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

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

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

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

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

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

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

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

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

What’s driving disinflation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here

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About Pendal

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

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

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

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

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

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

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

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

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

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

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

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

Market moves

The challenge to US exceptionalism continued last week.

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

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

This occurred due to:

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

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

 

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

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

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

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

US equities

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

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

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

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

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

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

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

Australian equities

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

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

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

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

Global equities

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

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

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

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

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

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

What were the big headlines that impacted markets?

1. US Supreme Court rules in Trump’s favour

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

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

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

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

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

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

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

2. Big Beautiful Bill approved by the House

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

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

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

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

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

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

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

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

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

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

3. Tariff uncertainties continue

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

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

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

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

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

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

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

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

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

US macro data

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

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

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

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

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

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

The housing sector is at risk of further slowing.

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

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

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

Reserve Bank of Australia cuts

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

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

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

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

Markets

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

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

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

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

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

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

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

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

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

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

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

 

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About Elise McKay and Pendal Australian share funds

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

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

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

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

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

Contact a Pendal key account manager here

Tariffs, trade and AI are the big stories driving markets. But with investors increasingly focused on global themes, opportunities are emerging at home on the ASX, says CRISPIN MURRAY

• Markets are increasingly theme-driven
• Opportunities emerging on ASX
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NARRATIVE-DRIVEN volatility is causing market dislocation, rewarding investors that can stay focused on business fundamentals, says Pendal’s head of equities Crispin Murray.

Share prices are increasingly moved by popular themes like AI disruption, trade wars, and tariff fears – without regard to company fundamentals or long-term valuations.

As a result, quality Australian companies with sound outlooks and predictable cash flows are being indiscriminately sold off, creating opportunities for fund managers.

“A lot of it is driven by flow, particularly out of the US. Worried about tariffs? Sell the tariff basket. Think interest rates are going down? Buy the discretionary basket,” says Murray, speaking at Morningstar’s 2025 Investment Conference in Sydney this week.

“We believe this is creating more distortions in the market. It means that the amplitude of mispricing is greater, and it lasts longer.

“The challenge for fund managers is to take advantage of that – it actually creates more opportunity.”

Tariffs part of a larger picture

Murray says tariffs are just one part of a broader US policy push that also includes deregulation, lower taxes, and efforts to drive down energy costs – all of which are supportive for global growth.

“I think we need to step back and think about why are the tariffs happening? The tariffs are one pillar in a strategy which is all about trying to change the world trading order.”

He says there is logic behind the need for change because America cannot continue borrowing money indefinitely to fund consumption.

“It is unsustainable – and therefore they need to change it.”

Alongside tariffs are plans to reduce red tape, reduce taxation and lower the costs of energy.

“What they’re trying to do is make America the place people want to invest, not be forced to invest.

“The problem we had until maybe two weeks ago was that everyone just saw the stick, not the carrot.

“Now, they’re beginning to think ‘they don’t want a recession, they’re going to do this in a more managed way’.

“It will be choppy, it’s going to be unpredictable – but I still feel that underlying all of that, we’re going to have a reasonable growth in the global economy.”

Predictable cashflow

Murray says global market dislocation means the ASX has a range of industrial companies with predictable cash flows and returns that have been sold down and offer opportunities for investors.

“One example is CSL – one of Australia’s largest, most successful companies. Five years ago was running high – at an over 40 multiple. It’s now down to about 22 times earnings,” he says.

Not all the decline is global factors. CSL has seen reduced margins as the pandemic hurt the company’s core plasma collection business and overpaid to buy Vifor Pharma. But the looming threat of tariffs on its pharmaceutical business has dampened investor sentiment.

“The company has actually been able to grow earnings over five years by about 40 per cent – but the rating has halved and therefore the share price has gone backwards.

“When it comes to investing you make money from anticipating change, and our bet is that the failures of the last five years have finally permeated into the psyche of the company. They realise that they need to improve.”

Murray says fears of tariffs affecting CSL is “assuming the company doesn’t do anything to respond – and I think that’s where the market’s overreacting.

“Companies can realign where they produce things. They can do that within two or three years.

“And so, we think the risk on the tariff front is being overstated, and that’s what’s providing you the opportunity.”

