Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by investment specialist Chris Adams
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LAST week was quiet on the macro front, with little data to add to the debate on disinflation and growth.
Fed speakers remain patient, as an economy holding up well allows them to wait and see if improving inflation trends are confirmed.
The US equity market was singularly focused on the Nvidia result, which once again beat consensus expectations, taking the stock – and the market – to new highs.
The S&P 500 ended up 1.68% for the week.
US earnings have been good, index momentum is strong, breadth is reasonable, the macro backdrop is supportive, and seasonality is positive – with March/April historically the best two months in 1H.
So, while consolidation is possible, the market remains in an uptrend.
The Australian market was largely flat, in a week dominated by results (S&P/ASX 300 +0.12%).
Earnings season is telling us the economy is okay; there is the odd pocket of softness, but generally, trends are continuing as before.
Industrial and tech companies are doing better, while large consumer-facing companies are wary of delivering a message which is too positive for fear of a media backlash.
Economy and inflation
United States
There was little relevant data last week.
We are seeing some survey data – such as the Evercore ISI Company Survey Diffusion index – indicate that the industrial sector is beginning to improve in the US.
This had been dragged lower by substantial destocking in 2023.
Even a gentle recovery here would help underpin economic growth.
A number of Fed members made comments during the week, generally emphasising the importance of not overreacting to January’s CPI data.
Governor Chris Waller was the most cautious, saying that the chance of January’s CPI being noise versus a signal was a fifty-fifty chance. He does tend to be at the more hawkish end of the debate.
Vice-chair Philip Jefferson and New York Fed chief John Williams took a more benign view.
Williams noted that disinflation tends to be bumpy but is moving in the right direction, and that while core inflation is still above the 2% target, it is below 3%. He also noted there was no need to shift the view on neutral rate levels.
These comments continue to suggest a likely first cut in May or June.
Economic resilience gives the Fed capacity to be patient; it would be a tougher call if there was a weaker economy, but inflation hasn’t fallen sufficiently.
Europe
Europe also saw some marginally positive industrial survey data, as the Euro Area S&P Global and Global Composite PMIs – a measure of confidence – ticked up.
We also first signs of wage growth data easing in Europe.
China
Sentiment remains poor and authorities continue to try to support the stock market.
The National People’s Congress annual meeting in March looms large.
The market will be looking to this event to provide signals on growth targets, fiscal deficit, local government bond quota and potential central government bond issuance.
Markets
Nvidia is the bellwether for the AI theme which, in turn, is the leading theme in the market.
Its Q4 result was strong and better than expected, leading to a US$250 billion rise in market cap on the day and a current market cap of more than US$2 trillion.
The market liked several messages from management, including:
- Revenue was diversifying, implying a more sustainable earnings stream.
- The company absorbed a large hit from China, where regulation shrank its market from about 25% to mid-single digit of revenue in the quarter.
- New production innovation from late 2024, which has five to ten times the computational power and should underpin the outlook for 2025.
- Enterprise and sovereign demand are gaining share.
The spread into enterprise is particularly interesting as that goes to the use case and the potential for generative AI to accelerate productivity and earnings in other sectors.
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Overall, the US market appears to remain well underpinned as it breaks to new highs.
The percentage of stocks above their 200-day moving average has remained in the 70-80% range in 2024, which compares to a trough of near 20% in October last year.
Sentiment is very bullish, but this is not a reason in and of itself for the market to drop.
For example, the market stayed near current levels of bullishness – as measured by the Consensus Inc % Bullish measure – for extended periods across 2014-15 and late 2016-18.
Earnings season
Earnings season in Australia remains mixed, with no clear macro themes emerging.
REIT and retailer results suggest that the consumer continues to hold up relatively well.
But there are pockets of softness – for instance, the supermarket sector as price inflation falls, but no pick-up in volumes in response.
Advertising remains very soft, but industrial companies are generally seeing activity remain at the same cadence.
Cost control has been a point of differentiation at the company level, but it tends to be disciplined control rather than large restructuring announcements.
One recurring theme is that large companies, particularly with a consumer focus, are mindful about the media and government reaction to their results.
There is a less positive spin and more focus on evidence of reinvesting to help customers.
In some cases, it appears as though companies are prepared to sacrifice valuation ratings to avoid facing backlash.
Industrial and tech companies are more immune to this issue and are, therefore, faring better.
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.
Despite some negative surprises among ASX industrials this earnings season, there are still opportunities for stock pickers. Pendal analyst ANTHONY MORAN explains his approach
- Industrials hit by changes in customer behaviour.
- Opportunities in sold off stocks, but watch margin pressures
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THERE have been plenty of negative surprises among industrial stocks this ASX earnings season, showing how companies across the economy are changing their behaviour, says Pendal equities analyst Anthony Moran.
It’s an environment that provides opportunity for stock pickers – if you know what to look for.
“Several industrials companies have demonstrated weakness for the December six months and it’s been a surprise,” Moran says.
“There is more weakness than expected and that’s manifesting in corporate results.”
Moran nominates packaging group Amcor where volumes were down 10 per cent for the December quarter, year-on-year.
“That’s quite astounding for a company that sells packaging for centre-of-the-aisle groceries.
“It highlights that there is weak demand in certain sectors, and the de-stocking impact has exceeded expectations,” Anthony says. Pendal holds Amcor.
More broadly, it shows that companies across the economy are trying to manage higher interest costs by reducing working capital and maximising their cash balances, he says.
“Amcor saw it. Fletcher Building experienced it through the New Zealand construction cycle.
“Treasury Wine Estates saw it in their US wine business and in their Asian premium business. At Treasury there is more destocking then expected along with a weaker consumer.” Pendal holds Treasury Wines.
Where to look for opportunities
The macro shifts hitting individual companies throw up opportunities for investors, Moran argues.
“There are companies that have cyclical weakness, and their valuations can be attractive.
“You want to look for a company that has the ability to grow above its end market and has the potential to accelerate its share, even in a declining market.
James Hardie (held by Pendal) is an example, he says.
“It’s shown strong growth in the last 12 months even as the repair-and-remodel cycle has been down double digits in the US.
