Health care – which had been strong previously – was weak for the second month and is now below the pre-Covid rate.

In contrast, federal job openings rose from 117,000 in June to 135,000 in July. But this was still slightly below last year’s range, consistent with a further gradual decline in federal payrolls ahead. 

The ratio of openings to unemployment fell from 1.05 in June to 0.99 in July. This was the first time the number of unemployed had exceeded the total number of openings since April 2021.

However the ratio remains above the 0.93 average ratio of the second half of the 2010s. 

The private sector “quits rate” was unchanged at 2.2% in July. This continues to suggest slower wage growth ahead. 

This data saw bond yields fall 4bps and equity markets up on the day of its release, as it underscored the case for near-term rate cuts.

Other data points:

• Initial jobless claims increased to 237K in the week ending August 30, from 229K, marginally above the consensus, 230K. The increase was broad based across states and is an 11-week high.
• Continuing claims fell to 1,940K in the week ending August 23, from a downwardly revised 1,944K, below the consensus, 1,959K.
• The unemployment rate ticked up to 4.3%, from 4.2% in July, in line with the consensus. Stricter migration policies are likely to have kept this increase modest.
• Average hourly earnings rose by 0.3% for the month and 3.7% year-on-year, in line with the consensus. This is consistent with the Employment cost index (ECI) 3.6% year-on-year.

August payrolls rose by 22K, well below the consensus expectation of 75K. The two-month net revision was -21K. This is likely to see the Fed cut rates in September and suggest that further action before year end is required to stabilise the labour market.

• Federal payrolls fell by 15K, accompanied by a small fall in state and local government payrolls, resulting in a 16K drop in government jobs, about 20K weaker than the year-to-date trend
• Healthcare rose 47K, though this was the weakest print since January 2022.
• Manufacturing payrolls fell by 12K as uncertainty about tariffs bites.

Expectations of lower retail sales are weighing on distribution sector jobs.

• Construction payrolls fell by 7K, the third straight monthly fall.
• Professional and business services payrolls fell for a fourth straight month.

The August employment data showed the U.S. has added less than 600,000 jobs so far this year. Excluding the Covid period in 2020, that is the fewest for the first eight months of the year since 2009, when the economy was exiting the GFC downturn.

The Fed

Federal Reserve Governor Christopher Waller noted that “when the labour market turns bad, it turns bad fast … so for me, I think we need to start cutting rates at the next meeting”.

He added that “people are still worried about tariff inflation” but that he was not.

St Louis Fed President Alberto Musalem said the labour market still looked relatively healthy, while inflation concerns loom, especially given the impact of President Trump’s tariffs.

He also said “recent data have further increased my perception of downside risks to the labour market”, which could be seen as signalling openness to a rate cut soon.

Atlanta Fed President Raphael Bostic did not think it was “unambiguously clear” that the labour market was weakening materially.

He was more concerned with risks on inflation than labour market weakness. As a result he saw one cut as necessary this year, but was ready to pivot.

Macro and policy – Australia

Australian GDP increased 0.6% in the June quarter, with growth accelerating 40bps to 1.8% year-on-year.

This was slightly ahead of consensus and RBA expectations of +0.5% for the quarter and 1.6% for the year.

This marks the third consecutive quarter of recovery in annual growth since the cycle low in Q3 2024.

Notably, household consumption increased 0.9% for the quarter, versus consensus at +0.65%, with year-on-year growth accelerating 120bps to 2.0%. This is consistent with growth in real household incomes.

Growth was driven by higher discretionary spending across recreation, hotels and restaurants. Spending also rose firmly across health and food. The household savings rate declined 100bps to 4.2%.  

Business investment fell 0.4% for the quarter, with broad-based weakness across non-dwelling construction (-0.9%) and engineering construction (-2.4%).

Growth in dwelling investment decelerated following a strong increase in the prior quarter but remains positive at +0.4%.  