About Crispin Murray and the Pendal Focus Australian Share Fund

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

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

Find out more about Pendal Focus Australian Share Fund  

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Although evolving tariff policies threaten a trade downturn, investor uncertainty about US economic policies is a positive for emerging economies, argues Pendal’s emerging markets team

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VOLATILITY in global financial markets increased further in April.

Notably this included US financial markets, with a general pattern of a weaker US dollar and rising bond yields.

Some analysts have described this as a “classic emerging market crisis”.

As veterans of actual emerging crises dating back to 1994, we consider that view to be wildly overstated.

In terms of actual market moves, US sovereign 10-year bond yields were highly volatile in March and April, but ended flat at 4.2%. US 30-year yields rose from 4.5% to 4.7%.

It’s particularly unusual that this came with a weaker US dollar.

The US Dollar Index (or DXY – a measure of the value of the USD relative to six other major currencies) fell 7.6% in the period while the broad trade-weighted index fell 3.9%.

There have only been four other occasions in the past 30 years when the US dollar fell by more than 1.5 per cent at the same time 30-year yields rose more than 10 basis points.

Those were during the Global Financial Crisis in February 2009, the European sovereign debt crisis of October 2011, the May 2013 taper tantrum and the first election victory of President Trump in November 2016.

Yields on US 30-year Treasuries rose in the period, but the increased interest rate demanded by investors is not because of inflationary expectations as inflation-protected bond yields also ended the period higher.

There is a concept that, “when the US sneezes, emerging markets catch a cold”.

Given this volatility and weakness in core US financial markets, how did major emerging markets fare?

In March and April, the currencies of almost all emerging markets strengthened against the US dollar (the four Gulf states with US dollar pegged currencies have been excluded from this analysis, as has Greece which uses the Euro).

The strongest was the Hungarian Forint, up 8.6%, while the weakest was the Indonesian Rupiah, down by a marginal amount.

In addition, the bond yields (looking at local currency bonds with a maturity closest to ten years) of the majority of major emerging markets declined.

For the very biggest emerging markets, the combination of moves was particularly positive.

Brazil saw the currency gain 3.7% and ten-year bond yields decline 1.2 percentage points; in India those figures were +3.6% and -0.4pp.

Major exporters, despite the prospect of US tariffs, generally fared well.

Currencies strengthened and bond yields declined in Mexico (+4.8%, -0.1pp), South Korea (+2.4%, -0.1pp) and Taiwan (+2.9%, -0.1pp). China (currency marginally weaker, bond yields marginally higher) was the only significant exception.

We feel the best explanation for this seemingly confusing set of market signals is that some global investors are relying less on the US dollar and US sovereign debt as their risk-free benchmarks. While the US dollar was down 7.6% against major currencies, it was down 15.1% against gold.

Emerging markets are driven by two major global drivers: international capital flows and international trade.

A weaker dollar represents capital flowing out of the US and into the rest of the world – and a weaker dollar has consistently been positive for emerging markets over the past 30 years.

Although evolving tariff policies threaten a downturn in global trade, the message from financial markets is that investor uncertainty about US economic policies is a clear positive for emerging economies and for investors in emerging markets.

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About Pendal Global Emerging Markets Opportunities Fund

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

The fund aims to add value through a combination of country allocation and individual stock selection.

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

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

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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

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THE walk-back of US-China tariffs has reinforced a faster-than-expected reversal from Liberation Day’s shock announcement and underpinned the rebound towards equity market highs.

The S&P 500 posted a 5.3% gain last week, while the NASDAQ gained 7.2% and the S&P/ASX 300 rose 1.5%.

General tariffs on China’s imports have been reduced to 30% for 90 days. This is better than the market was hoping for.

It also removes the effective embargo on Chinese imports – and has probably come soon enough to prevent it from having a major impact on economic growth.

Effective tariffs on China are still around 40% – and at a 14% blended rate for aggregate imports to the US – so we will see inflationary pressures build and slowing growth.

However, the tail risk of recession has fallen markedly. The consensus among economists has the chance of recession at around 35%, down from more than 50% in early April.

The removal of this tail risk, combined with the recent strong US quarterly earnings and a weaker US dollar and oil price, are all supportive for equities.