“You want companies that are able to do that,” he says.
Another example is Orora (also held by Pendal) which is a major packaging distributor which has spent time implementing a new operating model, that is now showing sustained market gains, Anthony says.
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Delivering good performance from a core business, even if the market is not growing, is attractive to investors, Anthony says.
“Aristocrat Leisure is doing that at the moment. The US casino market is stable, but Aristocrat is delivering good performance.” Pendal holds Aristocrat.
Look for companies emerging from down cycles
He says investors should consider looking for industries that are emerging from down cycles, particularly if they are worried about the economic outlook.
Another theme coming through earnings season, particularly across industrials, is margin disappointment, Anthony says.
“In Fletcher Building’s case, the sensitivity of the margins surprised but that’s what you get in big volume downturns.
“But for someone like Hardie, it did disappoint on its margin outlook, and that’s because some of the cost relief they got during Covid is starting to normalise up.
Transurban is another example where they recorded another year of cost growth above inflation and that’s crimping their margins.
“The headline is that costs are still an issue for a number of companies and for most industries pricing power is coming off. It means investors need to watch margins,” Anthony says.
“The next 12 to 24 months is going to be the great normalisation of the post-Covid super-cycle in margins, at least for the industrials sector.”
About Anthony Moran
Anthony Moran is an analyst with more than 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.
Here are the main factors driving the ASX this week, according to portfolio manager RAJINDER SINGH. Reported by portfolio specialist Chris Adams
- Find out about Rajinder’s Pendal Sustainable Australian Share Fund
- Find out about Crispin Murray’s Pendal Focus Australian Share Fund
- Register for Crispin Murray’s bi-annual Beyond The Numbers webinar on March 8
GLOBAL equity markets took a breather last week, while bonds continued to sell off as they have so far throughout February.
Stronger-than-expected US inflation numbers weighed on both asset classes. Core CPI — and the services components in particular — stayed stubbornly high.
Other key US data releases were mixed.
Overall, these indicators increase the likelihood that the US Federal Reserve will want to accumulate more evidence of sustained disinflation before making its next change in rates.
Markets already had moved to a view of a first cut in May or maybe even June, rather than March as hoped earlier in the year.
In other international economic news, two G7 countries – Japan and the UK – dipped into technical recessions.
Commodities have been relatively resilient, with oil holding onto its previous gains, and copper and lithium enjoying some relief after a difficult 2024 so far.
In Australia, the unemployment rate edged up and Australian bonds followed US bond yields higher.
We saw reporting season moving up a gear with numerous important results coming out.
Early indicators suggest that in aggregate, companies are delivering revenue in line with expectations, but with upside on earnings due to better margin management.
The S&P/ASX 300 gained 0.23% while the S&P 500 fell 0.35%.
US macroeconomics
Last week, we saw two important US inflation indicators: the producer price index (PPI) and consumer price index (CPI).
The headline PPI advanced 0.3% in January, which was a stronger than the 0.1% expected.
The acceleration in core PPI was an even bigger surprise, increasing by 0.5% versus consensus of 0.1%.
Another concern is that some components of PPI, especially health care, were strong in January and these are aligned with those used in the Fed’s preferred measure of inflation – the personal consumption expenditures (PCE) core services ex-housing (CSEH) index.
Some economic forecasters increased their predicted PCE inflation as a result.
The CPI report was the most influential of the week’s economic indicators.
Headline CPI for January came in higher than expectations, up 0.3% month-on-month and 3.1% year-on-year versus consensus increases of 0.2% and 2.9%, respectively.
Core CPI advanced 0.4% and 3.9% year-on-year, which also was higher than consensus.
Strength in housing-related Owners Equivalent Rent (OER) and Core Services ex-Housing drove this result.
This was the highest Core CPI reading in eight months, prompting a sell-off in the S&P 500 and an increase in bond yields.
While CPI is still decelerating, the concern is that the pace of this decline has stalled – requiring the Fed to keep rates up higher for longer.
The case for this is supported by the gap that has opened up between Core CPI and PCE Core Services ex-Housing measure.
There were some noteworthy trends in the CPI components:
- Services inflation remains consistently higher and stronger, though some forward-looking indicators suggest rent should have a moderating effect.
- Commodities and food effects have continued to reduce slowly over the last 12-18 months.
- Energy is having a deflationary effect, though this could easily reverse with base effects and changing prices.
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Following the release of the CPI numbers, the Fed’s Chair, Jerome Powell, held a closed-door meeting with US House members.
Here, he reportedly said words to the effect that the CPI numbers were consistent with the Fed’s expectations and that they would look at the upcoming PCE report to give them some more information.
Elsewhere, January retail sales were also disappointing, down 0.8% month-on-month.
Housing starts were soft, down 14.8% month-on-month in January, but poor weather has been blamed for depressing both indicators.
Initial Jobless Claims remained low at 212,000, indicating that US labour markets still appear resilient.
On Tuesday, we saw the release of the NFIB small business survey, which showed that US business sentiment remains at recessionary levels.
However, the survey also showed small businesses continue to moderate price rises.
In terms of consumer sentiment, the University of Michigan update showed consumers feeling significantly more optimistic than the low levels in 2023.
Historically, this has correlated with S&P 500 market performance.
Global macroeconomics
US goods imports data demonstrates the sharp decline in China’s share of the US market.
As a percentage of total US imports, China has fallen from a peak of more than 20% prior to Covid back to 13.7% in December 2023 – roughly the same level as 2004.
Mexico has overtaken China with 15.3% of US imports, which at least partly reflects the outcome of “near-shoring”.
Elsewhere, the EVRISI survey of company sales in China shows that sales have fallen back to near-record lows and are only just above the Covid trough.
Japan and the UK dipped into technical recessions with a second quarter of economic contraction in Q4 2023. Germany also contracted but had been flat in the previous quarter.
Japan’s three-decade economic slide continues, with the country slipping from the third to fourth-largest economy in the world after the US, China and Germany.
Australian macroeconomics
The unemployment rate rose to 4.1% (consensus 4.0%), which is the first time above 4% since Jan 2022.
