Tariffs will either show up in inflation or corporate earnings. The implications are starkly different for portfolio decisions, observes 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 either show up in inflation or corporate earnings. 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 we’ve 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 dry powder ready for better entry points.

Tariffs and inflation: the missing pass-through

Since “Liberation Day”, tariff pass-through into US CPI has been far weaker than most expected. Historically, US inflation surprises and actual inflation have moved together (Figure 1). This time, they’ve diverged sharply.

Figure 1: Where are the tariffs?

US CPI and Citi US Inflation Surprise Index

Purchasing manager surveys show input prices rising (Figure 2)—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.

Figure 2: 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 (Figure 3).

Figure 3: The market has yet to price-in the “pinch”

S&P 500 sales and earnings

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 (Figure 4).

Figure 4: Heavily discounting

China PPI and the Industrial Metals Index

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%—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. 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. Afterall, 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

• Find out about Pendal Focus Australian Share fund
• Find out about Pendal Property Securities Fund

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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In this video, Australian equities portfolio manager BRENTON SAUNDERS explains the strategic role of ASX mid-cap stocks in a diversified portfolio

An excerpt from Brenton’s interview

ASX-listed mid caps represent the “ideal sweet spot” of the market, offering compelling opportunities for investors seeking growth, income and diversification in their portfolios.

That’s according to Brenton Saunders, portfolio manager of Pendal Midcap Fund, who explains the opportunity set in the video above.

The ASX mid-cap universe — which Pendal defines as companies ranked 51st to 150th by market capitalisation — is rich with innovation and diversity. It includes high-growth names in fintech, healthcare and technology, as well as early-stage resource companies ramping up production.

“Most of the best growth stocks sit in the mid-cap universe,” argues Brenton.

These often founder-led opportunities are not only a more evenly weighted representation of the economy, but can also be the subject of corporate activity, making it an exciting part of the Australian market.

“These companies augment growth and capital appreciation at a reasonable level of yield,” Brenton says. “In aggregate, they tend to outperform large caps while offering more stability than small caps.”

However, performance is often tied to domestic economic conditions — which means it’s critical to invest with an experienced team with the resources to carry out deep macro-economic insight.

“Most mid-caps have high domestic exposure, so understanding the shape and health of the Australian economy is key,” says Brenton.

Pendal Midcap Fund is well placed to benefit from the scale, infrastructure and experience of Pendal’s Australian equities team, which is one of the biggest and best-resourced in the country.

“We have deep sector coverage and high continuity, which can translate into better research, stronger conviction and more robust portfolios,” Brenton says. “That allows us to find and cover opportunities in different parts of the economy at different times of the economic cycle.”

Supported by a disciplined, research-driven process, the fund offers a powerful tool for enhancing exposure to an exciting part of the market.

Watch the video above to hear more from Brenton and Pendal’s mid-cap strategy.

About Pendal

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

Pendal’s Australian equities team is one of the most experienced and well-resourced equities teams in Australia. 

Contact a Pendal key account manager

Find out more about Pendal’s Australian equities capabilities

Here are the main factors driving the ASX this week, according to Pendal portfolio manager PETE DAVIDSON. Reported by head investment specialist Chris Adams

• Find out about Pendal Focus Australian Share fund

GLOBAL equity markets are climbing the wall of worry, with most indices now 25% above their post-Liberation Day lows and close to all-time highs.

This suggests investors are backing a Goldilocks version of the US economy with not too much inflation from tariffs (as exporters “pay to play” by absorbing tariffs through lower production margins) and just enough spending growth from consumers to keep growth intact.

The US technology sector has reached record highs, fuelled by optimism that strong earnings will persist following the passage of Trump’s One Big Beautiful Bill Act (OBBBA) on 4 July, which includes tax cut extensions for individuals and new permanent capital expenditure deductions for companies.