But this has been a significant bounce and some consolidation is likely, given there is still uncertainty over policy and the economy.

Détente on tariffs has also affected bond yields, with the forward curve removing one implied rate cut in the US; expectations are now for two cuts by the end of 2025.

This, in combination with what looks to be a stimulatory US budget bill, has seen US 10-year Treasury yields rise 29 basis points (bps) to 4.41% in May.

In Australia, employment data suggests the economy is in good shape.

Employment growth was stronger than expected (+89k jobs in April versus consensus expectations of +20k), while the unemployment rate remains at 4.1% as a result of growth in participation of 0.3% to 67.1%.

Hours worked are more subdued at 1.1% growth year-on-year.

The RBA is still expected to cut this week, which will underpin growth.

The results and outlook for tech companies Life360 (360) and Xero (XRO) were positive and we expect continued rotation from defensives into growth and deeper cyclical names as the outlook for world growth becomes more secure.

US macro and policy

In the space of four weeks, we have moved from probable recession in the US to a likely scenario of moderating, but positive, growth.

The market had feared a downward spiral as the direct effect of tariffs on consumer spending would be compounded by a significant fall in confidence, lower investment, supply chain disruptions, tighter financial conditions and a Federal Reserve unable to cut rates due to inflation.

We have subsequently seen the walk-back in tariffs, while the US economy is proving more resilient than expected, corporate earnings were stronger, oil prices were lower, and financial conditions have eased as equities and credit rallied and the US dollar fell.

This virtuous circle has taken the market within 2% of its February high.

We will probably never know if this was chaotic “policy-on-the-run” or some grand plan, but there are two take-outs we would emphasise:

1. The Trump administration has shown they are not prepared to tank the US economy in the pursuit of their long-term economic agenda. The speed of initial trade agreements has surprised the market. We note that Treasury Secretary Scott Bessent recalled in one interview that one of the first questions President Trump asked him was how they can change the economic order without triggering a recession. When faced with that risk, they clearly looked to adjust policy.
2. The US economy has more momentum than the market appreciated. Growth has been more resilient despite sentiment indicators being weak and corporate earnings have surprised on the upside, which underpins jobs and investment.

In our view, the market is likely to consolidate from here.

Despite the suspension of reciprocal tariffs, the overall tariff level is rising from 3% to around 14% – and this looks set to be a permanent feature, as they remain an important pillar in the strategy to reduce US economic reliance on other countries.

During this period of tariff suspension we will see the work done on the other pillars of this policy, which are deregulation, tax incentives and lower energy costs.

These are to incentivise and enable investment to help balance the negative effects of tariffs.

There are still uncertainties which can check the market’s continued immediate rise:

• A blended tariff rate of 14% now is materially higher than the 3% at the start of the year. While this is a more manageable level, it will lead to higher prices and eat into consumer spending power.
• We still are not clear whether the fall in sentiment indicators will translate into real economic data.
• We do not know if the US can reach a constructive deal with Europe.
• Finally, the US equity market sits on relatively high multiple of 22x price/next-12-month earnings, with less transparency on earnings growth and the market consensus still around 11% EPS growth in CY26.

It is also important to watch the bond market, which may present another risk if yields rise too high. They have continued to back up this month, though they are still manageable at around 4.5%.

The US fiscal position is an important factor here – Moody’s downgrade to the US credit rating reflects its longer-term concern here.

US – China trade détente

Monday saw the US and China walk back from the trade brink with a 90-day reduction in general tariffs on China from 145% to 30% (10% reciprocal tariffs, plus 20% related to fentanyl). This is a better outcome than most expected.

China agreed to a cut from 125% to a 10% on US imports.

If nothing is agreed by the end of the 90 days, then both sides will increase tariffs by 24% i.e. tariffs revert to 54% on China and 34% on US.

These tariffs do stack on the original 2018 Section 301 tariffs and the fentanyl one stacks on top of Sectoral 232 tariffs. That means the weighted average tariff on China is estimated to be around 40% for the next 90 days, which compares to 11% prior to the escalation.

The market is not expecting a deal to be done by the early August deadline.

