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

• Overall, the US economy looks “robust”
• Early earnings season shows expectations high but still being met
• Find out about Pendal Focus Australian Share fund

MARKETS have been positive, following a soft US Consumer Price Index (CPI) print and robust economic data in the US, China and Australia.

This would provide a positive setup for equity markets – except for the uncertainty surrounding the Trump administration, which takes office this week.

There is potential for unpredictability and market volatility on the back of announcements on tariffs, undocumented immigrants and government spending.

It is a broad range of outcomes, which supports having balanced portfolio positioning.

The S&P 500 rose 2.9% and the S&P/ASX 300 0.2% over the week.

From a portfolio perspective, the combination of (i) yields having peaked, (ii) global economic growth remaining robust and (iii) China turning a corner could see a reversal of some of the dominant investment themes from CY24.

US CPI

December’s CPI week print was dovish, with the Core measure up 0.2% month-on-month (MoM), the lowest rate since July, compared to consensus at 0.3%. The year-on-year (YoY) rate was 3.2%.

Global bond yields had been rising consistently into this report, so the outcome was contrary to market positioning and saw a fairly sharp reversal in yields.

Headline CPI rose 0.39%, as energy prices rose 2.6% and food prices rose 0.3%.

Digging into the details:

• Goods inflation eased back (up 0.1% MoM) and is trending at a low level. Used cars and trucks are a key driver, with core goods inflation ex autos down 0.1% MoM. With CPI auto price indices catching up to market-based indices, we may see a slowdown in growth. Some of the goods components that serve as source data for core Personal Consumption Expenditures (PCE) – the Fed’s preferred inflation measure – fell sharply this month (e.g. major appliances down 4.1%), possibly reflecting larger-than-usual holiday sales. We saw a similar pattern take place last year, which was reversed early in the new year.
• Services inflation ex-Owner’s Equivalent Rent (OER) was up 0.2%, the lowest level since June, with stronger airfares (up 3.9%) offset by a decline in hotel/motel pricing (down 1%). Medical care services inflation moderated, with prices rising 0.2% this month (versus 0.4% last month). Trend services inflation appears to be easing after an acceleration earlier in 2024. 
• OER/Rent bounced back to 0.3% MoM, which comes after a surprisingly weak November print. Zillow’s observed rent index is showing a rising MoM trend in recent months.

The CPI print followed a likewise benign US PPI print for December earlier in the week, up 0.2% MoM.

The Fed’s Governor Christopher Waller’s comments were dovish, noting that the CPI data was “good” and that “as long as the data comes in good on inflation or continues on that path, then I can certainly see rate cuts happening sooner than maybe markets are pricing in.” 

Waller went on to note that if the US makes “a lot of progress” then three or four more cuts could be delivered, but if the “data doesn’t cooperate, then you’re going back to two and going maybe even one.”

Overall, this print shows inflation that is generally stabilising at a level a little above the Fed’s target range. It is a bit of a goldilocks outcome for markets, as it averts the risk of too-hot inflation leading to higher-for-longer interest rates – but equally not seeing the deflation that might accompany a cooling economy.

President Trump’s tariffs may, however, muddy the waters on goods inflation.

Commodity prices

The global rally in commodity prices over the past month and a half is a fly in the ointment for the dovish inflationary view.

Oil price is a big driver, with brent crude up 8.9% year-to-date, while copper (up 10.6%) and agricultural prices have been rising strongly as well.

Resources was broadly a one-way trade to the downside in CY24; positioning almost certainly started the year quite short, accounting for some of the aggressiveness of the pricing move.

Risk/reward may be moving to the upside, with China positioned to stimulate in response to any tariff moves and a better-looking starting position.

Other US macro data suggesting a robust economy

US Retail sales were solid. Headline sales rose 0.4% MoM (below consensus) and control group sales (excludes gasoline, autos, food and building materials and feeds into GDP estimates) were up 0.7% MoM (above consensus).

Strength was broad-based across categories, though strong sales for Durables in the December quarter may reflect some buying by consumers ahead of potential tariffs.

The Philly Fed Survey was stronger than expected (+44 in January versus -12 in December), but the Empire Manufacturing Survey was weaker (dropping to -12.6 from +2.1 in November and +3 expected).

These surveys were attributed as being drivers of market behaviour on individual days during the week but are more likely to just be noise.

US Industrial Production rose 0.9% in December (well above consensus expectations of 0.3%), with manufacturing output up 0.6%. There was a degree of “catch-up” in these numbers with a Boeing strike ending.

Weekly employment claims were stable on a seasonally adjusted basis. Unadjusted numbers were quite weak – something to keep an eye on. The perma-bears believe lead indicators for the labour market are deteriorating.

 

US housing construction

There was some positive news on US housing construction – an important lead indicator for the economy – last week, starting with the pullback in bond yields and mortgage rates from recent highs following the CPI release.

Sentiment has been very negative over the past couple of months for homebuilders, but December new housing starts weren’t as bad than feared. Single family starts were down 1.4% YoY in December after being down 10.5% in November, while multi-family starts were down 5% after being down 30% in November.

KB Home was the first listed homebuilder to report its quarterly last week.

After a super strong November quarter with orders up 40%, new orders were down 12% YoY in the first six weeks of the company’s February quarter. However, it guided for its February quarter new orders to be flat YoY as new communities came online, which is much better than feared.

Finally, the key sentiment survey for the homebuilders sector, the NAHB Housing Market Index, was up one point in the December quarter (versus the September quarter) to 47 points, despite the increase in bond yields. But within that, the Future Sales Index declined to 60 from 66 last month.

The outlook for Repair and Remodelling (R&R) is looking better after a weak couple of years.

The Remodelling Market Index jumped to 68 in the December quarter versus 63 in the September quarter. The improved R&R outlook appears to be supported by a return to YoY growth in existing and pending home sales.

Pulling this together, there is a fair bit of evidence that the outlook for US residential construction, while softer, is not as bad as feared, which supports a view of a still-robust US economic outlook.

Early US reporting season read

Overall, the US economy looks robust, which is supportive for earnings. Broadly speaking, expectations are high but are being met.

It was banks reporting in the US last week. There were strong results from the investment banks and money centres, with JP Morgan, Citi, Wells Fargo and Goldman Sacks beating on EPS and providing better-than-expected 2025 guidance.

The key Trading, FICC and Equities divisions are all doing well and the credit environment remains benign, with provisions coming lighter than expected.

Regional banks underperformed during the week, including PNC and US Bancorp, with less-bullish guidance looking soft compared to the investment bank outlooks.

There was a small hiccup for the Chip/Data centre stocks, with Nvidia declining after press reports that some of its biggest data centre customers were cutting back on purchases of Nvidia’s Blackwell racks after initial shipments of the product had some glitches.

Insurance stocks were weaker given estimated economic costs from the LA wildfires coming in at $150 billion, one of the costliest natural disasters ever.

Australia

The unemployment rate rose by 0.1% to 4.0% in December due to a higher participation rate, but jobs growth was very strong (up 56k versus consensus expectations of 15k). This was largely driven by part-time jobs.

Unemployment of 4% is below the RBA’s year-end forecasts for 4.3% and measures of labour market spare capacity, such as underemployment and hours worked, are showing tightening not loosening.

MYEFO estimates suggest government opex increasing 10% for FY25, suggesting continued strong support for employment.

Consequently, the prospects of rate cut prospects in February look slim despite several investment banks calling for one. It will require a surprisingly soft Q4 CPI print to be released on 29 January.