NVIDIA’s market capitalisation reached a historic US$4 trillion last week, equivalent to 2.3x the total value of the ASX200 and approximately 30 times the size of Commonwealth Bank (CBA).

Additionally, NVIDIA is reportedly planning to launch a new AI chip specifically designed for the Chinese market in September.

Last week’s key headlines included US copper tariffs, a US Department of Defence rare earth offtake agreement and, domestically, an unexpected pause in rate cuts by the RBA.

On tariffs, the Trump administration noted a pending letter to the European Union – delivered over the weekend and imposing 30% tariffs on both it and Mexico – alongside threats of a 35% tariff on Canada and plans for a blanket 15% or 20% tariffs on most other trading partners.

The market was largely inured to these developments last week, perhaps seeing them as a negotiating tactic and preferring to wait for final resolution.

The S&P/ASX 300 fell 0.3% last week. Resources (+0.5%) fared better on a firmer iron ore price – underpinned again by tariff news with the US threat to hit major iron ore producer Brazil with a 50% tariff.

The S&P 500 was also off 0.3% and is +7.2% for the year.

There has been a change in leadership so far in 2025 with European (Euro STOXX 50 +12.8%) and UK (FTSE 100 +11.8%) markets performing well on expectations of far greater fiscal stimulus and a reindustrialisation of Europe. German defence names have been particularly strong.

At the margin these markets are also benefitting from a shift away from dollar assets, with the US Dollar trade-weighted index (DXY) down 10% for the year.

Indian and Chinese equities are also lagging.

US treasuries were relatively quiet, with 10-year bond yields edging up 7bps and remaining contained at the long end.

Commodities were generally stronger, led by copper which jumped 9% after the announcement it will face a 50% US tariff – the same rate as steel and aluminium.

The US uses about 6% of global copper and is expecting a surge in demand, mostly in tech and data centres applications. The Trump administration wants to secure its sovereign supply and bring smelting and refining back onshore.

Copper is now up just under 40% for the year. Lithium remains soft, down 18.5% for the year, in part reflecting reduced EV subsidies in many countries.

US macro and policy

It was a slow news week for macro data in the US.

The June FOMC minutes showed most members are waiting for more clarity on the effects of tariffs before altering rates.

A July rate cut is unlikely, but weaker labour data could prompt action in September.

The committee expects possible 25bp cuts in September, October, and December, though opinions remain divided.

The NFIB Small Business Optimism index inched down to 98.6 in June from 98.8 in June. This is better than this year’s lacklustre average of 93.0, though still far from its peak at 105.1 post Trump’s election, before tariffs dampened the mood.

While business owners’ optimism bounces around, hard data like hiring and investment plans remain soft. With fewer respondents than usual even bothering to answer the survey, things might be rougher than they appear.

Mortgage Applications leapt by 9.4% in the week ending 4 July to reach their highest level since February 2023.

The gradual decline in the 30-year average conventional mortgage rate to 6.77%, from 6.93% four weeks ago, is likely to have helped to bolster demand.

Some consumer surveys, however, also point to a pick-up in optimism and improved perceptions of job security over the last couple months.

The further decline in Initial Jobless Claims (to 227K last week, from 232K the week before) was largely driven by states with relatively large auto sectors where figures can be noisy due to annual summer shutdowns.

Meanwhile, continuing claims increased to 1,965K in the week ending 28 June, continuing to suggest a future rebound in the unemployment rate, which fell from 4.2% in May to 4.1% in June.

There were several developments on the tariff front, with the Trump Administration announcing:

• A 50% tariff on copper, in line with aluminium and steel.
• A 35% tariff on Canadian imports starting next month
• A 50% tariff against Brazil – which is a major supplier of beef, coffee and orange juice to the US. As a major supplier of iron ore, a large tariff is potentially positive for Australia.
• Intended tariffs of 15% or 20% on most other trade partners.
• A 200% tariff on pharmaceuticals is being considered – but the US will give companies extended time to build the manufacturing facilities in the US before applying tariffs if they don’t. Like copper, the aim is to bring manufacturing back to the US.