However, if negotiations are progressing then the suspension could be extended, with the UN General Assembly meeting in New York in late September providing an opportunity for Presidents Trump and Xi to meet, with a deal possibly formalised around mid-October.

The other components of negotiations include progress on fentanyl and Tik Tok ownership.

The ultimate outcome is now expected to be tariffs on Chinese imports around the 34% level which, adding on sector-specific tariffs, rises to the low-40% range.

This is, however, all conjecture – and the market did not expect the scale of walk-back in tariffs so soon. The direction of risk, in our view, is probably slightly lower tariffs than implied by the market.

Implications of the deal

Both sides were motivated to land a deal. Previous tariff settings were effectively an embargo on trade, with expectations that Chinese exports to US would fall more than 65%.

The freight industry has been warning that US shelves would begin to empty out of key products within weeks as a result – and it was feared that US GDP would see a hit to growth expectations between 0.5% to 1.0%.

Beijing was also facing an 2.5% hit to China’s GDP and there were 16 million jobs directly affected in their export sector.

The suspension buys both sides time to prepare, should there be no agreement in future.

The US can work on its tax legislation – which will be looking to put more money into the hands of consumers to offset the effect of tariffs – while China can work on other measures to support its economy.

The consequences of this deal are:

1. Better US growth expectations. Estimates have increased around 0.5% for GDP growth in 2025.
2. Lower inflation in the US.
3. Chinese growth net revisions for 2025 in the range of 0.5% to 1% – this is reduced by less need for stimulus.
4. The market has removed 1-2 cuts from the forward curve in the US. There has also been one cut taken out from the ECB’s forward curve
5. A bounce in the US dollar, though this has been relatively limited.

Clearly, removing the tail risk of a major trade breakdown – combined with a lower risk of recession – has been a catalyst for US equities to catch-up with the rally we have seen in other markets.

US economic growth signals

Some demand was pulled forward into Q1 to front-run tariffs. This supported economic data but is now expected to unwind. Along with the weaker sentiment signals of recent weeks, it is expected to lead to a few months of softer data.

We began to see the first signs of this in retail sales, which were up 0.1% month-on-month in April, after rising 1.7% in March.

The control group measure – which excludes food, gasoline, autos and building materials and feeds into GDP – was down 0.2% month-on-month, possibly reflecting some of the sentiment issues rolling through. 

The Food service sales component remained firm. This is an important discretionary measure and indicates spending is still holding up OK.

Homebuilder confidence was weaker and looks to be a soft part of the economy. Weaker sentiment may weigh more here, as uncertainty tends to lead to deferral of major decisions and mortgage rates remain elevated.

However, the sector is already subdued. Housing starts are at the historically muted rate of 1.36m annualised for April and building permits are declining about 5% month-on-month.

So, while this sector remains a headwind, it is unlikely to be an additional material one.

Sentiment indicators remain poor, with the Michigan Consumer Sentiment Index falling to 50.8 in May from 52.2 in April, below consensus and forecasts of 53.4.

The survey is distorted by the Expectations component – which sits well below the current conditions level.

The Inflation expectations component is also continuing to rise.

There is a question mark over the reliability of the Michigan Consumer Sentiment Index – as it has been poor for some time and not translated into real data. There is also a huge political divergence with sentiment among Democrat voters at 22.5 versus Republican voters at 90.

So, we are not placing too much weight on this indicator.

Weekly initial jobless claims held steady at 229k.

The upshot is that data is softer at the margin, but suggests an economy which is slowing but still holding up

We note that the Atlanta Fed GDPNow indicator – which tanked in Q1 and was one of the early indicators that suggested growth was weakening – is looking much better in Q2 so far, suggesting growth near 2.5% quarter-on-quarter.

Inflation signals

April’s US consumer price index (CPI) was slightly lower than expected and is giving us an insight into inflation trends before the impact of tariffs.

• Overall, the trend is solid: Core CPI was +0.24% month-on-month (MOM) and +2.8% year-on-year (YOY).
• Core goods rose +0.1% MOM after a decline in March, though excluding used cars there has been a tick-up on a 3-month basis. This may indicate that, broadly speaking, companies are in a position to pass through the effect of tariffs – some, such as Walmart, are indicating this is what they will do.
• Core services (excluding rents) rose 0.3% (MOM) but is still decelerating on a three-month basis, possibly reflecting a slowing in the economy and helping to absorb the inflationary effects of tariffs.