China – signs of life

The view on China remains wait-in-see ahead of Chinese New Year, major economic meetings in March, and the expected announcement of the Trump Administration’s tariff plans.

Having said that, the data from last week was generally more positive.

GDP growth rebounded to 5.4% YoY in the December quarter, with activity driven by better-than-expected retail sales (up 3.8% YoY in December) and exports (up 10% YoY), though strength in the latter may be linked to inventory building ahead of prospective tariffs.

Property sales and investment continue to cool, but manufacturing and infrastructure investment were robust.

Chinese credit growth picked up in December, with Total Social Financing up 47% YoY – taking the three-month trend to 8%, driven by government bond issuance. Private sector borrowing remains subdued.

More recently, credit growth has turned a corner after a very weak first half of the year.

In residential property, floor space sales were down 0.3% YoY and starts were down 23% YoY in December.

FY24 property starts were the lowest in nearly two decades. The stabilisation in sales over the past few months is a positive sign, but the lags to activity are long.

House prices are also showing signs of stabilisation.

---

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  

Contact a Pendal key account manager

To cut or not to cut? Pendal’s head of government bond strategies, TIM HEXT, explains what information the RBA needs to make a decision

• Join our webinar: How to prepare for rate cuts in a shifting global economy
• Browse Pendal’s fixed interest funds

WE are just over a month away from the next RBA meeting, the first of the year.

The information the RBA will need in order to decide on a rate cut is now falling into place. Let’s look at what we know and what pieces of the puzzle are left.

Employment and wages

Today’s employment numbers were the last before the meeting, with January’s numbers not coming out till 20 February.

An unemployment rate of 4% for the end of 2024 is definitely lower than the RBA (and nearly everyone else) expected. The RBA had forecast 4.3% by now. This, of course, counts against a rate cut but is not the end of the story.

What matters more is where full employment is, and this is not something scientific.

The US Federal Reserve believes its full employment to be around 4%, so were happy to start a rate cut cycle despite overall strong job markets.

The RBA has previously suggested that full employment here was closer to 4.5% but – as always – it is an educated guess. What is the main observable indicator? That would be wages.

On this front, the news has been far better. Wages look to be settling down nearer 3.5% than 4%, suggesting that full employment may also be closer to 4% than 4.5%.

The only large pocket of elevated wage claims seems to be public sector unions playing catch up, as their wage agreements always lag inflation.

So, on the employment and wages front, the RBA will need to work out just how much excess demand is in the job market – one still largely fuelled by the public sector.

In summary, the job and wages market is not a reason to cut, but may also prove not strong enough to stop one.

Inflation

The Q4 2024 inflation data does not come out till 29 January, but we already have around 70% of the data and a good idea on most of the rest.

We anticipate market expectations to be at 0.3% headline and 0.6% underlying for the quarter.

Clearly, government subsidies are artificially depressing headline numbers, but that is not the only news.

In the housing sector (23% of CPI), two stars of the inflation surge in 2022 and 2023 – new dwelling costs (9% of CPI) and rents (6% of CPI) – are also moderating. We expect rental cost growth to be down from 9% in 2024 to nearer 6% and for new dwelling costs to settle nearer 4%, having peaked around 10%.

This should help keep services inflation nearer 4% than 5% which, in turn, allows inflation to settle around 3% – the RBA forecast for June 2025. The fact is that inflation is somewhat circular, so as goods prices have fallen and subsidies have lowered other costs, then overall pressure comes off.

Most importantly, as consumers feel less of a cost-of-living squeeze, they are less likely to push for higher wage outcomes.

In summary, high inflation is now past us, inflation is moderating near 3%, and the need for rates up at 4.35% has now passed.

Growth

We won’t have Q4 growth numbers till early March, but we all know the story of sluggish growth, only held up and partly squeezed out by high public spending.

The RBA is forecasting a decent rebound in GDP, expecting 2.3% in 2025 after around 1% in 2024.

Growth has not been the factor keeping rates high, but rather a lack of supply in the key government areas of healthcare and social services and construction.

Unfortunately for the RBA, both state and federal governments have shown little drive to restrain their spending further. This could mean 2025 is likely to be another year where the private sector needs to make way for the government sector.

Either way, growth numbers are unlikely to be a major deciding factor for the RBA in February.

Putting the pieces together

I have avoided discussing international factors, such as Trump’s early weeks. In what might be a close decision for the RBA, these factors may yet play a part but will not be the main game.

The main game is that inflation is now back towards the top end of the RBA’s inflation range, meaning there is now space for moderate cuts.

We expect 0.25% in February (70% priced in) and 0.25% in May.

Cost-of-living relief for mortgage holders will be very welcome (especially by Albanese) and is unlikely to unleash any inflationary spending surge. In fact, the big spenders last year were retirees, pumped up with their 5% term deposit rates and strong equity markets.

I am sure they will survive on 4.5% term deposits.

---

About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here

---

About Pendal

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

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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
• Tune in: register to watch Crispin’s Beyond the Numbers webinar

MARKETS have started off the year on a weaker note, with the “US exceptionalism” theme seeing an increase in bond yields.

US two-year yields are up 14 basis points (bps) and 10-year yields up 19bps year to date. The move in bonds has been driven by some combination of:

• Signs of inflation basing out and turning higher
• Perceptions that US economic growth is stronger than expected, exemplified in US payroll data
• Building concerns that Trump’s policies will reinforce growth and inflation issues
• Some circumspect comments from the Fed on the rate cycle
• Structural fiscal deficit concerns affecting term premiums

We have also seen an impact on currencies, with the US trade-weighted dollar index up 0.6% year to date.

Equity markets have struggled when US 10-year bond yields move over 4.7%. They are currently 4.8%, which explains the small recent sell-off.

The S&P 500 was down -1.9% last week and -0.9% for the year to date.

Australian equities have held up better, with the S&P/ASX 300 up 0.5% last week and 1.6% year to date.

There is a perception that the US Federal Reserve (the Fed) declared victory over inflation too early, with bond yields up 115bps since the 50bp interest rate cut in September.

There are, however, some self-correcting mechanisms as the rise in yields potentially slows the economy, with some data points indicating this may already be beginning to play out.

Equities have also been affected by strength in the US dollar, which is back to three-year highs on a trade-weighted basis.

This partly reflects the divergence in the economic and rate outlook for the US versus the rest of the world and is reinforced by US funding needs tightening the market for dollars.

The final macro factor to watch is oil, which has risen 3.1% year to date, breaking through technical resistance levels. 

Potential macro outlook scenarios

We see four broad potential scenarios developing from here, with an aggregate 70% bullish/30% chance bearish conclusion for equity markets:

1. Recession. There is still a cohort of economists that believe the economy is softer than current perceptions and the risk of recession cannot be dismissed (~10% chance).

2. The economy slows, disinflation reasserts, leading to falling bond yields and equity markets continuing to rally (~35% chance).

3. US economic growth continues to hold up better than expected, prompting the Fed to pause rate cuts, meaning bond yields stay higher but equity markets are supported by better earnings (~35% chance).

4. Inflation goes higher, prompting the Fed to shift monetary policy stance to slow the economy. This is negative for equities, as we get higher yields without the higher earnings (~20% chance).

