Here’s what the latest CPI data and state budgets say about the Australian economy, according to head of government bonds TIM HEXT

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THE May year-on-year CPI series was released today.

The data showed headline prices 2.1% higher than May last year, with trimmed mean prices 2.4% higher.

Only two items have double-digit changes: Tobacco is up 11.5% and Fuel is down 10%. Electricity subsidies are still playing a role (electricity down 5.9% from May 2024), but this will turn sharply positive in July.

The Reserve Bank will not look too deeply into this data as it is consistent with its current forecast of 2.6% trimmed mean inflation.

Pleasingly, services inflation is now 3.3% year on year, the lowest since May 2022. The quarterly inflation numbers released at the end of July, which are the main focus of the RBA, should show goods prices around 1% and services around 3.5%. 

Health and education will make further significant falls in services inflation difficult.

Inflation is not a reason to cut or not cut – but, when put together with ongoing sluggishness in consumption, allows the central bank to cut rates in July. 

The market remains priced at 80% chance of a cut.

State budget downgrades are coming

New South Wales (NSW) and Queensland both issued budgets this week. Both highlighted a recent trend towards optimistic rather than conservative forecasting.

Budgets have always been part finance and part marketing, but not surprisingly – given the current zeitgeist and short attention spans – spin is everything.

New South Wales

For New South Wales, the general government forecast budget position is improving.

The state announced a surplus – or, more accurately, hopes of a surplus – by 2027/28. This is the operating position, which is basically cash receipts, less cash payments, less depreciation.

It does not include infrastructure that can be financed either on or off budget (through debt).

The optimism comes from the forecast growth in expenses: 2.4% a year on average for the next five years.

Now employee expenses, 40% of total, are forecast to grow at 3.7%, which is consistent with recent wage rises granted of 3.5-4% a year to many public sector employees, but not consistent with growth in the number of workers.

Even if this number turns out to be accurate, it puts a lot of pressure on the other 60% of expenses to grow by around 1%. The heavy lifting is to be done by what is called ‘Grants, Subsidies and Transfer expenses’ which make up 20% of expenses and are forecast to go backwards.

We will look under the hood on this one as it is very unusual to see these go backwards absent any policy announcements.

Overall, this is a treading-water budget and will leave Standard and Poors (S&P) somewhat in limbo on its negative outlook for the AA+ rating. If the government was to deliver on 2.4% expense growth, then the AA+ would stay, but there is likely to be some cynicism around this number.

Negative outlooks are not supposed to be permanent and are usually resolved one way or the other within two years. The negative outlook was put on in November last year so I suspect it stays for at least the next year.

Queensland

The shambles of the Queensland mid-year fiscal update (MYFER) in January have now been uncovered as another cynical exercise in making everything look as bad as possible and then blaming on the outgoing government.

CEOs do it all the time, but you would hope for better from an elected government – particularly a government department calculating the numbers.

So how do we look at this budget?

The new LNP government are heralding it as a $6.6 billion improvement over three years from the MYEFR, driven by its responsible management. This is the chart in their budget papers.

 

But it is, in fact, a deterioration of around $21bn from the last budget.

No charts for that one. No doubt the previous Labour government was, as usual, too optimistic (see above in NSW) but the shock/horror revisions in January went from Pollyanna to Cassandra in one move.

Now, after the MYEFR, the new government probably hoped Queensland would be downgraded by S&P – the thought is to get it out of the way and easily blame it on the last crew. In fact, the forecast debt revisions in January were even more spectacular than the budget revisions, clearly blowing Queensland way below the AA+ thresholds.

However, S&P didn’t play ball – merely putting Queensland on negative outlook in February and putting the onus on the new government to fix it.

Well, in our humble view, the government has not done enough to “fix it”.

By our calculations, it will still see Queensland trickle down to AA – even if not blowing down. Put another way, the new government is more fiscally responsible than the old one, but not enough to keep the AA+ rating.

Anyway, for those still reading, we think the Australian state ratings with S&P will look something like this by year’s end. Note: S&P does not rate the Northern Territory.

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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.

Contact a Pendal key account manager

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

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WHILE geopolitical headlines are dominating, they have not yet driven major shifts in markets.

The S&P 500 was off 0.1% last week, while the ASX 300 was down 0.5%. There were only small moves in currencies and bond yields. Oil was up 3.7% and gold was down 1.8%.

So far, markets have largely shrugged off the Middle East conflict but with the US officially joining in active combat over the weekend, that might change. The next move from Iran will be critical. 

We have seen some risk premium come into the oil price, though physical flows have been largely unaffected. Action to close the Strait of Hormuz – through which roughly 20% of the world’s oil trade flows – could change that too.

Central banks globally are looking to cut rates to stimulate somewhat anaemic outlooks – the extent to which an inflationary oil price shock may alter this mechanism seems to be the main implication markets are focused on. 

Elsewhere, the US FOMC meeting was – as expected – uneventful. There was little meaningful news flow on tariffs, but some weaker data on the US housing market.

We are entering a period with strong seasonal effects in market and tax-loss selling ahead of the end of financial year so there may be some unusual moves over coming weeks.

US macro and policy

FOMC

The Fed unanimously voted to keep rates in the 4.25-4.5% range and is leaving its options open, stating that uncertainty about the economic outlook “has diminished but remains elevated” and that “the Committee is attentive to the risks to both sides of its dual mandate”.

In his press conference, Chairman Powell said that there might be some small cracks in the US labour market – and all but four of 19 participants noted that the outlook for unemployment was more uncertain than usual – but that the Committee was not concerned at this point. 

He also noted that current settings were moderately restrictive and well positioned to be able to manage the risks and uncertainties they face.

Most members are also seeing the inflation outlook as unusually uncertain, with the risks skewed to the upside. Powell emphasised the importance of keeping longer-term inflation expectations well anchored to ensure that a one-time, tariff-induced increase in the price level does not become an ongoing inflation problem.

Other macro data

Headline retail sales were -0.9% in May, versus -0.6% expected, with net revisions to previous months of -0.3%. However, “control” retail sales, which exclude the most volatile items, rose 0.4%, slightly ahead of +0.3% consensus expectations, with net revisions of +0.2%.

Sales ex-autos dipped by 0.1% versus +0.3% expected. Net revisions were -0.2%.

Industrial production fell by 0.2% in May, versus flat expectations.

The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) builder confidence in the newly built single-family home market was 32 in June, down from 34 in May.

This index has only been lower twice since 2012 – in December 2022 (when it hit 31) and in April 2020 when it slumped from 40 to 30 at the start of the pandemic.

Housing starts fell 9.8% (versus -0.8% expected) in May to an annualised rate of 1.26 million homes, which is the slowest pace since the pandemic. Initial jobless claims are spiking, but this is a usual trend at this point in the year. Employment in the US remains a major watch-point.

Global macro and policy

The UK Consumer Price Index (CPI) eased, rising at 0.2% month-on-month and 3.4% year-on-year.

Bank of England kept rates at 4.25% as expected, though more committee members than anticipated had voted for a cut.

The Eurozone CPI was 0% month-on-month and up 1.9% year-on-year.

The Bank of Japan also kept rates unchanged and reported a reduction in Japanese government bond purchases of ¥200B each quarter, starting from April 2026.

In China, it is worth noting that while the month-on-month shift in newly built home prices remains negative, it has improved sharply from this time last year. If this flips back to positive, it could see a swift improvement in China consumer confidence, such as we saw in late 2022/early 2023.

Macro and policy Australia

The Australian unemployment rate remained steady at 4.1%. Underemployment at 5.9% fell to a new cycle low. Hours worked rose 1.3% in the month.