April’s Core Producer Price Index (PPI) at -0.4% was below expectations, driven by a 1.6% fall in trade services, which reflects distributor’s gross margins.

At face value, this may indicate tariffs are being absorbed into gross margin. However, this data is prone to significant revisions and it may be the tariff increases surprised distributors, who had not adjusted prices at the time the data was collected.

Walmart’s CFO said that consumers will start to see price increases from the end of May. We will get updates from other retailers this week. 

US budget update

The latest indicative proposal from the House is to bring forward a series of tax cuts which will be financed in later years i.e. a near term fiscal stimulus starting in CY26.

This is at a time of full employment and inflation still above target range.

While good for growth and corporate earnings, it could be a catalyst for bonds yields to rise further and make it more difficult for the Fed to cut rates.

We note Moody’s downgrade to the US credit rating, which highlights the lack of action on the structural fiscal deficits.

Markets

One important dynamic of the market recovery has been the better performance of the Mag 7.

This is relevant for Australia as it tends to correlate with the performance of our growth stocks versus defensives.

Mag 7 earnings have surprised to the upside, which has led to them reversing part of the underperformance they have seen earlier this year.

This is an important support to the overall market and underpins the rotation we have seen to tech in the ASX.

The other dynamic to note is that sentiment is far more subdued than it was when the market hit its highs at the start of the year. This is important as it means the market is less vulnerable to a deterioration in news flow.

The S&P/ASX 300 is now 14% off its 7 April lows, up 3.7% in 2025 and within 2.5% of its February highs.

The 1.5% gain last week was driven by tariff détente, as well as supportive results from tech stocks Life 360 and Xero.

The index move higher was held back by a rotation away from defensives and gold stocks.

Consumer Staples fell 3.5%, Utilities 2.5% and REITs 0.5%.

The rise was led by Tech (up 5.3%) and bombed-out deep-cyclicals, notably some of the more leveraged resource stocks – for example, Mineral Resources (MIN) rose 25.4% for the week.

Given i) supportive domestic economic backdrop, ii) the reduction of offshore tail risk (notably Chinese growth and commodity demand), iii) the likely cut in domestic rates this week, iv) stable government and, v) loose fiscal policy, the market is well-placed to test the prior high and consolidate there, in our view, while we wait to see how the various global trade negotiations play out and the degree of slowing in the US.

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About Crispin Murray and the Pendal Focus Australian Share Fund

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

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

Find out more about Pendal Focus Australian Share Fund  

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While it’s all systems go for a rate cut next week, caution will be the RBA’s message, writes Pendal’s head of government bond strategies TIM HEXT

• Browse Pendal’s fixed interest funds

THE final pieces of the economic puzzle before the Reserve Bank’s rate decision next Tuesday have now been released.

The data paints a mixed picture, among the wider chaos of April.

The NAB Business Survey for April, our favourite trove of leading indicators, showed an economy slightly easing.

Business conditions remain below average, driven largely by falling profitability. Manufacturing and retail remain soft, with Victoria still the weakest.

Of more interest was capacity utilisation – it is finally back at long run averages, the final post-COVID indicator to resume normal transmission.

Here is the graph, courtesy of NAB.

The second piece of data was the Wage Price Indicator (WPI) for the March quarter.

This came in at 0.9%, slightly higher than expected as several higher public sector agreements hit. After the surprisingly low 0.7% Q4 number, it is fair to characterise wages as growing around 3.2-3.4% annually, consistent with RBA forecasts.

This is near an ideal outcome for the central bank, as slightly positive real wage growth should support consumer spending without impacting inflation.

The annual Minimum Wage decision will be handed down by the Fair Work Commission in early June and should see a similar outcome.

Finally, we got the April employment numbers today.

As always, volatility was high – with a large 89,000 job growth, but no change to the unemployment rate as participation also shot up.

No great explanations were forthcoming from the ABS, where I imagine corralling 26,000 people to fill in their survey each month must be the least wanted job among the statisticians.

When the RBA board sits down on Monday and Tuesday next week, they are highly likely to land on a 0.25% rate cut, as the market now prices.