US economic data holding up OK

Recent US employment has been better than expected – see data below:

1. December payrolls added 256k jobs versus 156k expected – the strongest gains since March 2023. The unemployment rate fell from 4.2% to 4.1%. The three-month average is 170k jobs, which is running slightly above the threshold needed to hold unemployment constant. Unlike previous months, private payrolls were stronger than expected at 223k versus 140k expected. Economic bears believe this is overstating labour market strength as it is a catch-up post the hurricane and strike-affected September/October period. Still, the underlying unemployment rate has reversed its recent upward trend and therefore gives the Fed cause to pause.
2. JOLTS (the Job Openings and Labor Turnover Survey) saw an upside surprise in job openings, which still sit above the pre-Covid levels. This was mitigated to an extent by the quits rate falling to new low levels for the cycle, which is a positive signal for wage inflation.
3. Weekly jobless claims have fallen back and most recently came in at 201k versus consensus at 215k.

A stronger ISM Services Index gave the market a jolt.

The December Services Purchasing Managers’ Index (PMI) rose to 54.1 from 52.1, driven by the current business activity component and the price diffusion index. The latter increased to 64.4 from 58.2 – the highest since February 2023 – highlighting that services inflation will potentially prove more resilient.

More positively, December average hourly earnings rose 0.28%, which was in line with consensus and indicates that the likely trend is 3.5% annual wage growth.

US economic outlook

The upshot is that the market is now pricing in 25bps of rate cuts in 2025, with no rate cut in January and a roughly 35% chance in March.

Not until July will we see an implied chance above 50%.

The interesting issue is that by deferring a March cut, it would mean that the Fed would be cutting in May or June at a time when prospective tariff increases would be potentially impacting inflation.

There are several reasons why the Fed retains scope to cut rates in 2025:

• While there is more risk on inflation than three months ago, underlying drivers such as wages are relatively benign as demonstrated by average hourly earnings and the quits rate.
• Trump’s policies may represent a one-off price shock rather than a money supply or demand-driven impulse and are, therefore, not necessarily as negative for inflation – or as large an impediment to Fed easing – as perceived.
• Real rates do remain high and the move in bonds and currencies are tightening financial conditions.

The monetary policy environment is not negative but has shifted to a more neutral factor than was the case last year. This emphasises the need for vigilance on markets given current valuations.

Australian inflation – slightly better data raising hopes for rate cuts

November’s monthly Consumer Price Index (CPI) data was seen as aiding the case for the RBA cutting rates in February, rather than waiting for April or later.

While headline CPI rose to 2.3% from 2.1%, this was as expected, and the composition proved a bit better.

Electricity prices rose more than expected for the month, however, these are being distorted by the government subsidies.

Travel prices fell both for international and domestic travel.

Construction costs (new dwelling purchases – the largest component of the CPI) are falling quicker than expected. This segment was down 0.6% in November, taking annual inflation to 2.8% versus 4.2% in October.

The underlying trimmed mean measure of monthly inflation has improved to 3.2% from 3.5%.

Does this mean rates will be cut sooner? We do not think so.

Given a lower likelihood of US rate cuts, a weaker Australian dollar, uncertainty on services inflation and a healthy labour market, it would be a bold move that could very quickly look a mistake.

This would represent a significant gamble for a newly formed monetary policy board.

Markets

We continue to believe markets are consolidating, rather than starting a more material sell-off – but that is conditional on the above view that growth and inflation remain as expected.

The market consolidation has taken us back from an extreme in sentiment, looking at a variety of criteria such as S&P futures positioning, various bull/bear ratios, and sentiment surveys.

Equity ETF flows remain the biggest support for this market.

These are at an extreme for US equities, with a four-week average of US$9.6bn/week versus a $5.7bn/week average for the year. However, flows into other equity markets are subdued.

S&P 500 market breadth has deteriorated to the lowest level in a year in terms of percentage of stocks above their 200-day moving average. That is a warning sign we need to watch.

Bonds remain a key issue.

There appears to be some disconnection in yields from fundamentals, in that 10-year yields have risen from early December even as the overall economic surprise index has fallen.

This probably highlights the anticipation – or fear – of what Trump will do post-inauguration.

But this may prove overstated. Fiscal policy measures are likely to run into issues in the House and may be diluted. At the same time, tariffs may be designed to avoid giving the Fed a reason not to cut rates, nor to drive the US dollar any higher.

Australian equities

The S&P/ASX 300 has performed better than other equity markets, which reflects optimism that rates may fall sooner than expected, in addition to being helped by thin volumes.

Sentiment on Resources is very low. While iron ore prices have been subdued, copper and oil prices are bouncing off their recent lows and, given positioning is skewed against the sector, there has been better price action. The Resource sector is up 1.6% year to date.

Real Estate Investment Trusts have so far defied the negative lead from offshore, up 2.8% year to date.

Banks were the sector that caught much of the market out last year and have continued to perform well, up 1.8% year to date. Valuation multiples remain at historical highs for the Big Four except ANZ, where the market has been cautious on changes in strategy and management.

---

About Crispin Murray and the Pendal Focus Australian Share Fund

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

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

Find out more about Pendal Focus Australian Share Fund  

Contact a Pendal key account manager

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

• Find out about Pendal Focus Australian Share Fund
• Tune into our latest on-demand webinar: Beyond the Numbers

IT was a fascinating and action-packed week in the market, though perhaps too action-packed for this time of year.

The news headlines of the week included US Consumer price Index (CPI) and Producer Price Index (PPI) data, local RBA and employment figures, and announcements from China’s Politburo.

While the data itself wasn’t groundbreaking, much of the discussion centred on the finer details and minor variations.

The 10-year yield has surged 80 points since the Fed’s rate cuts began in September. Inflation concerns persist, with core inflation stubbornly high.

The economy shows limited spare capacity in employment, and fiscal stimulus is expected under Trump.

Markets anticipate a rate cut this week, but will Powell signal the end of the rate cut cycle?

In Australia, the RBA opened the door to more dovish monetary policy on Tuesday. However, the door was slightly closed again due to a strong employment report on Thursday showing tightening conditions.

The NAB Business Survey and business turnover were weak, with the public sector providing support.

Liquidity remains positive, supported by seasonal trends, though January could be tricky.

It’s a good time to be cautious with positions and valuations. Market breadth is narrow, and relative valuations are extreme.

Implied volatility is almost non-existent, with Tesla’s surge to $420 and profitless tech stocks keeping pace with the Magnificent 7, indicating frothiness in the market. Google’s new quantum computer chip kept the bulls excited.

Monday’s momentum unwind marked Pure Momentum’s worst day since November 2022, highlighting market vulnerability.

This week, all eyes are on the FOMC and Personal Consumption Expenditures (PCE) data in the US, along with Australia’s Mid-Year Economic and Fiscal Outlook (MYEFO).

US macro and economy

Headline CPI rose by 0.3% (up 2.7% YoY), slightly above consensus. Core CPI also edged up, with a 31-basis point (bp) increase versus the expected 28bp, maintaining a sticky 3.3% over 12 months.

Other highlights include:

• Housing Inflation had its smallest monthly gain since January 2021.
• Core MoM has been stable since mid-year.
• Services Inflation appears on the decline.
• Rent numbers finally aligned with the Zillow Index.
• Super Core remains stubbornly high at over 4%, which should limit the Fed’s ability to keep cutting.
• Goods inflation ticked up after a benign period.

The market is comfortable with the current US CPI story, but persistent core inflation could challenge the Fed in Q1. Goods inflation rising above core services MoM for the first time since May 2023 adds to the discomfort.