Employment was flat, the number of unemployed rose 22,000, and the number of hours worked dropped 2.5%, though there may be seasonal effects at play.
It’s only one month of data, but it is in line with other indications that the Australian economy is starting to show signs of slowing.
The trend in employment growth slowed considerably towards the end of 2023.
Also, the shift from full-time to part-time employment as the composition of hours worked indicates a degree of under-utilisation within the Australian labour force, which is important in helping slow inflation.
ASX earnings season
It’s still relatively early days, but it’s been a decent start to ASX half-year reporting season.
Australian companies seem to have navigated relatively subdued revenue growth by increasing margins and delivering decent EPS outcomes.
An analysis of management commentary indicates that companies are, if anything, a bit more optimistic (or at least less pessimistic) about current positioning and the outlook for the year ahead.
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:
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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.
What’s next for rates and how should fixed-interest investors be positioned? CommBank chief economist STEPHEN HALMARICK and Pendal’s head of government bonds TIM HEXT discuss their views in a new on-demand webinar
Below are the highlights. Watch the webinar here
- Soft landing likely with rate cuts around September
- Bond rally to be sustained
- Watch now: How to conquer the rates peak webinar with CommBank’s Stephen Halmarick and Pendal’s Tim Hext
AS chief economist at Australia’s biggest bank, Stephen Halmarick has better access to real-time consumer data than almost anyone.
The day after the RBA’s February rates decision, Halmarick sat down to share his insights in a webinar with Pendal’s head of government bond strategies Tim Hext.
“The Reserve Bank kept a mildly hawkish tone … at its board meeting,” Halmarick said after the no-change decision.
“Governor Michelle Bullock isn’t yet ready to declare victory against inflation.”
Official figures, and internal data from the Commonwealth Bank, show the economy is slowing and growth this year is likely to be below trend, he said.
“Household sectors will be under ongoing stress. But business investment intentions are holding up nicely. And state government infrastructure spending is still pretty solid.”
Soft landing
Halmarick believes the Australian economy is heading for a “soft landing”, based on weak consumer spending.
“It’s not till we get the rate cuts through the door that we see consumers start to pick up,” he says.
“We think the unemployment rate by the end of this year will be closer to 4.5 per cent.
“There will be more people employed but there will also be more people joining the labour market.
“It’s important to remember that nobody needs to lose their job for the unemployment rate to go up.”
Halmarick expects inflation to keep falling this year, giving the central bank confidence to cut the official cash rate in September.
US inflation almost under control
Pendal’s head of government bond strategies Tim Hext says the US economy is close to getting inflation under control.
He believes the first rate cut in the US will happen in May, followed by several more this year.
“The RBA always follows what happens globally,” Hext says in the webinar.
“This cycle has been all about inflation and that’s what will allow the Reserve Bank to start cutting rates.”
Hext believes there will be three or four cuts within six months of the first reduction in the local cash rate, which he tips will be in September.
Geopolitical factors and other risks
What are the key risks to this scenario?
Halmarick points to geopolitical factors and risks around supply chains, as well as the performance of China.
“Domestically the key risk is the fall in household real income,” he says “The other big issue is the housing market.
“I’m particularly interested in rental markets. Rents are chewing up so much more of people’s money.”
Hext says the list of worries about the economy is getting smaller, not bigger.
One potential concern is the Reserve Bank’s aggressive reduction in its inflation forecast – it expects headline inflation to be 3.2 per cent by the end of 2024.
There’s a risk that won’t be met, says Hext.
And he says oil – via primary and secondary effects – can also have an impact on inflation.
Significantly, the Reserve Bank seems more relaxed about wages.
Both Stephen and Tim agree that the upcoming tax cuts in the middle of the year will not make a significant difference to inflation or growth, relative to the already legislated Stage 3 tax cuts.
What does it mean for fixed income investors?
With a soft landing the most likely outcome, the current bond rally should be sustained, argues Hext.
Last year investors could buy “real yields” on 10-year bonds above 2 per cent – meaning the investor gets 2 per cent above the inflation rate on a government bond.
“That’s very generous for taking very little risk,” Hext says. “It’s not sustainable unless you have a massive productivity boom.
“If inflation heads towards 3 per cent and real yields start to head back towards where productivity is at the moment – somewhere between zero and 1 per cent – then 10-year bonds should land around 3.5 per cent and the cash rate around 3 per cent.
“Right now we are a bit above 4 per cent so there’s a fair bit of juice left in 10-year bonds,” he says.
“The rally should be sustained. Bonds still represent some value though they’re not as cheap as a year ago.
“Under a soft-landing scenario, it is quite risk friendly. “
Which asset classes should investors consider?
“You should have more duration than normal in bonds, you should be comfortable about owning credit, and it’s not a bad environment for equities,” argues Hext.
About Tim Hext and Pendal’s Income & Fixed Interest boutique
Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.
Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.
Find out more about Pendal’s fixed interest strategies here
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.
The latest US CPI data surprised to the upside. Pendal’s head of government bond strategies, TIM HEXT, explains what it means for investors
- Why bonds, why now? Pendal’s income and fixed interest experts explain
- Browse Pendal’s fixed interest funds
THE inflation numbers were released this week and surprised to the upside.
Headline for January was up 0.3% (3.1% year over year) and core up 0.4% (3.9% year over year).
This meant that CPI has, for now, failed to follow the PCE (the Fed’s preferred inflation measure) below 3%.
This was only a small miss, 0.1% higher than expected, but was still against the narrative of falling inflation.
After all, the US needs monthly inflation numbers hitting 0.2% before the Fed can relax.
In the US, CPI is heavily influenced by what is called Owner’s Equivalent Rent.
Unlike most countries which only measure rents for those actually renting (in Australia this is 6% of the CPI), the US CPI tries to capture the idea that owners are ‘consuming’ their residence by putting an equivalent rent on it.
This is almost 25% of the CPI basket, on top of the 7.5% for actual rent. Together, they make up housing inflation.
Analysts use Zillow private sector rent numbers as a good lead indicator, but the downward trend there was not matched in this CPI.