Tariff revenues have quickly risen from the range of US$6-8bn per month, to over $20bn in May.

A projected US$30 bn per month would equate to US$360bn per annum – the problem is that the US Budget Deficit is US$1800bn and is increasing, thanks to the Trump OBBA, which is projected to add US$240 bn in deficits per annum for next decade.

China macro and policy

Beijing has announced further population growth stimulus measures – with cash payments for children born after January 2025.

There was also further rhetoric related to recent comments around the need to remove excess capacity in core industries – such as steel. The risk here for Australia is that reduced steel capacity results in lower demand and pricing for iron ore, despite higher steel margins.

There was also some social media speculation that the leadership will be holding a meeting to help revive the property sector.

Australia macro and policy

The RBA surprised the market with its decision to leave the cash rate unchanged at 3.85% against expectations of a 25 bp cut.

The decision to pause the easing cycle was “about timing rather than direction” with the RBA just “looking for further confirmation we are on the forecast path”.

Governor Bullock reasoned a “cautious approach” was warranted, because year-over-year growth in the quarterly trimmed mean inflation had only just returned to the 2-3% target band (2.9%yoy), labour conditions were tight with negligible productivity growth, and because global uncertainty remains elevated.

The high number of dissents – the vote passed 6-3 in favour – also caught attention, highlighting clear debate over the appropriate policy stance.

Multiple economists previously calling for a July rate cut pushed back those expectations, but retained terminal rate forecasts of 3.10%, implying three more 25 bp cuts. Bond yields shifted ~14 bp higher across the curve.

Australian equities

July has seen a continued rotation from growth into resources/cyclicals, despite a slight bounce in US bond yields and further tariff agitation from Trump.

Stocks like James Hardie (JHX), BlueScope Steel (BSL) and Sims (SGM) have all benefitted from sector rotation, as have some of the weaker stocks in FY25 such as Amcor (AMC), Orora (ORA) and Light & Wonder (LNW).

The re-rate looks to be outpacing fundamentals in some instances – for example, BSL’s North American steel spreads have stabilised and there is an emerging risk around cost inflation and increased discounts.

Since the RBA surprise “hold” decision, the ASX 200 is flat, while the AUD/USD cross is +0.3% and Australian Government 10-year yields are +10bps.

Banks notably outperformed after the decision while, interest sensitive and defensive sectors have been weaker.

AREIT update

The AREIT sector returned 12.9% in FY25, against 13.8% for the S&P/ASX 300.

Performance was led by Charter Hall Group (CHC, +76.6%), driven by lower bond rates and signs that commercial real estate values have bottomed and, as a result, we have seen a pickup in fund flows and transaction activity.

Goodman Group (GMG, -0.6%) was a drag on the sector, unwinding previous outperformance with the market concerned about the capital required to build its data centres.

We expect stronger EPS growth for the sector, particularly from the retail REITs, affordable housing and fund managers.

We see a stronger-for-longer cycle for quality asset owners, as rising demand (helped by population growth) is met with limited supply – with higher construction costs meaning a majority of proposed developments are uneconomic.

Residential apartments, like many other forms of commercial real estate, are trading below replacement costs.

The sector has a twelve-month-forward dividend yield of 3.4% (5.5% excluding GMG), a price/earnings of 19x (14.7x excluding GMG) and three-year EPS growth rates of 5-6% or more, which is a historical high (4.2% excluding GMG).

Meanwhile we are seeing signs of equity managers buying AREIT cover and reducing active underweights.

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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 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

In this video, ELISE McKAY explains the Pendal process for identifying income, growth and diversification opportunities in Australian shares

An excerpt from this interview

AUSTRALIAN equities have the potential to offer investors a compelling trio of benefits, argues analyst and portfolio manager Elise McKay.