With the PCE reading looming next Friday, headline PPI rose a bit higher at 0.4% MoM – surpassing the 0.2% consensus.

This marks the largest monthly gain since February 2023, driven – interestingly – by a spike in egg prices, encouraging a turn to quality and defensives.

Combined with this week’s CPI, the report positions next week’s PCE to only post a modest PCE acceleration, reassuring the Fed that its favourite inflation gauge is on track.

PPI final demand rose 0.4% in November (above the 0.2% forecast), with the prior month revised up to 0.3%. The year-on-year rate increased to 3.0% from 2.6%.

Core PPI was in line at 0.2%, but the annual rate rose to 3.4% from 3.2% after a revision.

Bloomberg noted the surging egg price helped drive some of the beat but indicated other categories suggested a muted increase in the Fed’s preferred PCE measure.

PPI for final demand rose 0.4%, the highest since June, beating the 0.2% estimate. Overall, services costs edged up 0.2% and goods prices (excluding food and energy) rose by a similar amount.

Economists see little change or declines in key service categories, allaying some concerns over recent firming in broader inflation metrics.

Elsewhere, the NFIB US Small Business Survey saw its largest monthly jump ever in November, surging eight points to a three-and-a-half-year high, surpassing the post-2016 election spike.

US initial jobless claims for early December rose by 17k to 242k (versus 220k expected), mainly due to seasonal distortions from the Thanksgiving holiday and wildfires in California affecting around 20k residents.

Insured unemployment claims also trended higher, indicating a cooling labour market.

China

Copper, zinc, and iron ore prices surged after China’s Politburo (the highest political bureau of China’s central governing committee) announced a shift to a “moderately loose” monetary policy for 2025, the first stance change in 14 years.

This announcement on Monday signalled greater easing and a more proactive fiscal policy.

This shift from a “prudent” stance comes as Beijing braces for a potential trade war with the US under President-elect Donald Trump.

With China dominating metal demand, the prospect of rate cuts and increased stimulus spending is a welcome sign for investors seeking stronger economic growth measures.

The Central Economic Work Conference (CEWC) echoed the Politburo’s announcements, focusing on consumption demand as the key priority without providing any novel statements.

The government did announce a widening budget deficit for 2025, and the absence of “fiscal discipline” in post-conference commentary suggests a commitment to achieving economic targets.

More specifics on macro policy and stimulus measures will be revealed at the CEWC and the NPC meeting in March.

A new phrase was used – “enhancing extraordinary counter-cyclical adjustment” – which hints at stronger, unconventional stimulus measures, though details are lacking.

Other macro

Both the Bank of Canada (BoC) and the European Central Bank cut rates by 50bps and 25bps, respectively, which was as expected this week.

The BoC’s consecutive 50bp rate cut, its fifth straight, highlights the urgency to remove policy restrictiveness. Recent policy measures and new tariffs have increased uncertainty and clouded Canada’s economic outlook.

Elsewhere, the Swiss National Bank (SNB) delivered a larger-than-expected cut, Brazil saw a bigger hike, and reports suggest the BOJ may downplay the potential for a hike next week.

Australian economy

At its latest meeting, the RBA Board kept the cash rate target unchanged at 4.35% and the interest rate on Exchange Settlement balances at 4.25%.

While softer-than-expected data was anticipated, the Board made notable changes to its communication.

It now believes “some of the upside risks to inflation have eased” and is “gaining confidence that inflation is moving sustainably towards target.”

Some key phrases that had given a hawkish tone to previous RBA statements were removed:

• “Vigilant to upside risks to inflation” – language used since May.
• “Not ruling anything in or out” with respect to policy – language used since March.
• “Policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range” – language used since August.

The Board still isn’t ready to declare victory on inflation, reiterating that it will take time for inflation to reach the target range.

New language highlights that while aggregate demand still exceeds supply capacity, the gap is closing, and the Board is gaining confidence that “inflation is moving sustainably towards target”.

Moving onto employment data, Australia’s unemployment rate dropped to 3.9% in November, the lowest since March.

Employment rose a solid 35.6k, though total hours worked tracked sideways – indicating there is not much spare labour capacity to go around.

The data supports the RBA’s view of a tight labour market, with unemployment expected to average 4.3% in Q4.

The NAB Business Survey noted current conditions are at their weakest since August 2020.

This weakness is broad-based, especially in trading conditions and profitability. Manufacturing saw the sharpest decline with retail also soft. Government spending is driving growth, while private sector conditions are soft.

The ABS Nominal Business Turnover remains flat and CBA Household Spending is growing at low single digits, while household goods are relatively strong.

Markets

It was a softer week for equity markets, which intensified further down the market cap spectrum.

Resources outperformed Industrials and Banks, while Tech stocks were hit hardest by rate concerns and sector rotation.

Financials and Real Estate also struggled due to rate expectations, while Staples remained defensive, and Energy held steady.

Two-year Treasuries rose 15bp, and 10-year Treasuries climbed 25bp.

Oil had a positive week, recovering some year-to-date losses. Most commodities saw slight gains, with gold and Bitcoin leading year-to-date performance.

Interestingly, the ASX 300 underperformed other global indices despite Australia’s resource exposure. The current darling, the Russell 2000, also had a notable decline.

The AUD/USD saw little change, while the DXY strengthened.

There was not a lot of action on the upside this week in Australian markets, with most stocks trading lower. Resource stocks led on the upside and high-priced growth stocks led on the downside

There are a few other market observations that investors should keep in mind:

• NASDAQ breaking 20,000 for the first time on record, with global flows leaving other markets and rushing into US equities.
• December is typically a strong month, especially in the days leading up to Christmas.
• Increasing chatter about the market’s narrow breadth with Tech’s leadership. Is it late cycle or time for new leadership?
• Momentum appears stretched and typically struggles in January.
• We are seeing a period of concurrent earnings and multiples expansion, which is not very common.
• There is currently almost no implied volatility in the S&P 500.
• Corporate executive stock sales have reached an all-time high.

---

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

In investing – just like in music – real success is found beyond the obvious. China’s Tencent Music is a great example, argues Pendal’s SAMIR MEHTA

• Value to be found in Asian equities if you know where to look
• Tencent Music generating cash and buying back stock
• Find out more about the Asian Share Fund

WHO is the Bob Dylan of music streaming?

That’s the question Pendal’s Samir Mehta posed at the Sohn Hearts & Minds Conference in Adelaide last month.

For most, the answer is obvious: Sweden’s Spotify has revolutionised the way we consume music, dominating developed markets and setting the benchmark for subscription-based streaming.

But in investing – just like in music – real success is found beyond the obvious.

For every Bob Dylan – whose sandpaper voice and sermon-like lyrics changed the face of music worldwide – there’s a Sixto Rodriguez: overlooked by mainstream audiences until an Oscar-winning documentary, Searching For Sugar Man, revealed he had been quietly building a cult following in small but devoted markets.

“Spotify has done a brilliant job in developed markets, but there’s lots of other markets that still have potential,” says Mehta, who manages the Pendal Asian Share Fund.

“What we need to do is search for the Sugar Man of streaming.”

“Music follows exactly the same trends across the world – and the Sixto Rodriguez of streaming is China’s Tencent Music Entertainment.”

With paying subscriber base of 117 million, a market capitalisation of around US$20 billion, over US$4 billion in cash, and revenues in the online subscription business growing at 20 per cent annually, Tencent Music generates almost US$1 billion of cash each year, says Mehta.