Maybe next time.
There was other noise in the numbers, but the market was focused on core services.
The narrative of core goods falling (down 0.3% in this number) contrasts with core services (ex-shelter), which were up 0.7% on the month.
It’s hardly time for the Fed to declare victory.
The focus will now turn to whether core PCE can stay down around 2% annualised or drift higher towards CPI at 3%.
The PCE has a smaller weight to shelter of only 15%. This will help keep it lower than CPI for now.
Historically, core CPI has been around 0.3-0.5% above core PCE as housing has increased at a faster pace than other services.
The following graph, courtesy of Citigroup, shows that these gaps between CPI and PCE do open up quite often, especially when house prices are on the move.
Source: Citigroup, 2024
For now, the markets will grant inflation a bit of leeway.
Yes, cuts from The Fed are being pushed out and bond yields are drifting higher.
Inflation break-evens (long-term expectations) only moved 0.05% higher (from 2.25% to 2.3% for 10 years).
But the market is on notice.
If this becomes a trend in the months ahead, then risk markets will start to take notice, as rates will stay higher for longer and the chances of a recession also increase.
Goldilocks beware.
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Our view is that the overall trend to lower inflation is still intact, but the sugar hit from lower oil prices and improved supply chains we saw late last year is now entering a period of more balanced risks.
This is also helped at the margin by the small improvement in the US budget deficit, which is taking some of the steam out of the economy.
We expect the fallout from today’s numbers to persist very near term, as momentum funds lean against a vulnerable market.
This will open up opportunities to once again build exposure into long-duration positions.
The US now has less than four cuts this year (1%) and Australia less than two (0.5%), from almost six and three respectively at the end of 2023.
About Tim Hext and Pendal’s Income & Fixed Interest boutique
Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.
Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.
Find out more about Pendal’s fixed interest strategies here
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.
Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by investment specialist Chris Adams
- Find out about Pendal Focus Australian Share fund
- Crispin Murray: Five key questions for 2024 (and how we’re going so far)
GLOBAL equity markets continued to rise last week despite another sell-off in bonds.
The market continues to see stronger economic data — and is now pushing out the expected timing of rate cuts in the US to May or June, rather than March.
Equities were supported by a good US earnings season and the prospect of higher growth to underpin positive earnings revisions. The S&P 500 gained 1.4% for the week.
There was little new insight on the US economy, though a Federal Reserve survey of US bank lending showed early signs that credit tightening was coming to an end. In addition, annual US CPI revisions produced no surprises.
Oil bounced on rising concerns about geopolitical risk but remained in its recent trading range. Brent crude gained 5.6%.
In Australia the Reserve Bank held rates steady and gave a mixed signal on the outlook, effectively conceding they do not really know which way things will break. The S&P/ASX 300 fell 0.65%.
Early half-yearly results were mixed among ASX-listed companies, but largely reflected stock-specific issues.
Sentiment on China continued to deteriorate ahead of the Lunar New Year with base metals lower, which in turn dragged on the resource sector (-3.36%).
US growth outlook
The latest Fed Reserve bank-lending survey pointed to a significant reduction in the number of banks tightening financial conditions.
Credit tightening has been an area of concern for recession bears. Easing here would support the soft-landing case.
Lending standards may be a lead on improving US manufacturing data.
Anecdotally, we are hearing of companies that have reached inventory target levels — and are now waiting on consumer signals before dialling up production.
Jobless claims continued to stay low in the US, averaging 212k per week. This indicates February payrolls will be more than 200k.
The Atlanta Fed GDPNow — a monthly forecasting model created by the Federal Reserve Bank of Atlanta —continues to signal good growth of just under 3.5% for the first quarter of 2024.
Fiscal policy — which has not tightened in the US despite low unemployment — is one factor which explains the resilience of growth.
US Inflation
Inflation news remains supportive, despite better-than-expected economic growth.
This is good for equities, since we’re still seeing the economy holding up with rates able to come down.
The Atlanta Fed’s wage-tracker continues to improve, with 12-month wage growth falling to 5%.
The US Employment Cost Index is back near pre-pandemic levels. Unlike Australia, productivity is strong in the US, which is supportive of the disinflation thesis.
The annual revision of US CPI was also helpful since it contained no surprises (unlike last year). Some feared the progress on disinflation may have been overstated. This has not been the case.
Overall, three-month annualised core CPI stayed at 3.3% with goods a bit higher (-1.2% from -1.6%) and services lower (4.8% vs 5.1%).
There are some signs to be mindful of on inflation.
The service prices component of the ISM Manufacturing Index rose materially and we continue to have freight disruption due to the Red Sea.
There are some concerns the January CPI due this week may be higher than expected. There has been a seasonal effect recently as certain industries load price increases in that month.
There are offsets to these concerns. Chinese deflation remains material, providing a very different context to the situation during Covid. At this point the market has all but given up on a March cut in US rates.
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A May cut is regarded as lineball. June is priced as a near-certainty.
China
Chinese deflation continues.
Its consumer price index (CPI) dropped 0.8% in January (year-on-year) versus -0.5% expected.
Core CPI rose 0.4%. This was the lowest since June 2022 when the economy was in the midst of its zero-covid policy.
The producer price index (PPI) was down 2.5%, in-line with forecasts.
The Lunar New Year holiday may provide some respite from bad news on the Chinese economy.
There remains a lot of speculation about whether its weak stock market will trigger a more aggressive policy response.
Last week Beijing replaced the head of its China Securities Regulatory Commission with a banking veteran who was serving as deputy party secretary for Shanghai.
This is a signal that China president Xi Jinping was not pleased with how the sell-off has been managed. Though the issues are more to do with the economy than anything the regulator is able to control.
We doubt this is a sufficient catalyst for China to become more aggressive on stimulus, since the equity market is still not widely owned and the issues are more structural (related to consumer and private business confidence).
Credit data in terms of total new loans was stronger than expected. Though this was also the case last January and did not follow through then. So we do not place too much faith in this signal.
We note that Chinese fiscal policy was not as supportive in 2023 as it could have been.