In this video, Elise explains how the Pendal investment process helps her team identify and take advantage of opportunities in Australian shares.  

“Firstly you get income, secondly you get growth, and then thirdly you get the diversification benefit,” she says.

High dividend pay-out ratios and a strong franking credits regime make Australian stocks attractive for income-seeking investors, she says. 

On the growth front, Australia has been a fertile ground for scalable business models.

“If you can succeed and grow from nothing in Australia, you’re really well placed to scale that model offshore,” she says, noting examples such as CSL, Xero and Wisetech, which are held in various Pendal portfolios.

Diversification is another key advantage. Unlike tech-heavy US markets, Australia’s ASX is weighted towards financials, resources and healthcare companies which can offer additional sector and geographical balance — particularly for businesses with exposure to Asia.

Pendal clients benefit from the experience and tenure of the Australian equities team, which is one of the biggest and best-resourced in the country.

Pendal thrives on respectful debate and diverse perspectives, where “everyone feels free to challenge each other, which translates to better outcomes,” Elise says. 

“We’re core managers, so style consistency is critical. We actively monitor performance and risk to avoid surprises.”

Elise manages Pendal Horizon Sustainable Australian Share Fund, which aims to align performance with purpose by supporting companies driving the transition to a more sustainable future.

“We exclude harmful sectors, we support sustainable practices, and we engage with companies to improve,” she says. “It’s about de-risking and building better businesses.”

Watch the video above to learn more about Elise and Pendal’s Australian equities strategies.

About Pendal

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

Pendal’s Australian equities team is one of the most experienced and well-resourced equities teams in Australia. 

Contact a Pendal key account manager

Find out more about Pendal’s Australian equities capabilities

In this video, explore the opportunity set in Australian equities through the eyes of one of the country’s biggest and best-resourced equities teams

An excerpt from the team’s interview

AT the heart of investing in Australian equities is a belief in Australia itself.

In this video, hear more about the opportunity set in Australia through the eyes of the Pendal Australian equities team – one of the biggest and best-resourced teams in the country.

According to Crispin Murray, head of equities at Pendal, Australia is not only one of the fastest-growing economies in the developed world – it’s also home to strong institutions, well-run companies and a government with a strong balance sheet.

“Put all that together and you have a market full of opportunities and the potential for strong returns,” Crispin says. “That means it’s a really good part of any diversified portfolio.”

Investing in the Australian market can offer a trifecta of benefits, adds analyst and portfolio manager Elise McKay.

“In Australia, you get income, growth, and diversification,” she explains. “Plus, we have some world-class growth companies – if you can succeed in Australia, you’re well-placed to scale globally.”

However, staying abreast of the opportunity set, navigating market cycles and selecting the best stock ideas calls for the knowledge, skills and research power of a well-resourced team.

Pendal’s 19-strong equities team hail from all walks of life – supporting a diversity of thought that underscores their understanding of industry, sector and business performance through various market cycles. 

“We have one of the biggest active Australian equities teams in the market, and we do that very consciously,” explains portfolio manager Brenton Saunders. “We want to understand all the opportunities and have very dedicated coverage across each sector of the market.”

By “acting like business owners”, the team can also harness their knowledge of business fundamentals to get the inside track on the challenges companies face in each environment and the solutions they can offer shareholders.

“We task ourselves with making money in any and every environment,” says co-portfolio manager Lewis Edgley. “The way we do that is having a very good fundamental understanding of the businesses that we’re investing in. And when we get that right, we can identify mispriced opportunities and exploit them.”

Get to know our portfolio managers better in these individual profile videos:

Crispin Murray, head of equities
Elise McKay, analyst and portfolio manager
Brenton Saunders, portfolio manager
Lewis Edgley and Patrick Teodorowski, co-portfolio managers

About Pendal

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

Pendal’s Australian equities team is one of the most experienced and well-resourced equities teams in Australia. 