The number of employed people fell 2,500 for the month after rising 89,000 in April.

Despite this volatility in month-to-month data, the underlying pace of employment growth remains solid. The employment to population ratio remains around record highs of 64.3%.

Markets

Oil markets remain watchful on the Israel-Iran conflict and the risk of a wider and more prolonged conflagration.

Physical flows remain uninterrupted thus far, although Iran has indicated the possibility of closing the Strait of Hormuz.

The price has risen more than 20% in June, but the level itself (Brent crude US$77/bbl) is not stretched versus where it has been trading previously – there is further risk should the conflict escalate and affect physical flows.  

We note on underlying fundamentals that global crude oil inventories are low, China’s oil demand has improved somewhat sequentially, and OPEC+ members also appear to be complying with production targets.

Turning to equities, there are a number of interesting observations:

• Historically, S&P 500 selloffs in response to geopolitical volatility going back to the Second World War have been a median of 17 days with a median of 16 days to recover.
• Bloomberg reported that the number of conversations about “reshoring” in the S&P 500 earnings season spiked to 60 (and to 193 in the small company Russell 3000). For the S&P 500, most of the conversations were in the healthcare, industrial and utility sectors.
• There are some signs of softer sentiment, with the AAII net Bullish verses Bearish sentiment indicator shifting back into negative territory after briefly swinging positive.
• Positioning also remains cautious, with cyclicals versus defensives exposure having plunged in April to historically low levels.
• Despite narratives to the contrary, foreign inflows to US stocks are annualising at the second largest year ever, behind 2024.
• Next-twelve month earnings estimates for the S&P 500 have hit an all-time high, regaining ground lost after the initially tariff announcements.
• Retail buying of the US market slowed from the extremely high levels of March and April, but still remains strong at US$23bn inflows.

In global equities, we sawsolar names lower following the release of the US Senate’s draft of the “Big, beautiful bill” that retained the phasing out of solar, wind, and energy credits by 2028.

Residential construction company Lennar noted it continues to see softness in the housing market due to affordability challenges and a decline in consumer confidence.

Payment stocks like Mastercard, Visa and PayPal came under pressure after passage of the Genius Act in the Senate, which establishes a pro-growth regulatory framework for crypto stablecoins and Coinbase’s launched a new stablecoin-based payments platform.

Global recruitment firm Hays issued a profit warning ahead of its FY25 close, noting activity levels have softened in the June quarter, with broad-based weakness in permanent roles globally reflecting low levels of client and candidate confidence as a result of macroeconomic uncertainty. They noted that temporary employment and contracting activity continues to be more resilient.

Australian equities

In Australia, Resources (-2.5%) was the weakest sector, though there was strength in Energy (+5.5%), while Materials (-4.2%) was the weakest GOCS sector.

Technology (+1.4%) and Industrials (+1.0%) were both solid.flow out of the Government review into supermarkets.

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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

Here’s what the latest employment data means for the market, according to Pendal’s head of government bond strategies TIM HEXT

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THE latest employment data was released today.

Headline employment was slightly weak, with a loss of 2,500 jobs – payback from the very high 87,000 increase in April.

Given volatility from month to month, we look at a three-month rolling average, which remains at around 35,000 jobs – enough to soak up new job entrants.

More importantly, the unemployment rate remains stuck at 4.1%, which the same result for every month so far this year.

Stability like this is almost unheard of.

Currently, any sharp move in jobs is matched by a similar decent move in the participation rate – again showing the limitations of the survey.

The good news for the job market is that full-time job growth is exceeding part-time growth.

This means less spare capacity in the labour market, as some of the 25% of part-time workers who say they are seeking more hours looks like they are finding them through full-time jobs.

This reduces underemployment and, in turn, what is called the underutilisation rate (unemployment plus underemployment).

The underutilisation rate now sits at 9.9%. This is the lowest since early 2023 and almost 1% lower than early 2024, highlighting a healthy job market. If we look back a decade, it is almost 4% below pre-Covid levels.

Our base case

We are less than three weeks away from the RBA’s July decision.

The RBA has forecast unemployment to be at 4.2% by the end of June. This data on its own would indicate no cut. In fact, unemployment is still below its estimate of full employment.

However, weaker consumption data since the May cut and the fact that the RBA looked closely at doing 0.5% in May means our team favours a July rate cut.

Right now, the market is pricing an 80% chance of a cut.

We do not expect it to move far from here pre-July, absent global events. Terminal cash is still priced at 3% by March 2026.

We still like duration despite market pricing. While optimists cling to the hope that we will make it through July without tariffs disrupting markets again, it is not something we think is a base case.

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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.

Contact a Pendal key account manager

Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund

DESPITE a 12 per cent rise in the oil price following rising geopolitical tensions between Israel and Iran, equity markets ended close to flat last week.

Markets had been higher prior to the Friday attack, as US-China tariff tensions eased and benign May US inflation figures helped bond yields lower.

The S&P 500 and the NASDAQ fell -0.4% and -0.6%, respectively, while the S&P/ASX 300 closed up +0.3% as equities consolidated following strong performance over the quarter to-date.

The US economy is proving more resilient than many feared, giving the market confidence it can cope with the impact of tariffs.

However, early signs of a slowdown are appearing and most economists anticipate Q4 2025 GDP growth falling to a 1%-2% range.

We believe equity markets remain well supported, but are likely to consolidate over the northern summer as we wait on trade deals and clarity on the economic effect of tariffs.

In Australia, the market was led by energy and gold stocks last week, with REITs also outperforming. Tech names – particularly the strong recent performers – did start to retrace.

We see three key issues for markets in the near term and will look at each in turn:

1. rising geopolitical tensions
2. tariffs and the US economy
3. concern over the US budget deficit and implications for bond yields.

Issue 1: The impact of rising geopolitical tensions

Israel’s attack on Iran triggered a 12% rise in oil prices which, in turn, saw equities sell off and bond yields fall.

There seem to be two catalysts for the attack.

One was the International Atomic Energy Agency (IAEA) announcing earlier in the week that Iran had violated its commitment under the Nuclear Non-Proliferation Treaty. The other was upcoming US-Iran nuclear talks, with Israel potentially concerned over the outcome.

The attacks have therefore been positioned as pre-emptive action to prevent Iran achieving nuclear strike capability.

The likelihood, reinforced by the Israeli rhetoric, is that there will be a series of ongoing strikes given the perceived damage to Iran’s nuclear program is limited so far. Iranian retaliatory strikes may also be a catalyst for escalation.

For financial markets, the focus is initially on the risk to the oil market.

Oil jumped 8% on Friday to US$75 on the news and is now 25% above its Liberation Day lows.

A lot of the move reflected short-covering given previously weak sentiment towards oil.

The key question is whether this will be sustained and if it’s the first part of a bigger move or if it will reverse quickly.

The threat to oil supply comes from two sources:

1. Disruption to Iranian oil as a result of infrastructure damage or tighter US sanctions on supply. Iran supplies around two million barrels per day – around 2% of the global market.
2. Iran blockading the Strait of Hormuz, through which around 20% of global oil production flows.

There is clearly risk of the first scenario, though this may be limited. The US has indicated it does not want to see oil prices higher as it wants to avoid any inflationary shocks exacerbating the impact of tariffs. It would be reasonable to assume Israel understands this and – as with previous attacks – will avoid oil export-related infrastructure.

We also note around 75% of Iranian oil is believed to go to China, so the prospect of US sanctions will be tied to their broader bilateral discussions.