This provides room for expansion. Any announcements are likely to come out ahead of the National People’s Congress starting March 5.
Australia
The RBA stayed on hold last week.
The message from the press conference was “each way.”
On one hand Governor Michele Bullock noted inflation was too high and needed to fall. This was important because it was tied to cost-of-living pressures.
On the other, she said recent developments were encouraging. The first cut would not require inflation to be in the 2-3% range if confidence was high that’s where it was heading.
Bullock’s testimony to the parliamentary committee was a little less hawkish but with no forward guidance.
There is an expectation that the economy is slowing and there are some anecdotal signs of this, notably with talk of job cuts.
However, retailers have seen decent sales, the housing market fired last weekend and the US is holding up better than expected.
We also note New Zealand inflation data has been worse than expected, prompting expectations of another hike.
On balance, we suspect the market’s current expectation of an August rate cut may be optimistic.
Markets
Three-quarters of the way through US earnings season we are seeing positive earnings revisions.
The market was expecting 3% EPS growth for CY24 and Q1 is currently signalling around 7%. Stripping out the “Magnificent Seven” tech stocks this is still coming in around 6%.
This strength is supported by resilient margins, as input and labour costs are coming in less than expected.
On the negative side, we’ve seen a step-up in layoff announcements.
This may be a seasonal factor — we saw similar announcements in January 2023. It also has not flowed through yet into claims data.
We are seeing cash deployed. Stock buy-backs were down in the first three quarters of 2023, but began to rise from Q4 and now stand at about US$150 billion.
We have also seen a strong start to investment-grade credit issuance, which is also supportive for funding requirements.
The US market is up 5.52% so far this year. But similar to last year, much of the gains are driven by the Magnificent Seven (which are up 15% while the rest of the market is flat).
We note that gains in the “Mag 7” stocks are supported by earnings growth.
In Australia, resources were weak last week due to concerns over China.
Meanwhile a collapsed deal between Santos and Woodside weighed on the energy sector (-3.53%).
Healthcare (+1.36%) and technology (+1.01%) were the best sectors.
That reflects a benign environment for quality growth stocks with rates likely to fall while the economy holds up.
About Crispin Murray and Pendal Focus Australian Share Fund
Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
Here are the main factors driving the ASX this week according to portfolio manager JIM TAYLOR. Reported by portfolio specialist Chris Adams
LAST week was a big one for economic data and US company reporting, amped up by the Federal Open Market Committee’s (FOMC) meeting and Chairman Powell’s press conference.
US reporting season is tracking in-line with historical trends, and the results from five of the “Magnificent Seven” which reported were generally well received – with a strong showing from Meta crowning the week of results.
US economic data was all largely as expected and supportive of the soft-landing scenario, until the monster Non-Farm Payroll print on Friday night potentially put paid to the notion of a March rate cut.
Powell had strongly indicated at the FOMC press conference that a March cut had not been the Fed’s base case.
Commodities were generally weaker and oil gave back all of the gains from the previous week.
The week’s upshot is that expectations around the extent of rate cuts in CY2024 now look more appropriately centred.
The S&P/ASX 300 rose 1.82% while the S&P 500 gained 1.34%.
Interest rates
The Fed removed the previous reference to “any additional policy firming that may be appropriate” from its statement.
Instead, it noted that it will “carefully assess incoming data, the evolving outlook, and the balance of risks” in determining adjustments to the interest rate.
In addition, Powell noted that he didn’t think it likely that the Fed could reach a required level of confidence by March to cut rates at that time.
The market is now focused on the May 24 meeting for a potential first cut.
This gives the Fed the opportunity to see three additional PCE, CPI, PPI and employment data, as well as the first quarter employment cost index (ECI).
Elsewhere, the Bank of England voted 6-3 to keep rates steady as expected; there were two votes for a hike and one for a cut.
US economic data
It was a big week for labour-market data.
JOLTS
The JOLTS job opening data rose to 9,026k in December.
This was above the upwardly revised 8,925k openings in November and ahead of the 8,750k expected by consensus.
Importantly, the JOLTS quit rate held steady at 2.2%.
This is regarded as a key lead on the employment cost index (ECI), which is the Fed’s preferred measure of wage growth and suggested moderation here.
ADP employment
The ADP employment report delivered 107k increase in private payrolls, which was well below the 150k expected by consensus.
ECI
The ECI rose 0.9% quarter-on-quarter for Q4 2023, down from 1.1% in Q3 and versus consensus expectations of 1.0%. This is the smallest increase since December 2019.
Wage gains slowed to 0.9% from 1.2% in Q3, while the year-on-year rate fell to 4.3% down from 4.6% in Q3 and from the high point of 5.2% in Q2 2022.
While hawks on the FOMC are possibly looking for a reading below 4%, the annualised increase in Q4 came in at 3.8% while a drop in the quits rate over recent months bodes well for further slowing ahead.
Initial jobless claims
Initial jobless claims rose to 224k from 215k, and ahead of the 212k expected by consensus.
Data around layoffs suggests that jobless claims could head toward 250k in the next few months.
This is still low by historical standards during an employment slowdown, but is something that the Fed may have their eye on.
During the week, we also had UPS and PayPal – among others – announcing up to 10% in workforce reductions.
Non-farm payrolls
The market had been generally happy with the jobs data through the week.
Then came the hammer blow from non-farm payrolls, which rose 353k in January – almost twice the consensus expectation of 185k.
Net previous revisions were also up 126k.
The headline payroll gain comprises 317K private and 36K government jobs, and gains were broadly spread across the economy.
The unemployment rate was unchanged at 3.7%, which was just below consensus.
The available work force has been growing because of migration.
Average hourly earnings rose 0.6%, versus 0.3% expected, however, this data series is not as reliable as the ECI which is favoured by the Fed.
The market’s reaction was initially negative on concerns that a firm labour market could push out expected rate cuts.
However, several analysts noted that Powell had stressed in his press conference that the Fed was not looking for a fall in employment as a pre-condition for rate cuts.
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Australia
Consumer price index (CPI)
The December quarter CPI came in weaker than expected.