Household spending was up 0.5% month-on-month in July, in line with expectations, with the year-on-year rate accelerating 50bp to 5.1%. 

This paints a pretty resilient picture of spending levels and the trends noted are pretty consistent with the company commentary coming out of reporting season.

RBA Governor Bullock’s remarks on the better-than-expected Australian Q2 GDP and consumption figures leaned somewhat hawkish.

She noted consumption growth was a bit stronger than the RBA thought and that if the trend continues there may not be that many rate cuts left in the current easing cycle.

“We are seeing it (consumer spending) come back, and that’s welcome,” she said.

“We’re seeing the private sector start to demonstrate a little bit more growth now, which I think is positive… That’s good, but it does mean that it’s possible that if it keeps going, then there may not be many interest rate declines yet to come. But it all depends.”

Macro and policy – China

Beijing is reportedly looking at some measures to cool the stock market, which is up US$1.2 trillion since August.

It is suggested these include the removal of some short selling curbs, and follows China Securities Regulatory Commission Chair Wu Qing signalling in late August his intention to consolidate the market’s positive momentum, while still promoting long-term value and rational investment.

Markets

Foreigners bought US$163 billion worth of US equities in June – a record monthly inflow, perhaps suggesting fears of the end of US exceptionalism are overdone.

June’s inflow was nine times the magnitude of the US$18 billion outflow seen from US equities in April at the height of the tariff worries.

With US equities seeing $285 billion of foreign buying in the first half of 2025, cumulative net foreign purchases of US equities are easily back at record levels.

All Things AI

AI-exposed stocks have driven a considerable portion of the market’s overall strength for the last few years.

AI-exposed equities have returned 50% in 2023, 32% in 2024 and 17% year-to-date in 2025, according to Goldman Sachs.

That compares with S&P 500 returns of 26%, 25% and 11% respectively.

Notwithstanding this share-price strength, current valuations of the largest stocks at 28x price/earnings is lower than their peak in 2021 of 40x.

Similarly, the valuations of the ten biggest largest technology, media and telecom (TMT) stocks at a median of 31x is still well below the 41x seen at the peak of the dotcom bubble in 1999.

So far, the spoils have gone mainly to the AI infrastructure companies in the semi-conductor, electrical component, power, tech hardware and industrials sectors, as opposed to companies expected to see productivity or revenues boosted by AI. 

The trend in capex by “hyper-scalers” such as Amazon Web Services, Google Cloud and Microsoft Azure in the next few quarters will be one of the key drivers of sentiment for AI stocks in the back end of 2026.

In this vein, the question is whether we will see hyper-scaler capex intentions increase as the year progresses, as we saw in 2025 when 20% expected growth at the start of the year morphed into 54% growth. There were similar trends in 2024.

The market is grappling with how AI is going to affect software companies.

Is it an opportunity for sales growth in the medium term? Or will it reduce barriers to entry and prove disruptive to business models, pricing structures and ultimately compress profit pools of the software-as-a-service (SaaS) players?

There is little evidence of value creation in enterprise software applications so far. Until some evidence is shown, the market is discounting first and looking to see how things pan out.

The recent share price performance of software maker Salesforce is an example of how this is playing out – down almost 10% in the last three months.

It was also evident in the company’s earnings call where the very first question was whether the SaaS cycle was coming to an end due to the rise of AI.

The company noted in response that “the software industry is going through a tremendous transformation” but that AI large-language models are providing “a new platform that we can build on and extend our applications”.

In terms of productivity we are clearly at the very early stages of the AI rollout with the highest level of adoption in larger firms and concentrated in finance and technology.

AI-related commentary on earnings calls continues to ramp up, with 58% of S&P500 companies mentioning it in the most recent quarterly results season.

While the detail on the use case for AI technology is compounding, very few companies are actually directly linking the use of AI with EBIT or profit margins, though there are increasing  instances of companies quantifying time or productivity benefits.

 

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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.

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