It also seems very unlikely that Iran would close the Strait of Hormuz given the largest impact would be on China, which is one of Iran’s key supporters. China receives roughly 57% of the oil transported through the Strait.

A blockade would also have a dire impact on Iran’s economy at a vulnerable time. Should Iran try this, it is believed that a military response would unlock the blockage within weeks/months.

The other issue to keep in mind is there remains an estimated five million barrels per day of excess capacity in oil markets, which would be available to partially offset any disruption, albeit with some lags.

The outlook for oil outside of this geopolitical risk is muted, with a slowing global economy and supply growth from both Saudi and non-OPEC nations.

For example, in its baseline view Goldman Sachs forecasts prices falling into the US$50 range. It suggests that prices could peak to near US$90 in the short term in the scenario that Iranian production drops by 90%, with OPEC offsetting half.

At this point we don’t expect a sustained oil price rally; history indicates geopolitical-relate spikes in oil are often short-lived and peak occurs very close to the event.

Issue 2: Tariffs and the US economy

Tariff news flow was better last week following the call between Presidents Trump and Xi and an agreement to lift Beijing’s restrictions on exporting critical minerals and magnets, in exchange for the US loosening controls relating to semis, aircraft parts and Chinese students in the US.

Overall, we are back to the original Geneva deal timeline, which we expect to lead to an agreement announced in September and implemented in October.

Separately, we saw the Court of Appeals extend approval to continue use of the tariffs linked to the International Emergency Economic Powers Act (IEEPA) to the end of July while it considers the case.

As a reminder, if it upholds the Court of International Trade’s block on using this measure to impose tariffs, the Administration will appeal to the Supreme court.

The key question for the US is whether the tariff impact is now kicking in and how much that will affect the economy. There are three components that will determine this:

1. The unwind of the “front loading” which boosted demand ahead of tariffs. The debate here is to what extend consumers held back on other spending to buy big-ticket items such as autos ahead of tariffs – there is evidence that this occurred, with incomes strong and savings rates rising. This would suggest consumers are managing their budgets carefully and there may not be as sharp an unwind as some expect. This unwind may be felt more in countries exporting to the US (notably the EU) where production and exports rose to get ahead of tariffs.
2. The impact of the effective tax increase. Fear here has diminished but is still live. As mentioned above, incomes and jobs have held up and corporate anecdotes indicate demand remains okay. The flow-through of pricing from tariffs has not yet been that evident. It will come through – though how quickly will be important to watch. The other issue to watch is to what extent this is absorbed in corporate margins and affects business investment.
3. The impact on sentiment. The effect of tariffs is estimated to be 1.0% to 1.5% off US GDP. How quickly this flows through is important – if this is a more extended period i.e. 9-12 months rather than 3-6, there is likely to be less risk of sentiment effects compounding the first order impact.

On inflation, the May Consumer Price Index (CPI) data was positive, with headline 0.08% month-on-month, versus 0.26% expected, and core 0.13% versus 0.27% expected.

It is estimated that tariffs added 4 basis points (bps) to the month’s CPI.

There is some debate over seasonal adjustments understating inflation, however, the key message for now is that the flow-through of tariffs is taking time and this may help with the sentiment effects.

Both goods and services inflation were below expectations and the “super core” measure was also benign, signalling around 2.5% annual inflation.

Tariffs should start flowing through into prices, with a survey indicating 31% of service firms and 45% of manufacturers intend to pass on tariffs in full. The bulk of the effects should be felt within six months, though existing inventories may delay some effects.

Inflation of 2.5% is not low enough for the Fed to feel comfortable about easing, particularly given the expectations that tariffs will lead inflation to the high 3% range by year end.

The Fed’s goal will be below-trend GDP growth, which will reduce the risks of inflation becoming embedded in the economy.

It appears as though that is happening, with the real data beginning to soften – such as initial and continuing jobless claims creeping higher. This is consistent with a deceleration rather than a more abrupt slowing.

The market continues to price in two more rate cuts in the US this year.

Issue 3: US deficit concerns and implications for bond yields

The third big issue for markets has been the rising fear of US debt sustainability, manifesting itself in higher long-bond yields.

The outlook here has improved, with some of the concerns flagged when the House version of the Big Beautiful Budget bill came out appearing overstated.

With slowing growth and benign inflation, bond yields have remained in their three-year range.

Yields declined last week, despite the increase in oil prices, and auctions for both 10-year and 30-year bonds were well supported.

One trigger for concerns on bonds was the rise in Japanese 30-year bond yields. These too have come off, partly on expectations of supply being constrained but also as immediate selling pressures abated. This has flowed through into the US 30-year yields as well.

The final factor reducing fears of fiscal sustainability is that tariffs are generating good revenues for the government – an incremental US$55bn so far and an indicative run rate of $200bn per annum.

This, alongside the more resilient economy, has helped raise overall federal government revenues.

Section 899

Outside of these three key issues, we are also watching the issue of Section 899.

This relates to a provision in the budget Bill creating a new section 899 of the tax code, which would raise taxes on many forms of passive and active business income for foreign investors and corporates in the US.

This is a complex issue, but to summarise, the goal is not to create a blanket tax – rather, it aims to force other countries to rescind taxes on US companies.

The tax would scale over four years, to potentially 41% on US earnings of overseas companies.

Theoretically, this could impact several Australian companies including Macquarie Group, CSL, ResMed, Bramble and Aristocrat Leisure.

Australia does charge a Diverted Profit Tax (DPT) and has an Undertaxed Profits Rule (UTPR), as does the UK and much of the EU. Should the US deem these to be discriminatory, then the Section 899 tax may apply.

It also targets passive income which may include bond coupons.

The likelihood at this point is that these taxes will not have material impact.

Firstly, the Bill is likely to be changed by the Senate – notably, the passive income component may run the risk of deterring foreign investors into US bonds, which is untenable given the deficit.

The corporate taxes will probably remain, albeit with time for negotiations to gain an exemption.

However, this is an issue we need to keep a close eye on as while probability remains low, potential materiality (in its current form) is high.

Markets

Equity markets remain in good shape technically but are now consolidating, having returned to prior highs in a short period.

As highlighted in recent weeks, earnings revisions and Mag 7 strength has supported the recovery in US equities. Sentiment remains subdued, which is supportive, while credit spreads are also near their lows.

Technical support levels are around 3-5% below current levels

Gold is at an interesting level. It has been consolidating following the recent strong run and remains well supported – the question is whether it breaks through the $3,500/ounce high.

Gold miners are now performing better than physical gold, reflecting growing belief in the sustainability of higher prices.

Australia

The local market saw subdued moves last week as the S&P/ASX 300 consolidates after a 9.3% run quarter-to-date and is now at the top end of its historic PE range.

We did see rotation last week. Energy (+6.3%) led on the rising oil price, gold stocks were also up on geopolitical concerns and REITs (+2.5%) outperformed as Aussie bond yields continuing to fall and approach their lows for the year at 4.15% (Australian government 10-year yield).

Technology (-0.7%) pulled back, notably stocks which ran hard in May such as Life 360 (360, -5.4%) and technology One (TNE, -4.2%)

 

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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

Emerging markets seem to be entering an extended period of rate-cutting, which should support their economies and equity markets. Pendal EM portfolio manager JAMES SYME explains

• Find out about Pendal Global Emerging Markets Opportunities fund

Uncertainty remains high in financial markets among participants and policy makers.

This uncertainty is driven by global trade policy and how it will affect growth, inflation and ultimately interest rate decisions (and market expectations of those decisions). The International Monetary Fund now believes today’s tariff-driven environment is more challenging than the COVID era.