They have already bought back US$1 billion of shares and this year’s US$500 million buyback is ongoing.

“Generating cash and buying back stock is not something that you associate with Chinese companies,” says Mehta.

“But there’s been a sea change in attitudes among well-managed Chinese companies and Tencent Music represents one of those; doing exactly what we as minority shareholders want them to do.”

Streaming has transformed the global music industry, replacing one-time purchases of LPs, cassettes, and CDs with stable, long-term subscription revenue.

When Tencent Music was first launched by its parent Tencent Holdings, which retains a 52 per cent stake, some 70 per cent of sales came from so-called ‘social entertainment’ – essentially user-generated karaoke and live music performances.

But after Beijing imposed regulatory changes in 2021 that forced the business to take responsibility for the content on its platform, 78 per cent of revenue is now from traditional online music streaming.

“That is Spotify-like subscription revenues – growing at a clip of 20 per cent per annum,” says Mehta.

“Faced with a regulatory diktat, the company cleaned up and now they proudly proclaim ‘we are now progressing towards a healthy development of China’s online music industry’.

“They are signalling to the government that their business now is well within the requirements of the law that the Chinese government imposes.”

They currently have 117 millio active monthly paying subscribers. A key focus for management is to steadily raise average subscription from the current US$1.5 per month to US$2 over the next 5 years.

Tencent Music generates 42 per cent gross margins – and a nascent advertising revenue stream will only supplement growth, says Mehta.

“You can see the similarities.

Searching for Sugar Man made a cult figure of Sixto Rodriguez. This conference, Sohns Hearts and Minds, is going to do for Tencent Music what the documentary did for Rodriguez.”

About Samir Mehta and Pendal Asian Share Fund

Samir manages Penda’s Asian Share Fund, an actively managed portfolio of Asian shares excluding Japan and Australia. Samir is a senior fund manager at UK-based J O Hambro, which is part of Pendal Group.

Pendal Asian Share Fund aims to provide a return (before fees, costs and taxes) that exceeds the MSCI AC Asia ex Japan (Standard) Index (Net Dividends) in AUD over the medium-to-long term.

Find out about Pendal Asian Share Fund

About Pendal Group

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

• Australian economy is “sluggish”
• Markets pricing up to three cuts by the end of 2025
• Find out about Crispin Murray’s Pendal Focus Australian Share Fund

GLOBAL equity markets had a solid start to December, supported by the increased likelihood of a rate cut at the Fed’s FOMC meeting this week.

Both the S&P 500 (up 1.0%) and Nasdaq (up 3.4%) hit all-time highs during the week, while US Treasuries rallied on relatively benign macroeconomic prints.

Overall, these indicators point to a solid US economy that is seeing an uptick in post-election confidence and activity, but without signs of any reacceleration in inflationary pressures.

There is plenty of interest for followers of international politics, though, with ongoing developments in France, South Korea and the Middle East. The implications for markets are not entirely clear, but it does affect confidence at the margin.

Australia released some mixed economic data points, with the September quarter GDP dominating discussions in both the economic and political spheres.

The Australian economy’s performance remains sluggish – with real GDP growth only slightly positive, due largely to public sector demand and strong immigration, and the per-capita recession continuing.

The market has brought forward the likelihood of the RBA’s first cash rate cut, though future CPI prints remain key.

Australian equities didn’t follow international markets higher, however, with the S&P/ASX down 0.2% for the week.

Technology (up 1.7%) and Consumer Discretionary (up 1.8%) continued their strong performance, while the weakest sectors were REITS (down 2.6%), Utilities (down 1.3%) and Energy (down 1.0%).

Fed commentary watch

On Monday we heard from Christopher Waller, a member of the Federal Reserve Board of Governors, whose remarks were regarded as dovish and risk friendly.

Waller discussed the case for a cut versus a skip in December, saying that “at present I lean toward supporting a cut”.

He also said he would be paying close attention to JOLTS (the employment report), as well as November CPI/PPI inflation and retail sales, and would shift to favour a skip if the data “surprises to the upside” and “alters my forecast for the path of inflation”.

Elsewhere:

• Mary Daly (San Fransisco Fed President) said an interest rate cut this month isn’t certain but remains on the table for policymakers.
• Adriana Kugler (Fed Board member) expressed optimism about the economy, saying inflation appears to be on a sustainable path to the central bank’s 2% goal.
• John Williams (New York Fed President) added that more rate cuts are likely needed “over time”
• Fed Chair Jerome Powell said that the FOMC can “afford to be a little more cautious” on moving policy toward a neutral setting given the current strength of the economy.

In summary, Federal Reserve officials indicated that they expect the central bank to continue cutting interest rates over the next year, but stopped short of saying they were committed to making the next reduction in December.

US economy

We saw an early read on Black Friday retail sales, with Mastercard’s SpendingPulse reporting that 2024 sales rose 3.4% compared with last year. Online retail sales increased 14.6% while in-store sales were up marginally (0.7%).

On Tuesday, we saw the release of the Institute for Supply Managements Manufacturing PMI, with the latest reading increasing to 48.4 from 46.5. While this indicator showed continued weakness in factory demand, it did exceed Wall Street’s 47.5 forecast.

Various components of the index indicated improvement on the previous month and, importantly, the forward-looking New Orders component showed increasing business confidence, with an expansionary 50.4 print.

There was a big focus on employment data last week, starting with the Job Openings and Labor Turnover Survey (JOLTS) – it confirmed recent labour market trends, where tightness in the jobs market is easing but remains in good shape overall.

The JOLTS data surprised to the upside, with overall job openings rising 372k to 7.74 million in October 2024. While this has come back from a peak of 12 million, it is still elevated when compared to pre-pandemic levels.

The JOLTS Quit tally rose 228k, taking the quit rate to 2.1% – the highest since May. The quit rate is important as it shows workers are confident leaving current employment and seeking a new job, making it a good predictor of future wage growth.

Initial jobless claims for the week ending 30 November rose by 9k to 224k (versus consensus at 215k) mostly on volatility around the Thanksgiving holiday, which came five days later than last year.

Cost-cutting measures announced at Boeing and Stellantis suggest jobless claims will rise through year-end and into mid-January.

The most anticipated data release of the week was the November non-farm payroll Employment Report on Friday.

Headline payroll growth bounced higher to 227k versus 36k in October, but the latter was affected by hurricanes and strikes. The unemployment rate ticked up to 4.2% from 4.1%.

This data was regarded as solid and as expected, but without too much upside surprise to stoke any fears of reaccelerating inflation.

Importantly, if the Fed wants some insurance against unemployment rising further, it is likely to cut rates by 25 basis points (bps) again in December as indicated in recent Fed board speeches.

We are still to see CPI data before the Fed meeting, but the market is already pricing most of a 25bp cut for December and up to three more cuts for calendar 2025.

Australian economy

There were a few mixed data points for Australia last week:

• Similar to the US, early indications on Black Friday sales showed solid performance. National Australia Bank’s transaction data showed overall spending was up 4% year on year.
• Official retail trade data from the ABS rose 0.6% in October, beating expectations of 0.4%. Annual growth increased to 3.4%, which is the highest rate since May 2023. Within components of this release, growth in discretionary spend categories was particularly strong.
• Credit growth in October 2024 rose 0.6% for the month and 6.1% year-on-year, which is the fastest pace since May 2023.
• Residential building approvals bounced up 4.2% month-on-month in October 2024 to 185k annualised, which is the highest level since December 2022.
• CoreLogic’s November house price series showed national house prices increased just 0.1% in the month – the weakest Australia-wide result since January 2023. There was large divergence across states, with Brisbane and Perth still growing well but down from previous high levels. Sydney was just below the national average, but Melbourne’s property (and economic confidence) woes continue.