Contact a Pendal key account manager

Find out more about Pendal’s Australian equities capabilities

In this video, our head of equities CRISPIN MURRAY explains Pendal’s advantages in finding opportunities and managing risks in Australian equities

An excerpt from Crispin’s interview

INVESTING in Australian shares is more than a financial decision.

According to Crispin Murray, it’s also a vote of confidence in the country’s economic resilience and institutional strength.

In this video, hear from Pendal’s head of equity strategies about the opportunity set in Australia and why he believes Australian equities deserve a place in your diversified portfolio.

“Investing in Australian equities is really a view on Australia as a country,” he says. “We’re one of the fastest-growing economies in the developed world, with well-run companies and a government that has a good balance sheet.”

This optimism is backed by the depth of experience within Pendal’s Australian equities team.

With 19 members averaging 20 years in financial markets — with 15 of those years at Pendal — the team brings a wealth of insight and historical perspective.

“If you’ve lived through COVID, the financial crisis, and the crises of the 90s, you understand how markets operate and when to step in or step back,” Crispin continues. “You can take a really long-term view and generate returns for your investors.”

At the core of Pendal’s approach, however, are three guiding principles: open-mindedness, critical dialogue, and awareness of bias.

“You need to be prepared to change your investment view,” Crispin notes, emphasising the importance of dynamic thinking and robust critical dialogue.

The Pendal Focus Australian Share Fund exemplifies this philosophy.

An actively managed portfolio of up to 30 stocks, the fund blends large and small caps, growth and value, to deliver consistent performance.

“You’re not relying on the cycle or market themes — just finding really good companies that aim to outperform.”

Tune into Crispin’s interview above to hear more about why, with a 20-year track record of disciplined investing and strong returns, Pendal offers a compelling case for inclusion in any diversified portfolio.

Get to know our portfolio managers better in these individual profile videos:

About Pendal

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

Pendal’s Australian equities team is one of the most experienced and well-resourced equities teams in Australia. 

Contact a Pendal key account manager

Find out more about Pendal’s Australian equities capabilities

In this video, our experienced ASX smaller companies team explain how they find mispriced opportunities

An excerpt from the team’s interview

BEYOND the familiar territory of the ASX 100 lies a universe of opportunity in smaller companies.

In this video, Pendal Smaller Companies Fund co-portfolio managers Lewis Edgley and Patrick Teodorowski explore how investors can benefit from the breadth and diversity of Australia’s small-cap market.

For investors seeking more than just the familiar names on the ASX 100, Lewis believes small caps offer a world of untapped potential.

“When we look at the ASX 100, it’s very dominated by financials and resources,” he explains. “Whereas the Small Ordinaries Index really is a very broad and diverse set of investment opportunities.”

This diversity is key — according to Lewis, there are “literally hundreds, if not thousands, of companies that we can look at”.

“Our job is to search through them and find where mispriced opportunities exist,” he says. “At different points in the economic cycle, different sectors will be doing better and doing worse. That gives us opportunities to find money-making opportunities regardless of what the economy is doing.”

According to Patrick, small caps can also offer a broad set of industry exposures that investors might not get from large-cap Australian companies.

“We invest in companies that have very long runways for growth,” he adds. “You can also invest in businesses before they can become household names and enter into the major indices.”

With central banks beginning to cut rates globally, Lewis sees a turning point for ASX-listed small caps.

“We think there’s a scenario over the next 12 months where the handbrake comes off. As a category, things get a little easier,” he explains.

Ultimately, the team’s edge lies in its relentless research — drawing from the resources of a 19-strong Australian equities team.

“We are bottom-up stock pickers,” says Lewis. “In small caps, our team has decades of experience. We’re always looking for that information edge and when we find it, we’re willing to exploit it.”

About Pendal

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

Pendal’s Australian equities team is one of the most experienced and well-resourced equities teams in Australia. 

Contact a Pendal key account manager

Find out more about Pendal’s Australian equities capabilities