Relative calm from the global picture in May has ruled out a larger cut, while the well-behaved inflation numbers make no change a highly unlikely call.

The RBA is in a good position right now.

A quarterly rate change cycle, post-quarterly inflation numbers, seems a cautious and easy path as inflation settles down in the 2-3% band.

We still look for cuts next week and in August and November taking cash rates to 3.35% (or somewhere near ‘neutral’). Markets should still lean in for a little bit more given the global picture.

So, what is the market pricing now?

The chart below shows a cash rate near 3.3% by year-end, up from an expected 2.9% only a few weeks ago.

As a result, we are once again building some overweight duration positions.

The market is not overly cheap, and exuberance may see it get a bit cheaper. However, for the first time since March, pricing allows for a more sensible risk/reward overweight duration position based off Australian fundamentals.

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

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

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

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

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here

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About Pendal

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

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

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Policy effectiveness doesn’t always come wrapped in transparency or even democracy, observes Pendal’s head of income strategies AMY XIE PATRICK

• Less policy guidance can be a good thing
• Focus on getting it right rather than always being right
• Find out about Amy Xie Patrick’s Pendal Monthly Income Plus fund

INVESTORS were witness to a tale of two central banks in early May.

The US Federal Reserve left policy unchanged, resisting calls for rate cuts despite growing political pressure.

Meanwhile, the People’s Bank of China (PBoC) delivered another dose of stimulus – cutting policy and reserve requirement rates and co-ordinating with regulators to prop up equity markets.

One central bank faced market criticism over its non-committal guidance.

The other moved swiftly and silently, without needing to justify its decision.

This divergence is not just a curiosity for anyone managing money through this phase of the economic cycle.

It’s a study in contrasts, a reflection of deeper structural differences, and a reminder that “policy effectiveness” doesn’t always come wrapped in transparency or even democracy.

Trump, Powell, and the art of political pressure

The Fed’s decision to hold rates came against a backdrop of renewed presidential frustration.

President Trump has been ramping up criticism of Fed chair Jerome Powell, calling him “Mr Too Late”, threatening to fire him and pushing hard for rate cuts.

This isn’t new behaviour from Trump, of course. But it’s gaining urgency for market participants as US sentiment sours and the S&P 500 appears more fragile.

Despite this, the Fed held its line.

I, for one, am not losing sleep over questions of the Fed’s independence. It’s too soon to be doubting America’s institutional integrity.

Moreover, Powell has shown the discipline to tune out political noise and stick to his mandate. Rather than guess which of inflation or growth will be the larger problem, he has chosen to “wait and see”.

These are very frustrating words for the market to hear.

The real lesson here is not about Powell. It’s about the limits of anyone’s ability to forecast far into the future and the risks we create when central banks try too hard to meet markets where they are.

China’s policy co-ordination

Unlike the Fed, the PBoC rarely emphasises the risks to inflation or employment.

In fact, it has never felt the need to publicly justify its policy decision.

The combined effect of the PBoC’s policy decisions will inject more than RMB 2 trillion (roughly $US280 billion) into the Chinese banking system.

Alongside market stabilisation and support measures announced by financial regulators, this will provide a supportive backdrop for domestic business activity.

Also unlike the Fed, the PBoC has never been independent in the Western sense. It functions as an arm of the state.

Nevertheless, this lack of independence hasn’t undermined the credibility of China’s bond market.

Quite the opposite. Since the pandemic, Chinese government bonds have behaved more consistently as a defensive asset than US Treasuries have, offering shelter during periods of global risk aversion and domestic slowdown.

I’m not suggesting we abandon democracy for technocracy.

I certainly would not advocate the removal of central bank independence in the West.

But from a markets perspective there’s something to be said for the capacity to act decisively, without being bound by the optics of forward guidance or the paralysis of public scrutiny.

This recent demonstration of China’s policy machine to be able to act quietly, decisively and in a coordinated fashion must be a source of envy for Mr Trump.

Borrowing from the East?

In some ways, the current US posture feels like a clumsy imitation of China’s long-practised state capitalism.