“[Early in the pandemic] central banks everywhere were moving in the same direction in the sense of easing monetary policy very quickly,” IMF deputy Gita Gopinath said last week.

“But this time around the shock has differential effects.”

Looking at previous cycles in emerging markets – especially considering the impact of a weaker US dollar and incoming capital flows – Pendal’s EM team believes emerging markets are mostly in an extended period of cutting policy interest rates.

We believe this will be supportive of emerging economies and emerging equity markets.

Emerging markets cutting rates

Last year we saw rate cuts in many advanced economies as the 2022 inflation surge eased.

But this year global central banks have been more cautious, either in their statements or the speed or extent of rate cuts.

Why? Because volatility in trade policy creates significant uncertainty about growth and inflation.

In the emerging world, however, most central banks have continued cutting rates.

The 19 independent central banks in the MSCI Emerging Market Index members (Greece uses the Euro and the four Arabian Gulf nations have USD pegs) have delivered 24 policy rate cuts and only four hikes in the first five months of 2025.

(Of those hikes, three were in Brazil where economic growth remains very strong, and the other was in Turkey after three big cuts.)

A clear pattern

There is a clear pattern here.

GDP growth forecasts for 2025 and 2026 have been revised lower in emerging Asia (and sharply lower in developed markets) but have held largely steady in EMEA and Latin America.

Many of the central banks on hold are in emerging Asia – China, Taiwan, Malaysia – despite this region’s more-challenging growth outlook.

We believe this is because those countries – with their export-based economic development models and big current account surpluses – have been less sensitive to the strong US dollar in recent years, and have been able to keep interest rates lower than the current account deficit countries.

For example, Taiwan had a 2024 current account surplus of 14.1% of GDP.

Its central bank has been on hold at 2% for more than a year despite CPI inflation in the first five months of 2025 averaging 2.2%.

By comparison, South Africa ran a 2024 current account deficit of 0.7% of GDP.

Its CPI inflation averaged 3.1% in the first four months of 2025 – but the central bank started the year with policy rates at 7.75% and has been able to cut rates twice so far this year.

What it means for investors

In terms of portfolio positioning, we expect global investor concerns about US trade and economic policy to continue driving capital flows into emerging markets.

We think this will be supportive of currencies, allowing stronger growth, lower inflation and faster/further rate cuts.

This, we believe, is the principal trigger of a positive feedback loop we’ve seen in emerging economies in previous up-cycles.

We prefer domestic-demand-driven emerging markets, with historically weaker current account balances and the ability to cut rates from higher real levels.

We remain constructive on the asset class, and overweight Mexico, Indonesia, South Africa and Brazil.

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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 investment analyst ANTHONY MORAN. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund

ROBUST employment and income growth in the US have been the lynchpin supporting markets at peak valuation levels – and the data didn’t disappoint last week.

Stronger-than-expected US payrolls on Friday saw US equities and bond yields both rising to close out the week.

The S&P 500 finished up 1.5%, the NASDAQ was up 2.2%, while the S&P/ASX 300 rose 1.0%.

Otherwise, there was little news on the macro and market front – with the media focused on President Trump and Elon Musk’s social media feud, which serves as an important reminder that a lot can change in six months.

The commodities picture was mixed, with cyclical exposures oil (Brent crude +4.0%) and copper (+3.8%) both rebounding, along with gold (+1.0%). Iron ore fell -3.5%.

US macro

May’s payroll data showed 139k new jobs, which was slightly ahead of the 126k expected by consensus and consistent with a slowing but still growing economy.

Average hourly earnings came in at +0.4% MoM, ahead of consensus at +0.3%.

This stronger hard data saw a spike in bond yields on Friday night, coming in as a bit of a surprise after softer economic survey data earlier in the week.

This softer data included the US Manufacturing Purchasing Manager’s Index (PMI) coming in at 48.5 versus 49.5 expected and the May ISM Services Index coming in at 49.9 versus 52.2 expected.

The Manufacturing PMI miss was primarily driven by de-stocking after the pre-tariff inventory build-up. This trend can also be seen in consumer data, with US auto sales down 9% month-on-month in May after a pull forward of purchases to beat tariffs earlier in the year.

The weakness in the ISM Services Index could provide a deflationary impulse to partly offset tariff impacts on goods inflation.

Elsewhere, the Fed’s “Beige Book” – a regular review of economic conditions – warned of a slight decline in economic activity.

Initial jobless claims also ticked up during the week, confirming a rising trend. However, seasonal adjustments made a big impact, so this is not yet a clear signal.

Commentary around inflation in many of the data releases was more hawkish – in the Services ISM, the price component spiked 3.6pts to 68.7 and the Beige Book noted: “There were widespread reports of contacts expecting costs and prices to rise at a faster rate going forward. A few Districts described these expected cost increases as strong, significant, or substantial.”

There was a partial offset to this from the Congressional Budget Office, which scored the current Budget Bill as a little less stimulatory than expected, which slightly eased longer term inflation fears.

The deficit-expanding impact of the Budget Bill is ostensibly the catalyst for Musk and Trump’s high-profile feud.

The takeaway is that data suggests the US economy is incrementally slowing – but this is not a big surprise and it suggests decelerating growth, not recession.

This incremental slowing is negative for stocks that are at the pointy end of economic weakness (e.g. US consumer-exposed stocks) but is unlikely to be enough to drag down the broader market materially.

The US economy is expected to reach trough growth in the December quarter.

Tariffs

There wasn’t a huge amount of news flow on tariffs last week, though anxiety is building as we get closer to the end of the tariff suspension period on 9 July.

Trump demanded the best offers from major economic partners by last Wednesday.

The biggest news was the phone call between Trump and China’s President Xi, but there were no real details apart from Trump being invited to Beijing.

The market still expects a Japan trade deal soon and the G7 Leader’s Summit from 15-17 June is seen as a possible confirmation point for deals.

Sentiment around tariffs looks set to remain volatile, with anxiety continuing to grow in the absence of news flow.

Australia macro

March quarter GDP was softer than expected at +0.2% quarter-on-quarter versus consensus at +0.4%. This is a marked slowdown versus the December quarter and a decline in per capita terms.

We have been expecting resilient economic growth in Australia on the back of rising real disposable incomes, an expansionary Federal Budget and interest rate cuts.

There were some unusual distortions in the March quarter from extreme weather events, which should reverse.

But we also saw a rare decline in public spending – driven by lower state government spending – and softer household consumption (+0.4% versus +0.7% in the December quarter).

 

Notably, real household income growth was good at +1.7% quarter-on-quarter, but this was offset by a rise in the savings rate, which rose to 5.2% in the quarter and is normalising towards historical trends.

The Fair Work Commission announced a 3.5% increase in the minimum wage, which equates to growth in real wages with CPI running in the high-2% range. It comes on top of the 0.5% superannuation increase.

However, the growth in real wages won’t be a support to GDP growth if the savings rate keeps rising.

Of more concern for the longer-term economic outlook, productivity growth was flat during the quarter and unit labour costs were +0.9% (or +5.1% year-on-year).

This suggests there is little downside from here for the inflation rate – so while the RBA still intends to cut rates on the basis that monetary policy is tight, this may reduce the number of cuts.

We still expect a base case of resilient Australian GDP growth to play out, with some of the drivers in the March quarter softness to be temporary.

But the savings rate – potentially driven by global macro uncertainty and weather events (i.e. relief payments) – is worth watching as a risk.

We also need to wary of a labour cost-driven bounce back in the CPI that limits rate cuts.