Headline CPI rose 0.59% for the quarter (versus 0.80% expected) and 4.05% year-on-year.
This is 45 basis points below the RBA’s forecast made in November.
The trimmed mean inflation rose 0.78% for the quarter, also weaker than the 0.9% consensus expectation.
This measure was 4.18% year-on-year and 3.12% at an annualised quarterly rate.
The result was explained by strong pressure on electricity prices from ongoing subsidies, as well as greater disinflation from tradable goods.
Strong disinflationary pressure on core goods is increasingly offsetting relative resilience in core services pricing.
Retail sales
Retail trade fell 2.7% for the month-on-month in December, worse than the expected -1.7% and reversing the 1.6% gain in November.
There were material seasonal adjustments to the December figure, without which this figure would have been a 5.3% month-on-month decline.
Weakness was broad-based across states and led by non-food spending.
Clothing and soft goods fell 5.7%, household goods was down 8.5%, and department stores were 8.1% lower. Eating out fell 1.1% month-on-month, while spending on food rose 0.1%.
About Jim Taylor and Pendal Focus Australian Share Fund
Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.
Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 14 years of its 18-year history (after fees), across a range of market conditions. Find out more about Pendal Focus Australian Share Fund here.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
The latest quarterly CPI data shows inflation is on the right path. But there’s still more work to do, writes Pendal’s head of government bond strategies, TIM HEXT
- December-quarter inflation lower than expected
- Housing still needs to cool
- Why bonds, why now? Pendal’s income and fixed interest experts explain
- Browse Pendal’s fixed interest funds
Inflation on track towards 3%
THE market was not disappointed with today’s December-quarter CPI inflation data.
The theme since early November has been inflation moderating globally — and today’s Australian numbers back that up.
The headline Consumer Price Index was 0.6% and underlying 0.8% for the quarter. Annual numbers were 4.1% and 4.2% respectively.
These numbers were slightly lower than expected due to electricity subsidies and international travel.
We also got a comparison of December 2023 with December 2022. Weak fuel prices saw that number at 3.4%.
The Reserve Bank is entering 2024 with inflation somewhere around 4% annually but with the three-month annualised number nearer 3%.
Next week’s RBA statement will urge caution
The RBA will be encouraged by these inflation numbers.
Their panic rate hike in November looks like a mistake — but they will claim some credit for the easing pace.
Their caution will come from non-tradable inflation. Non-tradables are prices largely driven by domestic factors — predominately services.
The RBA can have more impact in this area than in tradables, where we are a global price taker.
Non-tradable inflation has eased from 6% to 5.4% but this is still inconsistent with the RBA inflation band.
The RBA would need to see non-tradable inflation nearer 4% if inflation was to fall closer to the 2-3% target band. Non-tradables are around two-thirds of the CPI.
The biggest driver of non-tradable inflation is wages, which are now around 4%.
Therefore there should be some optimism that over 2024 non-tradable inflation can ease further — though recent hikes in areas like education will continue to put pressure on this.
The path of inflation this year
The key battleground for inflation remains housing, which makes up 22 per cent of the CPI.
New dwelling cost growth is easing, but at a slower rate than hoped.
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Rents are still growing, though closer to 5% than 10%. Utilities are held down by subsidies that will be reviewed later this year.
The RBA won’t gain confidence in the medium-term inflation path for inflation until they see housing moderate nearer to 4% in the CPI. (Housing CPI includes the cost of a new dwelling, rents and utilities but not house prices).
The RBA is expecting CPI at 3.9% by June and 3.5% by December.
They may tweak the June number lower but are unlikely to change the December number for now.
Implications for monetary policy
The market still has cash priced for 3.85% — or two cuts — by the end of 2024, with the first around September.
This is driven more by the fact the US is priced for 4% Fed Funds or 1.5% lower by year’s end.
The US is likely to deliver these cuts since their inflation is near target (unlike the RBA).
But the RBA should eventually deliver lower rates — and we think pricing is fair for now.
Hurdles include oil prices (which have sneaked higher in the past week) and resilient employment markets.
Yes, the long-and-variable lags of monetary policy could see last year’s hikes further weigh on the economy, accelerating the need for cuts.
But we think risks lie more to the latter than the former — which makes us still positive on duration.
About Tim Hext and Pendal’s Income & Fixed Interest boutique
Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.
Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.
Find out more about Pendal’s fixed interest strategies here
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.
Here are the main factors driving the ASX this week, according to Pendal portfolio manager PETE DAVIDSON. Reported by investment specialist Chris Adams
- Find out about Pendal Focus Australian Share fund
- Crispin Murray: Five key questions for 2024 (and how we’re going so far)
THE US market continues to hit all-time highs with the S&P 500 up another 2.38% last week. The S&P/ASX 300 gained 2.8%.
US macro data remains good, with solid fourth-quarter GDP growth and better consumer spending.
There was positive commentary on consumer resilience in US Q4 earnings season. But the ratio of companies beating expectations is running below the five-year average.
There were also concerns on electric vehicles as Tesla missed consensus expectations for both sales and margins. The lithium sector remains under pressure.
In Australia, the federal government proposed changes to the Stage 3 income tax cuts, providing extra relief to lower and middle-income earners.
This should help underpin consumer demand since these groups have a higher propensity to spend.
On Wednesday the Australian Bureau of Statistics will release the December-quarter CPI print, which may reset the tone for rates this year.
The market is now looking for two cuts this year, taking us back to 3.85%. There is some potential for a pivot, which would help markets.
Chinese authorities are looking to mobilise some US $278 billion to stabilise its slumping stock market. A recent cut to the reserve ratio requirement for banks may also boost credit.
Hopes of a China rebound from this stimulus supported oil prices (Brent crude +4.2%) which ended higher for a second straight week.
Crude also received support from a big inventory draw-down due to cold weather in the northern hemisphere as well as ongoing Middle East tensions and positive US GDP data.
US politics is pointing towards a Trump victory for Republican nomination, which the market seems comfortable with.
Treasury yields were a touch firmer last week, with yield curves slightly steeper as well.
US data and rates
Overall, US data is solid, though real-time, pulse-type information points to a slowdown.