The most watched economic release was the September quarter National Accounts, which showed GDP rising just 0.3% quarter-on-quarter, below the 0.5% consensus expectation.

Of most concern was the decomposition between the public and private components of the domestic economy, which showed that almost all of the economic growth was from the Government sector.

This continued a trend of weak Private sector demand over recent quarters.

Public sector demand has now risen to 29% of GDP, which matches Covid-19 emergency spending levels and represents some of the highest levels seen over the past 60 years – and this is before any new spending associated with the Federal election.

Aside from government spending, the only other support to the economy has been strong immigration levels.

Once this is accounted for, GDP per capita contracted for the seventh straight quarter, which is significantly worse than most of our international peers.

This softer GDP print saw the market move from pricing only one RBA cut to three by the end of 2025, with the first cut fully priced by April 2025.

Other global macroeconomic developments

Oil: OPEC+ delayed an output hike for a third time as the oil market faces a looming supply surplus that’s weighing on prices. The group will start increasing production in April instead of January and unwind cuts at a slower pace, in line with expectations

China: China’s top leaders plan to start the annual closed-door Central Economic Work Conference (CEWC) next Wednesday to map out economic targets and stimulus plans for 2025. Market watchers are looking/hoping for more concrete confidence building measures, particularly given Chinese property market concerns.

Europe: Traders are trimming their European Central Bank rate-cut wagers, though rates markets still have a cut still priced for 12 December – and a further five for 2025.

Geopolitics: Government instability in France and South Korea and the collapse of the Assad regime in Syria is not helping investor confidence outside of the US.

Markets

We are in a seasonally strong point for markets. Only once since 1928 has December been the worst month of the year performance-wise.

Historically, November and December are particularly strong return months in US Election years.

We see similar themes looking at the first month following Trump’s election victory in both 2016 and 2024.

There has been strong performance in risk-on cyclical sectors (Financials, Consumer Discretionary, Industrials, Small Caps), with weakness in defensives (Healthcare, Real Estate) and China-related (Materials) areas.

The Tech sector has performed a touch below the S&P 500 on both occasions.

We do note sentiment is getting very toppy, with Equity ETF flows more than two standard deviations above their average back to 2017.

---

About Rajinder Singh and Pendal’s responsible investing strategies

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

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

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

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

Contact a Pendal key account manager here

Australia’s latest GDP figures suggest the door for rate cuts has opened further, writes Pendal’s head of government bond strategies TIM HEXT

• Why bonds, why now? Pendal’s income and fixed interest experts explain
• Browse Pendal’s fixed interest funds

THE Australian economy grew by only 0.3% in the September quarter, once again falling behind population growth.

We managed only 0.8% growth for the year, yet the RBA still thinks demand outstrips supply.

The September quarter GDP numbers were always going to be more interesting than most.

Tax cuts and government subsidies were hitting consumer pockets and the big question was whether they would be spent or saved. For now, it appears consumers have been happy to pocket the extra money.

Spending by business and consumers once again flatlined and per capita consumption fell by 2% over the year.

The only growth we could find was, once again, the government – which now comprises almost 28% of GDP, up from around 23% for most of the past 50 years.

The graph below, courtesy of Westpac, highlights this extraordinary return of big government.

Source: Wages grow 3.5 per cent for the year | Australian Bureau of Statistics

The national accounts also provided more information around wage pressures. As the high wage outcomes of 2022 and 2023 have faded from view, these are easing quickly.

Average earnings per hour moderated to 3.2%yr, from 6.5%yr in the June quarter. This is consistent with recent wage data at 3.5%.

We have weak growth, moderating inflation, wages under control and global easing cycles – so why the hesitation from the RBA?

The central bank remains focused on the idea that the labour market remains too tight, as it believes that 4.5% – not the current 4.1% – to be full employment.

The data is now suggesting otherwise.

Outlook

It will be an interesting few upcoming meetings for the RBA board.

February will likely be the last monetary policy board decision for three of the six independent directors. And March or April will see a split into governance and monetary policy boards.

Whether this influences thinking remains to be seen, but the current spirit of caution may yet stop a rate cut in February.

However, I think the RBA may do a short sharp pivot in the next few months, and view two cuts (in February and May) as still on the cards.

The Q4 inflation data at the end of February will be another low number, with even underlying inflation likely to print 0.6%, or annualised at the RBA midpoint.

While bond investors will be cheering for a cut, the Labour government will be desperate for one ahead of the “cost-of-living” election.

Time will tell if the RBA delivers for them.

---

About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here

---

About Pendal

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

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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
• Tune in: register to watch Crispin’s Beyond the Numbers webinar

THE market finished November on a high, helped by falling bond yields and a lower US Dollar.

The S&P 500 returned 1.1% for the week and 5.9% for the month, while the S&P/ASX 300 was up 0.6% and 3.7%, respectively.

President-elect Trump’s threat of 25% tariffs on Canada and Mexico as well as 10% on China did not illicit a durable negative reaction in either bonds or equities – probably due to the attached conditionality and a timeframe that is still almost two months away.

The pre-conditions for a continued rally into year-end remain in place, with positive macro data, flows good, confidence high, and the supportive technicals.

There was strong divergence within Australian equities last week; tech and healthcare outperformed while energy and banks lagged.

The market’s favourite high-momentum growth names are melting up, with Life360 (360) up 20.5%, Pro Medicus (PME) up 13.6%, Sigma Healthcare (SIG) up 13.3%, Guzman y Gomez (GYG) up 12.7% and Telix Pharmaceuticals (TLX) up 9.6% week on week, with flows the main driver.

Our broad-cap portfolio positioning is generally skewed to growth, with Technology One (TNE) and Xero (XRO) underpinning performance in November. This was combined with quality industrials such as SGH (SGH) – formerly Seven Group – and James Hardie (JHX), as well as insurers which benefitted from higher bond yields over the month and the rotation to financials.

US tariffs: hard to know where they land, so not factored in by the market for now

Trump posted that he intends to impose 25% tariffs on Mexico and Canada on day one of his administration.

While these are higher than the market expected, he conditioned them on action relating to immigration and drugs.

We have subsequently seen Mexican President Sheinbaum have a call with Trump, while Canadian Prime Minister Trudeau popped in for dinner at Mar-a-Lago.

Trump also spoke to imposing an additional 10% tariff on China.

The impact, if applied, is material.

The percentage of import value collected as tariffs would rise from low single-digits to roughly 10%, before factoring in anything additional for Europe.

So far, the market is sanguine on this on the belief that they will be watered down in both size and scope.

The other issues to consider with tariffs are:

• suppliers absorb part of the impact in their margins
• that the inflationary effect is diluted as trade flows adapt to avoid them

• currencies may adjust to dampen down effects (e.g. USD strength reduces the inflationary effect)

US economic outlook: looks fine, persistent inflation is one area to watch

This week’s monthly payroll data is an important signal for the US Federal Reserve.

The signals are constructive, with claims data coming off post the hurricane-induced spike. While continuing claims are picking up, it is gradual and still low in historical context.