Rest-of-the world macro

Eurozone preliminary CPI was softer at +1.9% year-on-year versus 2.0% expected, being helped by a stronger euro and lower energy costs. 

This was below the ECB’s target and saw the central bank cut interest rates by a further 25bps on Thursday night.

Rates are now back to 2% and the ECB has signalled that it is nearing the end of the cutting cycle, albeit with downside risks and uncertainty ahead.

Tariffs are hitting the Chinese economy, with the Caixin Manufacturing PMI surprisingly down 2.1 points to 48.3 versus 50.7 expected. This is the lowest reading since October 2022.

China still needs to step up its stimulus, particularly in support of the consumer, to offset these impacts.

Markets

It was a good week for the Mag7 (ex-Tesla), with the AI narrative regaining some momentum, as:

• Taiwan’s TSMC spoke favourably about AI-linked demand.
• Meta struck a 20-year deal with Constellation Energy for nuclear power to support AI operations.
• The Wall Street Journal reported that Meta aims to have AI tools in place by the end of 2026 that would allow complete automation of the entire advertising process (including creating ads) – technology that could significantly disrupt traditional ad agencies.
• A report from private investment firm Bond Capital talked about the AI market growing to $244bn by 2025 and to $1.01 trillion by 2031.

In recent weeks, we’ve talked about how markets – despite trading at full valuations – seem well supported by technical drivers such as liquidity and slowing, but relatively resilient, economic growth.

This remains the case, but by some measures markets look like they have the potential to be more volatile.

Both long and short leverage is at a very elevated level historically. This leaves the net position balanced, but suggests the potential for outsized moves if there is a momentum shift as one side’s leverage is unwound.

There is a parallel of this in Merrill Lynch’s Bull & Bear Indicator, which is reading neutral, but under-the-hood components are sharply polarised with hedge fund and long-only positioning very bearish and credit market technical and equity market breadth very bullish.

So there is some potential for a pick-up in volatility, with tariff deadlines and deals a potential catalyst.

Another concern is that markets will underperform as hard data continues to slow in coming months. This risk is highlighted by the index of US Cyclicals versus Defensives pricing in economic growth well above current economic consensus.

This is clearly going to be a risk, but Goldman Sachs notes that in past recessions the market has rallied with the recovery in soft economic data, which leads the hard data.

We have already seen the weakness in the soft data and there are some signs of a rebound (e.g. consumer confidence recently rebounded 12.3pts to 98).

Also, the Cyclical versus Defensive reading may be exaggerated by the Healthcare sector – which is being challenged by government policy concerns – and tariffs hitting some normally defensive Consumer Staples.

More sector-neutral measures of economic sensitivity, like the High Operating Leverage versus Low Operating Leverage stocks index from Goldman Sachs, show High Operating Leverage stocks operating at a level more consistent with a recession.

The upshot is it seems more likely that trade policy, rather than the economic data, will be the main driver of potential volatility in coming weeks.

Australian market and stocks

The Australian market rose during the week, following the offshore lead – with banks and REITs leading the charge and defensives and resources underperforming, with iron ore declining and dragging down the latter.

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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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Cash rates finishing the year at 3.1% seems like a good bet, writes Pendal’s head of government bonds TIM HEXT. Here’s why

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THE GDP numbers for Q1 2025 were released today.

In volume terms, the economy grew by 0.2%. This leaves the annual rate at 1.3%.

Against population growth of 0.4%, we are once again back to the negative GDP per capita growth story seen over most of the past two years.

There was some dampening in mining and tourism from poor weather in Queensland and Western Australia, but the result will be a disappointment to the government and – more importantly – the RBA.

This is supposed to be the year that the primarily government-led growth of the past few years gives way for a resurgent private sector.

After all, tax cuts, rate cuts and positive real wages leave households with more cash to spend.

Public demand fell 0.4% in the quarter, led by a 2% fall in public investment. While we doubt it is the start of bigger falls, it will continue to taper off.

Private investment rose 0.7%, led by buildings and construction.

So far so good, in terms of following the script.

However, we the consumer are yet to come to the party. Household spending rose 0.4% but only really on essential items, partly offsetting reduced government subsidies.

It seems we are saving our income boost more than spending it – with the household savings rate rising to 5.2%, the highest since the pandemic.

It seems unlikely that this will change anytime soon as the trade wars won’t exactly fill consumers with confidence.

A couple of other points to note.

There were still no productivity gains, with productivity being flat for the quarter and actually 1% lower over the year.

Also disappointing was the lack of consumer growth in NSW and Victoria, where consumers should have responded more positively to income gains.

Cash rate implications

GDP always lags data, but the weaker trend is unlikely to change a lot in the current quarter.

Overall, the RBA was expecting growth to be at 1.8% by the end of June. This forecast only came out two weeks ago. Q2 last year was 0.2%, so the central bank would need to see a 0.7% result for Q2 this year.

While we expect growth to continue to pick up, it is likely GDP will be closer to 1.5% by the end of June and below the RBA’s 2025 forecast of 2.1% by year-end.

We were expecting the RBA to hold off till August to cut rates, in line with its quarterly CPI cycle.

However, recent consumer data (retail sales, household spending, and GDP) now suggests the RBA will cut in July to give the consumer a further boost to pick up their spending.

Cash rates finishing the year at 3.1%, or around their estimate of neutral, seems like a good bet.

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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.

Contact a Pendal key account manager

Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund

FALLING bond yields, decent earnings from Nvidia and a US court ruling against some of the Trump Administration’s tariffs combined to support equity markets last week.

The latter ruling is under appeal and tariffs will remain in place through that process. However, there is a perception that this may reduce the Trump Administration’s bargaining power and possibly lead to a lower tariff outcome.

There are other mechanisms for applying tariffs (detailed later in this note), so this process is unlikely to make a major difference to the ultimate tariff rate, in our view. The key issue remains whether we see negotiated outcomes that help reduce the end tariff rate.

The rally in bonds diffused some of the concerns that the rise in long-dated bond yields would derail equity markets.

At the same time, Nvidia’s outlook was constructive, and underpinned the recovery in AI and technology stocks last week.

The S&P 500 rose 1.9% and finished up 6.3% for May. The ASX 300 was up 0.9% and 4.2%, respectively. Both markets are now up over the year: 1.1% for the S&P 500 and 4.9% for the ASX 300.

Growth stocks, some domestic cyclicals and a recovery in the energy sector helped Australian equities last week.

Impact of the tariff ruling

Our first observation is that the timing of the US Court of International Trade (CIT) ruling caught the market by surprise – it was not expected this soon.

The second observation is that the CIT, while not well known, is held in high regard by legal experts, with a specific remit and technical framework and specialised jurisdiction over civil disputes related to US customs and international trade laws.

It found no legal defence for the Trump Administration’s implementation of the 10% reciprocal tariffs – and those levied on Mexico, Canada and China with regard to fentanyl and border security – under the International Emergency Economic Powers Act (IEEPA). The Court issued a permanent injunction blocking enforcement of the tariffs.

The government immediately appealed the decision and the US Court of Appeals ruled that the tariffs could remain in place while that process plays out.

The legal consensus is leaning to the view that the Appeal court will uphold the CIT ruling, which would then see the matter go to the Supreme Court, which may not rule until after their summer recess.

In reviewing this matter, the Supreme Court will be mindful that over-ruling the CIT could call previous rulings and cases relating to intellectual property and other matters into question, prompting further consequences.