The advance estimate for Q4 GDP growth was 3.3%, helped by surprising growth in inventories, which continued to build on a large gain in Q3.
However, Fed surveys on manufacturing, new orders, new shipment are all turning down. The Empire Fed, Philadelphia Fed, and Richmond Fed readings all imply a slowdown.
Employment data is on the weaker side with jobless claims ticking up, though that’s probably weather-dependent.
January non-farm payrolls came off the blocks strongly last year, with lots of jobs. A March rate cut from the Fed is less likely if that result is repeated.
Core PCE inflation has fallen to below 3% for the first time since March 2021.
The 6-month annualised change fell to 1.9%, matching last month for the lowest reading since September 2020, when the economy was wracked by the pandemic.
The market will keep a keen eye on any shifts in language or rhetoric from this week’s meeting of the Fed’s rate-setting Federal Open Market Committee.
The Fed’s latest summary of economic projections implied 75 bps of cuts in 2024 – a shallower cutting cycle than current market expectations. There have been big downward revisions to market expectations for central bank policy rates. This reflects faster-than-expected disinflation in major economies and a dovish pivot in central bank communication from several central banks, including the Fed.
China outlook
There was movement at the station last week when Beijing announced a US $278 billion package to support its stock market.
There was also some focus on Alibaba co-founder Jack Ma buying up the company’s stock.
The People’s Bank of China announced it would cut the required reserve ratio by 50bp from February 5. The cut was not a total surprise, but the market was expecting only 25bps.
Markets have been expecting some form of liquidity injection in the lead-up to the Chinese lunar new year, when seasonal cash demand tends to pick up. An injection of roughly CNY 1 trillion cash into China’s banking system is a positive surprise.
The market is now looking for additional stimulus packages for housing and the economy, which could be supportive for the Australian resource sector.
Changes to Stage 3 income tax cuts
The Albanese government proposed changes to the legislated Stage 3 tax cuts (to apply 1 July).
Low-and-middle-income earners (<$150k) would receive a bigger tax cut at the expense of higher-income earners (>$150k).
The rationale is that the post-Covid inflation crisis and cost-of-living pressures facing lower earners requires changes to the original package which was designed and legislated in 2019.
The changes are designed to be budget-neutral, but could be more stimulatory since lower-income earners may be more likely to spend additional disposable income. There is also focus on the political backlash, with the federal opposition continuing intense criticism of Albanese for breaking repeated promises that he would proceed with the original plan.
Australian inflation and policy
There is potential for a Reserve Bank pivot at its February 6 meeting. Recent communications indicate policy is already tight enough.
Past cycles suggest risks are skewed towards rate cuts earlier than the current market expectations.
Q4 CPI data due out on Wednesday will be important.
If the trimmed mean CPI reading is well below RBA expectations of 1% quarter-on-quarter, the RBA could revise down its forecasts for inflation to be within the 2-3% target range by the end of this year (rather than late 2025).
Lower travel and accommodation charges and lower fuel prices could all help the inflation picture.
Historical revisions to RBA forecasts have been big at times, so this has the potential to surprise on the downside in February – though the revisions will depend partly on the Q4 CPI outcome.
Recent data provides clearer signs of a softening labour market. While the unemployment rate remains low, its increase in recent months is larger than at the start of most RBA rate-cutting cycles.
The market now expects the RBA to cut rates twice later in 2024, bringing the cash rate down from a 12-year high of 4.35% to 3.85%.
Headline inflation is expected to only touch the upper end of the RBA’s target 2-3% band in Q1 2025. The RBA is likely to be the last central bank in the “dollar-bloc” countries to join the global easing cycle.
Australia’s property market has now fully recovered from the 2022 downturn, according to data from real estate website Domain.
Sydney, Brisbane, Adelaide and Perth have reaching new house price peaks, returning to pandemic-boom highs, Domain reports.
Demand is strong, but the country has a housing supply problem, with no near-term solution from rate changes.
That said, there are signs that student visa growth has peaked and is moderating. This may help ease population and housing pressures at the margin.
Markets
ASX 200 aggregate earnings are forecast to fall this year, largely due to softer resource and bank sectors.
Industrials are expected to be positive, providing some offset.
At this point the market seems quite happy to look through the earnings valley this year and seems prepared to pay higher valuations for banks (which are up 2.97% CYTD versus -0.53% for the S&P/ASX 300).
The S&P/ASX 300 Resources index gained 3.47% last week on improved sentiment around China, but remains down 4.6% so far this year.
About Crispin Murray and Pendal Focus Australian Share Fund
Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by investment specialist Chris Adams
- Find out about Pendal Focus Australian Share fund
- Crispin Murray: Five key questions for 2024 (and how we’re going so far)
US equities (S&P 500) gained 1.19% last week and reached a new all-time high – 106 weeks after the previous peak on 7 January 2022.
This happened against a rising US Dollar, an escalation in Red Sea tensions, and despite bond yields rising as Fed Governor Christopher Waller tried to cool the market’s view on the pace of rate cuts.
A combination of positive US economic news, confidence on inflation, and cash on the sidelines beginning to chase the market were behind the move higher.
US corporate earnings season has been solid so far, with some small signs of hope from the regional banks and indications that the consumer is holding up okay.
The Australian market (S&P/ASX 300) was softer, down 1.05%, as sentiment on China continues to wane and drag on the resources sector.
Inflation
There was little incremental information on the inflation front.
The latest Expected Change in Inflation survey from the University of Michigan fell from 2.9% in November to 2.8% on a five-year view in December.
This is constructive in terms of expectations around wages and is at the lower end of the post-pandemic period, but is still above the average pre-Covid level of 2.5%.
The market is aware of the effects that Red Sea disruptions are having on freight rates as well as oil and gas prices, but it is not yet affecting bond yields.
This is probably because the impact has been mainly to Europe-Asia shipping routes.
That said, there is now some spill-over apparent in US-China routes, but the upcoming Chinese New Year may be exacerbating this.
Deflation in Chinese export prices is also acting as an offset.