Trump’s tariffs are like a type of self-harm aimed at reorganising America’s industrial structure – much like Beijing’s Three Red Lines policy targeted the painful default and deleveraging of the Chinese property sector.

Trump’s tariffs are asking US consumers to share the pain while US manufacturers collect themselves under the new order – much like Beijing asked Chinese households to put up with low returns on their savings so cheap funding could be channelled towards industry.

The difference is that no votes are needed for President Xi to stay in power, whereas President Trump needs ongoing support.

The latest US manufacturing surveys already see much handwringing from producers over how the tariff pain could be shared through their supply chains.

The latest US consumer surveys point to sentiment falling through the floor.

While sentiment doesn’t always translate into economic outcomes, it sure provides fodder for those lobbying against the policy chaos in Washington.

Even though Trump claims he’s “not even watching the stock market”, policy sensitivity to the performance of equity markets likely remains far higher for his administration than it has ever been for China.

For the latter, it has also been thanks to a less-developed financial system and lower ownership of local share markets by private households.

The efficacy for Trump to borrow pages out of China’s policy playbook will always be limited by the sharp dichotomy of the two nations’ political constructs.

It is hard to argue that short-term policy efficacy is worth the cost of fundamental democracy and liberty.

Is guidance over-rated?

Perhaps the most contrarian, yet valuable takeaway is that less policy guidance may be a good thing.

For years, central banks have fallen over themselves to signal intent, reassure markets, and smooth volatility.

Pendal’s internal analysis of the Fed is that in the near term, it tries very hard not to surprise the market expectations for each policy meeting.

However, excessive clarity creates a false sense of security.

In Australia, we only need rewind to the RBA’s steadfast guidance through most of 2021 that there would be no need to lift interest rates until 2024.

By the start of 2024 the central bank had in fact raised interest rates by 4.25 percentage points.

Whenever markets have believed that a central bank’s guidance has removed uncertainty –  or at least truncated the left tail of return distributions – the behaviour of market participants becomes more risk-loving.

In the lead-up to the Great Financial Crisis that looked like the private sector and banking system taking on too much leverage.

Perhaps a little more policy uncertainty and a little less conviction on policy guidance is saving us from bigger troubles down the road – however unsatisfactory that may be for market participants today.

How Pendal’s fixed-interest team navigates uncertainty

It’s of little concern to us whether central banks give us clear guidance with conviction or simply tell us they’re “data dependent”.

Guidance that comes with strong conviction is often priced in by bond markets ahead of time if justified by the economic fundamentals – and creates volatility and trading opportunities if not.

Bonds and equities have both demonstrated that the fundamentals always matter, even though dislocations can occur.

By keeping ourselves focused on the fundamentals we are able to position our portfolios for the greatest likelihood of success.

By avoiding the hard task of forecasting far into the future, we free ourselves from unhelpful narratives that turn out to be false.

By focusing on getting it right rather than always being right, we’re able to preserve the flexibility to change course when the fundamentals change.

Maybe it’s time to stop giving RBA governor Michele Bullock a hard time for wanting to be guided by the data.

 

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

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

WHILE hard data continues pointing to a solid US economy, soft data and sentiment indicators remain weak.

The market is grappling with how much damage has been done to the US and global economies and, therefore, whether the recent market rally has been just another “buy the dip” opportunity (as in recent years) or if it is a genuine bear market rally.

Global equity markets took a break in their rally from April lows last week, with the S&P 500 down 0.5% despite a decent US earnings season.

Treasury yields drifted higher as the market watched for trade deals to ease previous macro concerns.

The Fed is also uncertain about the tariff impact, so made no change in last week’s FOMC meeting. It is maintaining its “wait and see” approach while the outlook for inflation and growth becomes clearer.

Other central banks – such as the Bank of England and People’s Bank of China – continued cutting rates in response to current and forecast domestic weakness.

Both gold and oil bounced around intra-week but ended up 3.2% and 4.3% respectively.

The S&P/ASX 300 was up 0.1%, though this disguised some significant moves at the stock and sector levels.

Banks (-2.2%) – with three of the Big Four reporting – were soft, while the Small Ordinaries (+3.5%), Technology (+2.1%), Utilities (+2.6%) and REITS (+1.3%) performed well.