Also, when the Supreme Court ruled on upholding the TikTok ban in January, it cited two previous IEEPA cases which emphasised that the President can’t assert authority on the basis of national emergencies that aren’t genuine and extraordinary – and that the impact of the remedy must be proportional to the threat.

So, there is a reasonable chance this may prevent the Trump Administration from using the IEEPA path. However, there are other paths that the Administration can take:

1. While the Appeal is pending, these tariffs can remain in place.
2. If suspended, then the President has authority to impose tariffs up to 15% for 150 days to address trade deficits, under section 122 of the Trade Act of 1974. This could be applied within days/weeks.
3. The Administration could launch investigations to lay groundwork for new permanent tariffs under Sections 232 and 301 of the same Act. While more time consuming, they can be expedited and probably undertaken during the 150-day period while Section 122 tariffs are in place.
4. There is an existing Section 301 tariff already in place on China, which can be used to increase tariffs.

So, while the CIT ruling notionally takes average tariff rates down from 14% to 6%, at this point we would still work on the premise that tariffs end up in the 14 to 18% range.

The other issue to watch is the bilateral negotiations between the US and other countries. Treasury Secretary Bessent noted that two are close to agreement and that two more are proceeding but are more complicated.

So, we could find that the bulk of trade is covered off by bilateral deals by the time the legal process is over.

There was further negative news over the weekend, as President Trump announced that steel and aluminium tariffs would be raised from 25% to 50%.

It is unclear if this will be followed through; this may be Trump trying to re-assert his credentials in response to the surge in TACO (“Trump Always Chickens Out”) memes.

We also note a deterioration in the tone of discussions between China and the US, with both sides accusing the other of breaking the spirit of the recent Geneva agreement.

The upshot, in our view, is that tariffs are an important part of the Trump Administration’s five-pronged strategy to re-industrialise the US economy – the other four being tax cuts, deregulation, cheap energy and a lower US dollar.

As a result, we should assume they find a way to apply them.

However, there is a risk that the legal wrangling weakens their bargaining position and delays the signing of bilateral trade deals.

“Big beautiful” budget bill process

There was nothing much new last week. As the bill marinates, there is an increasing sense that Congress will look to roll back some of the measures given the concerns over the fiscal deficit.

This could make it harder to reach final approval, which may mean it is not in place by mid-August when the debt ceiling needs to be lifted.

As it stands, the Bill does front-end stimulus measures – such as a US$4k tax breaks for retirees, no tax on tips, and increased tax credits and a baby bonus for people having children.

These would kick in around April next year and Goldman Sachs estimates this could add 1% to GDP in H1 2026.

This would coincide with the German fiscal stimulus, and potentially affects the duration and scale of the current monetary easing cycle.

Growth and inflation outlook

The Core Personal Consumption Expenditures (PCE) deflator – a measure of inflation – was helpful, coming in at 0.12% for April which was in line with consensus. It was 2.5% year-on-year, with services inflation decelerating.

This is likely to be the low point in inflation, however, with the spike from tariffs set to hit from late May through to October. Annualised inflation over those months may reach 6%.

In this case, the PCE could rise to 3.5% year-on-year by the end of 2025, versus a Fed target of 2%.

That said, this is a wildcard given no one knows how large the tariffs will ultimately be – and how much of the impact companies will pass through.

It is important to remember that this is a one-off impact – and the Fed has historically said it does not see tax-driven inflationary impulses as a reason to react as it is transitory.

Given greater slack in the labour market, there is less reason to expect this to trigger an inflation spiral.

There are also offsetting factors with the hit to GDP later this year – estimated to be from 1.0% to 1.5% – leading to slower services inflation, offsetting the traded goods inflation.

Elsewhere, real disposable income rose 0.7% in April after rising 0.5% in March, highlighting that there is still good support for consumers. The savings rate has risen from 4.3% to 4.9%, reflecting a more muted rise in consumption in April (up 0.1% month-on-month).

The conclusion is that the US consumer remains in decent shape to absorb the impact of tariffs.

The Atlanta Fed GDPNow is signalling Q2 2025 growth of 3.8% and we are now seeing Wall Street beginning to follow; JP Morgan lifted its forecast to 4% – a lot of this is the unwind of the negative trade impact of Q1.

The average growth for H1 2025 will therefore come in at around 2%, which is probably the right signal for the run-rate going into the tariff shock and which should pull growth down to around 1% by Q4.

The most important read on the US economy is jobs as this drives income. Interestingly, it is also important for the equities market, with the strength of 401K inflows providing important liquidity.

There is a small sign of deterioration here as continuing claims are ticking up and have hit a cycle high. Payroll data is out this Friday.

Markets

The US market reacted well to the Nvidia result, which saw revenues up 12% quarter-on-quarter, beating consensus by 2%.

The important message was that shipments are picking up as supply chain constraints ease and demand remains good, which will help drive gross margin expansion.

It suggests there are no signs of weakness in the market for its graphic processing unit (CPU) chips, reinforcing the message from data centre hyperscalers (the largest users of data centre capacity such as Amazon, Microsoft and Google, among others) that capex is holding up.

There is also more focus now on the application layer for AI – for example, AI assistants on mobile phones – which will provide more confidence that the investment being undertaken can begin to be monetised.

This completes the earnings season for the Mag 7, which has proven to be one of the best in terms of revisions.

This, combined with a large underweight in tech among US hedge and long-only funds, helps explain why the market has been supported by the tech sector.

Australia

The S&P/ASX 300 returned 4.2% in May, driven by Technology (+18.8%).

Energy (+8.7%) and Small Resources (+10.1%) also outperformed on reduced concern over the risk of recession. Financials (+5.1%) did well, driven more by the insurers and market sensitives rather than the banks.

Defensive sectors such as Utilities (+0.3%) and Consumer Staples (+1.2%) lagged, having done well in April, while Health Care (+1.4%) was also weak on lingering concern over tariffs.

Large-cap Resources (+3.1%) also underperformed, with the outlook for iron ore seen as more subdued.

May also saw a mini-reporting season, which went reasonably well.

Results from Life360 (360, +51.9%) and Technology One (TNE, +36.8%) led the market higher, while the rest of the tech sector followed the US lead – with WiseTech (WTC) +21.1% and Xero (XRO) +12.2% on a good result.

Domestic cyclicals such as Qantas (QAN, +19.9%), Nine Entertainment (NEC, +12.9%) and Seek (SEK, +14.1%) also outperformed, helped by the RBA’s 25bps interest rate cut and its positive signalling on future cuts, as well as Labor’s election win which underpins government spending.

Industrials generally did better – notably Dyno Nobel (DNL, +18.1%) and Orica (ORI, +15.7%) on decent results supported by capital management.

Banks (+4.4%) were in line with benchmark, but this hid a more material divergence – with Commonwealth Bank (CBA) +5.6% and National Australia Bank (NAB) +5.2%, while ANZ (ANZ) was -2.8% and Westpac (WBC) was -0.9%.

Aggregate bank valuations remain at extreme levels, with the sector trading at almost four standard deviations above long-term price-to-earnings (P/E) and price-to-pre-provision-profit levels.

However, the bulk of this is now the CBA premium over the rest of the big four banks – this has reached record levels at 13 P/E points (23x versus 15x for the other “Big Three”) and is the best representation of the distorting effects of index weights.

Overall, the S&P/ASX 200 has returned to the top end of its historical valuation band at around 18x, which limits the valuation-driven upside from here and means the market will be earnings driven.

The positive here is that FY26 earnings-per-share growth is currently expected to be 6.9%, with resources finally no longer being a headwind.

The current valuation rating does make the market vulnerable to a deterioration in earnings. This looks unlikely in the next few months, however, given the solid economic outlook and supportive fiscal and monetary policy.