Consumer confidence – reflected in the Conference Board Expectations Index – has seen a post-election increase tied to the election outcome.

History indicates that this may not result in higher spending, but it doesn’t hurt and reduces risks to the downside.

An encouraging component of the Conference Board measure is the confidence in jobs, which has improved and is a positive read on the outlook for employment.

Overall, the growth outlook remains encouraging according to the Atlanta Fed GDPNow indicator, which still has Q4 2024 GDP at above 2.5% growth.

There is a concern among some that inflation is not coming down sufficiently for the Fed to cut rates much below 4%.

In this vein, the latest Personal Consumption Expenditures (PCE) data – the Fed’s favoured inflation indicator – saw Core PCE up 0.27% month-on-month, in line with expectations.

However, the three-month annualised rate increased to 2.8% year-on-year.

Some of the services components are proving sticky; the concern is that the PCE won’t be able to break below 2.5% next year before we begin to get the effects of tariff increases and the potential impacts of lower immigration and tax cuts supporting the economy.

This could leave the Fed in a difficult position in terms of predicting the outlook, which may make them more cautious of further rate cuts.

The market is currently pricing 3.3 cuts by the end of CY25.

Australia: inflation data provides no help for case to cut rates

October’s Consumer Price Index (CPI) was lower than expected at 2.1% year-on-year, but this was all down to government subsidies.

Underlying inflation measures remain stubbornly high and the trimmed mean was 3.5% for the 12 months to October, up from 3.2% in September.

This provides no cover for the RBA to cut rates.

Inflation in areas such as rents and new dwelling purchase costs remain high, driven by structural issues in the economy.

We continue to see limited risk of a material slowdown in Australian GDP, but confidence is muted and growth seems likely to remain below trend for the next few quarters.

Markets: short-term signals remain positive

November was a good for equity markets, triggered by the decisive US election outcome.

The S&P 500 returned +5.9% for the month and the S&P/ASX 300 3.7%, with the bulk of the move from valuation re-rating.

Short-term market signals are positive:

1. The US dollar has not broken above its range and retraced in the last week.
2. Bonds yields have also rolled over and didn’t get back to the April highs.
3. Market technicals like breadth and seasonality are positive. For example, 77% of the S&P 500 is trading above its 200-day moving average.
4. Earnings revisions have been positive. This has been driven by mega-cap tech, where FY25 earnings have been revised up 11% over CY 2024. The rest of the tech sector has been revised down 1.6% and the rest of the S&P 500 down -3.8%. However, this is well within the normal range of zero to -5% earnings downgrades over the course of a year.
5. Flows into US equities remain strong, with a large spike following the election result.

The challenge is US equity valuations are full. There appears little catalyst to change this currently, but if there was a shift in liquidity or in the economy, then valuations could reset.

The S&P 500 is on the top decile in terms historical market valuation going back to 1999.

There is an argument being made that the market structure is now dominated by mega-cap tech companies which have low capital intensity, high rates of return on investment and incremental return, as well as strong revenue growth rates which may suggest that valuations aren’t as extended as simple historical analysis suggests.

We do note that credit spreads are low by historical standards, which suggests that the liquidity environment remains supportive.

Australia

Information technology (+10.2%), banks (+7.1%), consumer discretionary (+6.6%) and industrials (+5.6%) led the S&P/ASX 300 higher in November. Energy (-0.7%) and resources (-3.4%) lost ground.

Growth momentum performed best; results from TNE, XRO and Block (SQ2) were good, while PME won a key contract.

With limited revisions, the banks’ earnings season was neutral, with CBA performing the best.

Insurers outpaced the banks, helped by bond yields.

Resources continue to fall and have given back more than 50% of their China stimulus rally.

Battery materials remain the worst of the sector, despite lithium prices stabilising. BHP continues to be burdened by the fear of it re-bidding for Anglo American now that the six-month lock period is up. Finally, copper and gold have retreated post the US election.

Portfolio positioning

Generally, across our broad-cap portfolios, we have kept our sector skews relatively limited:

• We have been underweight defensives/bond sensitives, though this has been reduced somewhat with the addition of Scentre Group (SCG) in recent months.
• We also have a small underweight to resources.
• The bank underweight has increased in recent weeks. We see reduced risk of valuations breaking higher for the bank sector given the strong run and current rating. This exposure is also partly offset by the overweight in insurers. 
• We are underweight consumer defensive – notably supermarkets – which we see as expensive, low-growth stocks.
• Against this we are overweight growth, mainly through technology companies where we see earnings growth underpinning the higher valuations.
• We have also benefited from an overweight in cyclicals industrials, with stocks in good industries and/or strong market positions such as Aristocrat Leisure (ALL), SGH (SGH), James Hardie (JHX) and Qantas (QAN) all performing well in November.

---

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

At the end of a year in which almost half the world’s population were eligible to vote, investors can finally look forward to more certainty, says Pendal’s ADA CHAN

• End of a huge election year improves certainty for investors
• Potential opportunity emerges in China
• Find out more about Pendal Global Emerging Markets Opportunities Fund
• Watch a Pendal webinar covering the outlook for global equities and emerging markets

IF IT feels like a hectic year for emerging markets investors, you’d be right.

So far 66 national elections have taken place around the world in 2024, according to the International Institute for Democracy and Electoral Assistance, an intergovernmental organisation that supports democracy worldwide.

And another eight or so are still scheduled before the new year.

Just after the US election, Pendal Global Emerging Markets Opportunities fund manager Ada Chan joined Pendal Global Select fund manager Chris Lees in a live webinar to discuss major trends emerging from these polls, along with other issues.

You can watch the full webinar here. 

Below are Ada Chan’s key points. Click here for insights from Chris Lees.

A big year for elections

Investors in emerging markets (EM) can expect more certainty after a huge year in national elections, says Pendal emerging markets fund manager Ada Chan.

“We will have to wait and see the details on many Trump Administration policies … and implementation is key from the US.”

But there are already actionable lessons to be drawn from elections in Indonesia, Mexico and India — which all had “very different elections this year”, Chan says.

“In Indonesia, there is continuity and stability and that is viewed positively. It is a market where reforms are [working] and driving the economy. That’s a differentiator among ASEAN markets.”

James Syme, Paul Wimborne and Ada Chan (right) are co-managers of Pendal Global Emerging Market Opportunities Fund

“In Mexico investors expected Claudia Sheinbaum to win, but the surprise was her super majority. There was also an overlap with her predecessor … and that created uncertainty and investors don’t like uncertainty.

“Mexico is a difficult market – which part of a valuation is driven by a carry trade unwinding, which part is driven by local politics and which part is driven by anticipation of what Donald Trump is going to do. We think a lot of the bad news is already in valuations,” she says.

“In India, people expected Narendra Modi to win, and he did. But markets in India are pricing in perfection. In India it isn’t so much about the election as high valuations.”

China

Investors in China should focus on domestic industries, rather than manufacturing exporters, Chan says, ahead of any Trump Administration decision on tariffs.

“The Chinese government wants to stimulate its economy. But I think there is a little bit of wait and see, to make sure they know what Trump is proposing,” Chan says.

“It is a timing issue for China. They want a bit more clarity [on the Trump Administration] before they come up with their stimulus. We do expect there will be more stimulus, but it is a step-by-step process.”

Chinese consumers are changing as well. Previously foreign brands sold better than local products but that is no longer the case.

“Chinese consumers are embracing domestic brands. They can buy better products, with higher average prices, that are a lot cheaper than foreign brands,” Chan says.