Business and consumers are not yet showing any concern around the ability to access products, so we don’t see the hoarding noted during the pandemic – however, an escalation of the crisis could shift that sentiment.
Elsewhere, the Consumer Price Index (CPI) in the UK was worse than expected.
This is a reminder that the pathway to deflation may be rockier, even though the main cause was volatile components such as air fares, which are expected to reverse.
In addition, underlying economic data is soft (e.g. retail sales), suggesting inflation pressures should be easing.
Growth
Most recent signals support the view that the economy ended 2023 well and that it is not in recession.
US December headline and core retail sales were solid at 0.6% month-on-month, which is stronger than expected and reinforces the anecdotal evidence that Christmas spending picked up.
The overall trend implies real consumer spending was up 2.3% in Q4 2023, which also implies the economy is holding up.
The University of Michigan Consumer Sentiment indicator rose much more than expected, up 9.1 to 78.8.
This is the largest rise since 2005, though the overall level remains subdued.
Forward expectations of sentiment also rose; falling fuel prices and rising stock prices probably played a large role in this.
Initial Unemployment claims declined 16,000 to 187,000, indicating the labour market is holding up.
December housing starts were also stronger than expected, only falling 4.3% from November in what is traditionally a weak month.
New housing permits rose 1.9%, indicating more optimism over future demand.
Multifamily units under construction have risen to record levels, which is supportive to economic activity but also means supply should help ease pressure on rents – supporting lower inflation.
Policy
Fed Governor Waller dampened expectations on the potential scale of rate cuts for 2024.
He put a lot of store on the next CPI report, as it will incorporate seasonal adjustment revisions for 2023 which may change the rate of disinflation.
This suggests that the March meeting is “live” for a cut.
Waller reiterated his perspective that rates can fall to ensure real rates do not rise as inflation falls, but he also saw ‘no reason to move as quickly or cut as rapidly as in the past’, which reflects the starting point being one where the economy is holding up better than in previous cycles.
He also indicated no rush to slow quantitative tightening.
Bond yields rose in response, as Waller is one of the governors who triggered the shift in sentiment on rates last year.
The European Central Bank’s Christine Lagarde also reiterated the message that rates won’t be cut until the summer, with the market anticipating April as an option.
She also noted that “the risk would be worse if we went too fast and had to come back to more tightening,” highlighting central bank reticence on declaring victory over inflation too early.
One big positive for Europe is that winter has been mild and gas prices have fallen sharply, which translates into lower power prices.
Geopolitics
The Red Sea remains the most immediate issue in terms of the knock-on effects on inflation.
But elsewhere, Trump won big in Iowa – with neither Haley nor De Santis emerging as clear alternatives.
The latter subsequently withdrew from the nomination process, which places considerable importance on the New Hampshire Primary on 23 January.
It is an opportunity for Haley, as independents are able to vote; if she can run close, that will potentially give her momentum for her home state of South Carolina on 3 February.
Should she fail, however, the race could be over before Super Tuesday on 5 March.
China
A raft of data for 2023 was released last week.
Q4 GDP came in at 5.2% growth year-on-year, lower than the 5.3% expected (and having grown 3.0% in 2022).
Interestingly, the GDP deflator was -0.5%, which is the largest fall since 1998-99.
This means Chinese economy grew less than the US in nominal terms (the latter growing 4.8%) and actually declined in US Dollar terms.
Given the weakness in Q4 2022, this reinforces how subdued the Chinese economy remains.
The negative inflation and Producer Price Index highlight how the economy is being driven by the supply side, while underlying consumer demand remains weak for structural reasons.
Growth of 6.8% in industrial production and 4.0% in fixed-asset investment for the twelve months ending December 2023 was better than expected – however, retail sales were weaker at 7.4% (versus 8.0% consensus).
The property sector remains soft, with property investment falling 12.3% year-on-year (worse than the -10.9% expected and having already fallen 10% in 2022).
New home sales fell 12.7%, while the value of new home sales fell 17%.
New home completions actually rose 15.4% for the year, due partly to lagged effects and the efforts made to finish projects that were tied up with funding issues.
Unemployment rose to 5.1%.
The National Bureau of Statistics also released a new youth unemployment figure, which excludes those at university and school – this came in at 14.9% versus 21.3% in the old measure.
There were 9.02 million new births in 2023, according to official data, which was more than the market expected but which still means the overall population fell marginally.
The current lack of confidence in the Chinese economy can be seen in stock market weakness and in bond yields falling to cycle lows.
Expectations for 2024 GDP growth currently lie around 4.5%, with piecemeal stimulus propping up growth and an emphasis on infrastructure investment, which should support commodity demand.
Australia
December employment data was weaker than expected, with jobs falling 65,000 versus market expectations of a 15,000 rise, though November was revised up to 73,000.
The three-month run rate has stepped down from 30,000-40,000 to 15,000-20,000 per month and year-on-year employment growth is 2.8%.
Full-time roles fell 107,000 and part-time roles rose 41,000, while hours worked fell 0.5% month-on-month and landed at +1.2% year-on-year – the slowest since March 2022.
Unemployment was flat at 3.9%, as the participation rate fell back from a record high of 67.3% to 66.8%.
All of this indicates the economy is cooling and helped support the market’s view that rates have peaked.
Markets
The S&P 500 market broke to a new all-time high, clearing the peak we saw on 7 January 2022.
This came on option expiry day, which released the gamma overhang in the market, and had been flagged by some bears as a point where the market could roll over.
It was interesting that this occurred despite a higher move in bond yields, and suggests that there is still some scepticism on the economy reflected in positioning.
The early phase of US earnings season has been in line with normal experience, with about half of the companies reporting beating expectations so far.
Earnings revisions remain on track for a 3% uptick year-on-year.
The ASX was weaker due to continued challenges in resources due to softer commodity prices and poor sentiment on China.
We have begun to see more deferrals in mine developments, reflecting cost pressures, and weakness in base metal and lithium prices.
Growth stocks outperformed despite bonds rising, reflecting improving sentiment on the underlying economic outlook.
About Crispin Murray and Pendal Focus Australian Share Fund
Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.