Inflation this month was broadly in line with expectations, while retail sales was a bit soft (-0.1% month-on-month, possibly tied to the election) which helps underpin expectations for RBA cuts.

The July meeting remains live for a cut, with the market at 60% probability, with two more cuts expected by year end.

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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’s what the latest inflation data means for markets, according to Pendal’s head of government bonds TIM HEXT

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HAS a two-year disinflation trend in Australia finally come to a halt?

Today we received the Monthly CPI series for April. The headline numbers show prices 2.4% higher in April compared to the same period last year – the same as February and March.

The monthly trimmed mean (which removes the most extreme price movements to show the broader trend) was 2.8% – a small uptick from March.

Source: Monthly CPI indicator rises 2.4% to April 2025 | Australian Bureau of Statistics

As reminder, the monthly series tracks around 60 per cent of prices every month, 30 per cent every three months (varying by months), and 10 per cent once a year.

Therefore, the series can be volatile and is still not fully trusted by the RBA.

In her last press conference, Governor Michele Bullock reminded us once again that the RBA relies heavily on quarterly numbers.

The second quarter is young, but our early forecast for the quarterly inflation numbers released on July 30 is 0.8% for both headline and underlying.

What’s driving disinflation

There have been three main drivers of disinflation over the past two years.

Firstly, the most clear and obvious is the passage of time as we exit from pandemic supply shocks in many areas. It took a bit longer than we would have liked, but it did happen.

Secondly, monetary and fiscal policy have been contractionary. Added to this were government subsidies across several key areas at federal and state level.

Thirdly, as inflation fell, so did wages, creating a positive downside loop between the two and reversing the opposite from 2021 to early 2023.

However, all these have now either run their course or may even be heading in the opposite direction. Rates are coming down, fiscal policy is expansionary again, and there are few – if any – additional supply levers to pull.

From here, we expect services inflation to become very sticky around 3.5%. In fact, the risk is that services move a bit higher, with 4% more likely than 3%.

New dwelling costs (as measured by project homes) have been flatlining despite higher building prices. Margin pressure will see inflation resume there shortly.

Health inflation looks too low given actual costs, with health providers being squeezed as the government leans on health insurance costs.

And will private schools move back from 6% fee hikes to 3%? Unlikely.

Against this is an expectation that tariff wars may mean China and others move supply to Australia, seeking more demand through discounting. Goods prices have been growing around 1% in recent years and, with weaker commodity prices, may begin to flatline or even fall.

It is the only hope for inflation falling significantly further from here. We are, therefore, neutral on inflation at these levels.

Current levels do allow for more rate cuts – however, we do not share the narrative that the RBA has declared victory on inflation and is keen to get cash rates back to neutral (read 3%) sooner rather than later.

This narrative was fuelled by the governor’s recent comments, seeing markets currently price a 60 per cent chance of a July cut.

We think the RBA will still wait for quarterly inflation numbers to greenlight cuts and see August and November cuts as more likely.

Either way, we are still surprised to see Australian bonds above 4% and continue to favour long-duration positions.

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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.

Contact a Pendal key account manager

Here are the main factors driving the ASX this week, according to analyst and portfolio manager ELISE McKAY. Reported by head investment specialist Chris Adams

• Find out about Pendal Focus Australian Share fund
• Find out about Pendal Horizon Sustainable Australian Share Fund

WE expect markets to remain volatile and headline-driven in the short term, with risk assets vulnerable to further pressure if bond yields continue to rise, tariffs re-escalate or employment data deteriorates. 

That said, the underlying economy and corporate earnings remain resilient – particularly in Australia and the US. 

Weak oil prices, a softer US dollar, and the potential for fiscal stimulus also provide a supportive backdrop. 

Investor positioning remains cautious. We expect the market to continue favouring relative trades over outright directional exposure until there is greater clarity on US fiscal policy and monetary path. 

This reinforces the need for balance in portfolios.  We continue to favour domestic and services-based exposures that are insulated from tariff uncertainty.

Last week’s market moves were driven less by macro data and more by a series of headline driven shocks: from tariff escalation and the Moody’s US downgrade to market volatility and the narrow passage of the “Big Beautiful Bill” of tax cuts and other reforms through the US House of Representatives. 

This drove the S&P 500 down 2.6%, while the NASDAQ lost 2.5%. European markets were holding up well until Friday’s tariff headlines which pushed the Euro STOXX 50 down 1.6% for the week.

In Australia we saw the Reserve Bank cut another 25bps with surprisingly dovish commentary. The S&P/ASX 300 was flat at +0.3%.  

We’ll see a key test for AI sentiment on Wednesday when AI chip-maker Nvidia reports.

Market moves

The challenge to US exceptionalism continued last week.

Multiple developments shaped markets despite macro data suggesting the economy remains in reasonably good shape.

We saw a “bear steepening” of the bond yield curve, where long-end yields rise faster than the front end. 

This occurred due to:

1. Weak long-term bond auctions in the US and Japan, reflecting growing investor concerns over fiscal sustainability and rising interest rates. On May 21, the US Treasury’s US$16 billion auction of 20-year bonds was met with tepid demand and were sold at yields >5% (the highest since 2020). Japan then faced similar issues regarding investor appetite at their 10-year government bond auction on May 22.
2. Increasing concern over fiscal deterioration driven by the prior week’s Moody’s downgrade and by the cost of the Big Beautiful Bill.
3. Repricing of long-term sovereign risk driven by uncertainty and challenges to the strength of US institutions.

The US 30-year bond is at 5.04% – the highest level since October 2023. 

 

Markets are more sensitive to the pace of yield moves rather than their absolute level. With a >2 standard deviation (ie 60bps) move in May alone, pressure builds as the yield on the US 10-year bond approaches 4.7% (versus 4.54% on Friday). 

A bear steepening is often particularly damaging for risk assets since it reflects rising term premia rather than growth optimism. 

In other words, long-end yields are rising not because investors expect stronger economic activity – but because they are demanding greater compensation for holding duration amid fiscal uncertainty, inflation volatility and weakening institutional credibility.

This repricing of risk raises discount rates, compresses equity valuations (especially for growth stocks) and can crowd out flows from risk assets into higher-yielding, perceived safer alternatives like long-dated government bonds.

US equities

US equity market breadth is now very poor and hedge funds remain highly active with gross leverage at 212%. But a modest 48% net exposure suggests positioning remains heavily relative rather than directional.

This suggests we are still operating in a wait-and-see environment with elevated crowding risk and the potential for forced de-risking if volatility continues to move up. The CBOE volatility index (“the VIX”) advanced more than 20% last week to 22.3.

Flow data supports this cautious stance.  Hedge funds were broadly flat on the week, with long buys offset by short covering, indicating limited directional conviction.

Gross activity picked up (particularly in macro products). However, flows were balanced and risk appetite muted as higher yields and a lack of new catalysts kept positioning tight.

The only notable tilt was into mega-cap tech over unprofitable tech, with GOOGL a standout outperformer amid improving tactical sentiment. 

Meanwhile, long-only funds were US$2 billion net sellers, reinforcing the defensive tone.

ETF short covering and selective single-stock buying in defensives (health care, utilities) further points to a market rotating within risk rather than embracing it.

Australian equities

The Australian market was flattish last week but we saw high dispersion – ideal conditions for active management. 

There was also significant style reversal with momentum, low volatility and size (large caps over small caps) among the best performing factors, while investor conviction in cyclicals was weak. 