Country-first analysis

Chan’s investment process starts with identifying a promising country, based on an outlook and valuation perspective.

“There are opportunities emerging  in China. We think people had become too pessimistic and gone too extreme when looking at China.

“We saw Chinese companies report better numbers, raise forward earnings [guidance] and then get sold off.

“There is the opportunity to [invest] in companies that are becoming stronger because management are focusing on what makes the business more efficient, in an environment which is very difficult.”

---

About Pendal Global Emerging Markets Opportunities Fund

James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

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

James, Paul and Ada are senior fund managers at UK-based J O Hambro, which is part of Perpetual Group.
 
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

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

EQUITIES continue to grind higher, with the S&P 500 up 1.7% last week and the S&P/ASX 300 up 1.3%.

Safe havens like gold, oil and the Swiss franc caught a bid on the back of rising geopolitical tensions, with outgoing US president Joe Biden giving a final push to resolve the Russia-Ukraine conflict before Donald Trump takes office.

Treasury yields were relatively stable as markets attempt to discern the likely policy mix under a Trump administration, made even more difficult by some interesting cabinet nominees. 

US Fed-speak was mixed but on balance more dovish.

Nvidia, the world’s largest company, reported Q3 results with guidance for Q4 sales only beating by $400 million versus the normal $1 billion. Management highlighted some delays and cost pressures around the next-generation AI chip. 

In Australia, Reserve Bank minutes noted that easing in the labour market might have begun to stall or modestly reverse. The RBA wants to see two quarters of declining inflation before cutting the cash rate.

US macro and policy

Howard Lutnick, CEO of bond broker Cantor Fitzgerald, was appointed US commerce secretary and hedge fund manager Scott Bessent was announced as Treasury secretary.

Lutnick advocated for higher tariffs at a recent rally in New York, citing the prosperity of the early 1900s when there was no income tax and all the government had was tariffs. Though he did acknowledge they would raise prices, at least temporarily.

In an interview with the Financial Times, Richmond Fed president Tom Barkin noted the US was more vulnerable to inflationary shocks than in the past, with businesses more readily passing on costs to consumers.

The inflationary effects of potential tariffs and immigration plans under president-elect Donald Trump were a “concern” for businesses, but the Fed shouldn’t adjust monetary policy before possible changes in economic policy, he said.

Elsewhere, US home builder sentiment rose to a seven-month high. The results suggest optimism that high-income households will move forward with home-buying plans, given US personal tax cuts will persist.

While sentiment has been strong actual starts have been softer, with starts and permits declining 4% and 7.7% year-on-year. Mortgage rates have risen 80bp to 6.86% over the past two months.

Walmart reported sales +5.3% with the retailer benefiting from trading down.

Recent surveys suggest US consumers are set to spend 4% more on holiday shopping this year. While consumers may feel fearful of inflation, their balance sheets look good.

Initial jobless claims came in at 213k, better than consensus expectations (220k) with the data showing that the labour market is trending sideways at a healthy level.

The narrative that the US labour market is cooling appears inconsistent with the continued strength in data for above-trend GDP growth, strong retail sales, low jobless claims, and rising average hourly earnings.

In addition, credit spreads continue to be tight, corporate profits and forward profit margins are at all-time highs and US household balance sheets are in very good shape.

In short, the US economy remains very strong.

The market continues to pare back expectations of large Fed Fund rate cuts. Expectations for a December rate cut from the U.S. Federal Reserve have diminished, with the likelihood now at 53%, a sharp drop from 82.5% just a week earlier. 

Unsurprisingly the US dollar continues to be very strong.

US inflation and bond rates

The US 10-year bond yield has increased from 3.6% to 4.4% despite the Fed signalling significant rate cuts.

This has not been the case in previous rate cutting cycles where yields have either fallen or gone sideways.

The soft employment print in September prompted a 50 bp cut but was then met by a couple of sticky inflation prints.

Fed funds futures have shifted over the past two months, with the expectation for the end 2025 moving from 2.8% up to 3.8%.

While inflation has been trending down with the core measure at 3.3% year-on-year, it will remain a key concern for financial markets, as well as in the political sphere.

This was the 42nd consecutive month with Core CPI above 3%, the longest period of elevated inflation in the US since the early 1990s.

Voter perceptions of inflation were important in the recent US elections. The economy was the top concern for Republican voters, and three quarters of US voters felt inflation created hardship for them this year.

Tariffs generally apply to lower frequency consumer durables, with consumers less aware of price changes unlike the hyper awareness of changes in prices at supermarket or petrol stations.

As such tariffs may end up raising inflation with less impact on the politically important perception of inflation.

Europe macro and policy

The European Central Bank’s index for negotiated wages rose to 5.4% year-on-year in Q3, up from 3.5% in Q2, a record lift since the euro area was formed.

A jump had been anticipated after large, negotiated wage rises in Germany for auto and engineering workers.

The ECB expects wage inflation to fall next year to a rate more consistent with the 2% inflation target.

The market’s reaction was limited, with the data playing to the view that the ECB is likely to cut by only 25bps next month.

China macro and policy

China announced some tax reductions for home buyers. This might indirectly support consumer spending, with new home buyers having more spare cash to spend on furniture, for example.

However it is not the degree of consumer support markets really wish to see.

A wide gap has opened between mortgage interest rates and mortgage borrowing, implying that potential homebuyers are unwilling to buy apartments at any level of mortgage rate.

With an estimated 90 million empty apartments and a population expected to fall by roughly 100 million in the next 20-to-30 years, the cyclical and structural headwinds make stimulating this important part of the economy extremely difficult.

Australia macro and policy

Minutes from the RBA’s November meeting noted that easing in the labour market might have begun to stall or modestly reverse.

A breakdown of Australian unemployment by duration shows that short-term unemployment appears to have stabilised below pre-pandemic levels. 

The board also highlighted that due to govt subsidy ’noise’ from government subsidies in the December 24 quarter, it wants to see two quarters of declining inflation before cutting the cash rate’.

This means that the first rate cut (if any) is likely to occur from May 2025.

Australian housing prices have also hit a historical peak of unaffordability – with the average home now costing eight times the median household income.

The percentage of national median income needed to fund a mortgage on the national median dwelling value has hit 50.6%, according to CoreLogic, versus a 20 year average of 36.6%.

Rental costs are 33%, versus a 20 year average of 29%, by the same measurement.

The Australian Bureau of Statistics considers a household to be in housing stress if it pays more than 30% of income on housing costs.

While first home buyers have benefited from assistance from the Bank of Mum and Dad in recent years. There are warning signs of pressure here.

By one measure, the percentage of households in the 55-64 year age cohort owning a home with no mortgage has fallen from over 70% in 1995 to under 40% today.

Markets

There are some warning signals in US equities, such as historically high valuation levels, insider selling (although there are some seasonal effects here) and Berkshire Hathaway loading up on cash.

However, sentiment remains strong, and earnings growth continues to be supportive.

Market breadth is also improving and favouring small caps which are likely to benefit from US pro-growth policies.

The stock market is the second most expensive for any incoming President (after George W Bush in 2000). 

Given Trump’s pro-market tendencies, it is reasonable to expect that he is likely to double down on market friendly policies in the event of a big sell off.

Locally, the ASX unwound some of the recent weak performance in energy and resources with both sectors up strongly at the expense of IT, consumer discretionary stocks and AREITs.

 

---