This suggests a changing macro/sentiment backdrop and highlights the importance of staying on top of flows and maintaining agility across the portfolios. 

The outperformance of large caps suggests FX-related flows into Australia continues. 

Global equities

Data from researcher Vanda suggests investors are still more underweight US equities than historical trends, while more modestly overweight Europe and sentiment towards Japan continues to improve.  

The shift away from US equities has slowed, but last week’s headlines raise the question of whether this trend could reaccelerate. 

The US market as a percentage of the MSCI AC World Index peaked at 67% on Christmas eve 2024 – signalling peak US exceptionalism may now be in reversal.

A continuation of equity flows from US to the rest of the world supports further US dollar depreciation – which is what the Trump administration apparently wants.

A weaker USD would help the Trump cause. Not only would it reduce the US current trade deficit (albeit on paper), but it would also help support US manufacturing as exports become more cost competitive. 

Unsurprisingly, the trade-weighted US dollar index (the DXY) moved down 2% on last week’s news (while gold appreciated 5.7%) and options traders are betting on further declines.

What were the big headlines that impacted markets?

1. US Supreme Court rules in Trump’s favour

On Thursday the US Supreme Court issued a temporary ruling that blocked attempts by lower courts to stop the Trump administration removing the heads of two independent labour boards.

This suggests the court will likely support expanded presidential power in coming decisions. 

Trump believes in the concept of “Unitary Executive Theory” and the president having sole authority within the executive branch, enabling actions such as firing independent agency leaders, implementing tariffs, deregulating outside of the Advance Pricing Agreement (APA) framework, and impounding congressional funding. 

The court’s order explicitly excluded the Federal Reserve from this challenge (ie to protect Fed independence), noting its unique structure and historical precedent.

However, a dissenting opinion accompanying the ruling raised concerns the distinction was tenuous. 

A cornerstone of US exceptionalism has long been the strength and independence of its institutions.

This development suggests further erosion of that perception, raising US sovereign risk and supporting capital rotation away from US assets.

2. Big Beautiful Bill approved by the House

Later that evening, the “Big Beautiful Bill” narrowly passed the House (215-214 vote) and now heads to the Senate.

It includes measures to extend and expand the 2017 tax cuts, eliminate taxes on tips and overtime pay, and increase the state and local tax (“SALT”) deduction cap from $10,000 to $40,000 for married couples earning up to $500,000. 

To offset these tax cuts the bill proposes reduced spending, including stricter work requirements for Medicaid and the Supplemental Nutrition Assistance Program (“SNAP”).   

The Senate is aiming to pass a modified version by July 4. But there is risk that proposed spending cuts are watered down, potentially increasing the cost of the bill. 

Any material increase in the deficit could face resistance in the House, where fiscal conservatives have the leverage to block a final version.

Prior to last-minute amendments, the Bill’s implied cost was estimated by the Congressional Budget Office at US$3.8 trillion over 10 years (excluding tariff revenues).

While the bill contains tax relief elements, it is not yet clearly stimulatory for the economy or US consumers, given several offsetting provisions.

Citi estimates the Bill could actually reduce the fiscal deficit slightly in calendar 2025 (from -6.6% in 2024 to -5.7%) before widening it again in 2026 to -6.3% as tax cuts take effect. 

Evercore estimates the median household would receive a US$850 tax cut in the form of enhanced tax refunds in Q1 2026. Corporates could receive some tax relief in late 2025. 

This is equivalent to about 0.8% of GDP in 2026. 

3. Tariff uncertainties continue

On Friday, President Trump threatened a 50% tariff on imported goods from the EU effective from June, and a 25% (or more) tariff on Apple iPhones and smartphones made overseas, beginning late June. 

Apple declined only 3% on Friday, suggesting the market now sees Trump’s threats as part of the negotiation process. 

Tariffs on EU imports were originally set at 20% and paused for 90 days to allow for negotiations – which are not proceeding at the pace Trump would like. 

The EU negotiation is likely one of the toughest given the trade issues raised by Trump are structural and hard to address (eg the VAT, high levels of regulation). 

But other countries are also taking their time, with the 90-day pause to expire on July 9.

The closer we get to this date without conclusion, the higher the uncertainty for markets. 

A baseline 10% tariff remains in place, along with some specific product tariffs (eg auto). There could be a scenario where higher tariffs are implemented, even if just for a period, before negotiation is reached. 

The conclusion is that we are not yet out of the woods despite the current market reprieve. 

European equities sold off on Friday. The Euro strengthened 0.8%, illustrating that trade uncertainty affects earnings growth and continues to favour shifting assets out of the US.

US macro data

Fundamental data continues to suggest a robust economy with recession fears abating.

Polymarket now puts 2025 recession odds at <40%, down from a peak of <60% after “Liberation Day”.

Manufacturing and services purchasing managers indices (PMIs) were stronger than expected in May with the flash composite PMI rising to 52.1 (versus consensus at 50.3).

This reversed about 50% of the drop in April and suggests the economy is holding up well despite tariff uncertainty, so far. 

Prices did increase, albeit more pronounced in the manufacturing sector and the price of goods – potentially making it easier for Fed officials to argue tariff impacts are transitory.

The labour market was largely as expected, with initial jobless claims at 227,000 and continuing claims at 1.9 million. 

The housing sector is at risk of further slowing.

Mortgage rates are heading back up and weak readings on single family permits and starts, soft existing home sales and a sharp decline in the National Association of Home Builders (NAHB)/Well Fargo sentiment indicator from 40 to 35. 

Rising supply and softer demand should contribute to slower house price increases and hence slower core inflation. 

The many moving parts – and no obvious deterioration in the labour market – support the Fed’s wait-and-see approach to rates, with the probability of rate cuts being pushed out compared with the start of the month.

Reserve Bank of Australia cuts

The RBA delivered a second rate cut this year, lowering the cash rate to 3.85% alongside dovish guidance. 

Governor Bullock emphasised that inflation was now expected to remain around the midpoint of the 2-3% target range for much of the forecast period.

GDP growth forecasts were revised down from 2.4% to 2.1% for 2025 and the unemployment rate forecast increased to 4.3%. 

Markets responded by pricing in the possibility of up to three further cuts by the end of the year, with a 65% probability of a cut in July.  

Markets

In Australia we saw gold miners, communication services and tech stocks outperform, while energy was the laggard. 

Gold was back up at US$3363/ozt (A$5196/ozt), demonstrating its safe-haven attributes. It is the highest-performing asset class in 2025. 

This is great for the gold miners, which now account for 16.4% of the S&P/ASX Small Ordinaries. Eight of the largest 20 small caps are gold names. 

This contrasts with oil, which is the worst-performing asset class in 2025. Downside risk to the oil price remains. 

OPEC meets next week on June 1 and members are discussing making a third consecutive oil production increase in July. 

An output hike of 411,000 barrels a day for July – three times the amount initially planned – is apparently one of the options. 

We are watching this stark divergence between gold and oil carefully, mindful of the risk of a reversal.

Chip-maker Nvidia reports this week, marking the last of the Magnificent 7. 

Excluding Nvidia, Mag7 Q1 earnings grew by 28% YoY (versus 9% for the remaining 493 companies in the S&P 500), which was +16% ahead of consensus estimates. 

An Evercore survey of some 150 public and private US companies suggests AI adoption is accelerating. It is now at about 15% adoption and on track for 25% by year-end.

 This trend continues to support sentiment toward Australian AI-leveraged names such as data centres.

 

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About Elise McKay and Pendal Australian share funds

Elise is an investment analyst and portfolio manager with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.

She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.

Pendal Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.

Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.

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

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