US macro and policy

The ISM Services Index recovered to 51.6 in April, from 50.8 in March.

This was above the consensus of 50.2 and the recovery in the headline ISM Services Index provides some re-assurance that the service component of economy is so far holding up in the face of the tariff shock.

The new orders, employment, and supplier deliveries components all bounced, also unwinding at least some of their significant declines in March.

Initial jobless claims fell to 228K in the week ending 3 May (from 241K), which was in line with consensus.

Continuing claims fell to 1,879K in the week ending 26 April (from 1,908K), which was marginally below the consensus of 1,895K.

We note the impact of tariff uncertainty is starting to appear in some pockets – for example, Michigan initial jobless claims spiked, probably due to layoffs in the auto industry.

The US Census Bureau and Bureau of Economic Analysis revealed that the March trade deficit soared to a record $US140.5bn as consumers and businesses tried to get ahead of President Trump’s latest tariffs.

US exports for goods and services totalled $US278.5 billion (up $500 million), while imports climbed to nearly $US419 billion (up $US17.8 billion). This has roughly doubled, year-on-year.

It is important to note that the decomposition of imports shows that the surge was concentrated in only three areas: Precious metals/Gold, Pharmaceuticals and Computing/IT equipment.

When looking at broader business inventory levels, it seems clear there has been no stockpiling pre-tariff commencement, which may mean that businesses are still exposed to any tariff impacts.

We also saw the arrival of the first shipments of fully tariffed goods arriving at US ports from China.

Some reports have China-US shipping lanes seeing a 30%-50% volume drop in April, though new shipments from China to the US have risen in the past few days.

Treasury Secretary Scott Bessent and US Trade Representative Jamieson Greer met with Chinese Vice Premier He Lifeng in Switzerland over the weekend. President Trump said that if talks go well, he could consider lowering the 145% tariff he has imposed on many Chinese goods.

FOMC

As expected, the FOMC unanimously decided to keep rates unchanged.

It sees risks as evenly balanced and wants to wait for more information before reducing the funds rate again.

In recognition of the new tariff policy, the statement noted that “the risks of higher unemployment and higher inflation have risen”.

The Committee also looked through the drop in Q1 GDP and concluded that “economic activity has continued to expand at a solid pace”, while labour market conditions remain “solid” and inflation remains “somewhat elevated”.

Chairman Powell stated, “for the time being, we are well-positioned to wait for greater clarity before considering any adjustments to our policy stance” and “we think we can be patient”.

Fed-watchers believe the desire to wait for more information suggests that policy is much more likely to be eased in July than June, with the May and June CPI reports to be released in the interim.

This also allows the FOMC to see if there are additional reciprocal tariffs on 9 July, when the 90-day delay will expire.

The market is pricing a 70% chance of a rate cut by July and a two-to-three cuts by the end of 2025, which is aligned with investor surveys.

Comments by New York Fed president John Williams flagged the possibility that the Fed could remain in wait-and-see mode even beyond July/September if the data does not clarify the outlook and balance of risks sufficiently by then.

“Over the next few quarters, we’ll definitely get increasing information about what’s going on in the economy. But again, we’ll have to wait and see what we learn from that,” he said.

He emphasised that the Fed cannot act pre-emptively because while unemployment and inflation will likely both move higher, the mix, time horizon and correct policy response remains unknown.

UK policy and macro

The Bank of England (BoE) cut its main interest rate by 0.25 percentage points to 4.25 per cent on Thursday, despite an unexpected and unusual three-way split among policymakers.

The BoE’s Monetary Policy Committee voted 5-4 in favour of the decision to cut borrowing costs by a quarter point. Of the four dissenters, two members of the Committee voted for a bigger half-point cut while two others wanted to keep rates on hold.

The rate decision comes as the US and UK announced an agreement to reduce some tariffs, in a limited number of areas, while maintaining the base 10% tariff.

China macro and policy

In its first substantive monetary response to US tariffs, the People’s Bank of China (PBOC) cut seven-day reverse repurchase rates by 10 basis points to 1.4% and also lowered the reserve requirement ratio, which determines the amount of cash banks must hold in reserves, by 50 basis points.

It is estimated this would unlock 1 trillion yuan (US$138.5 billion) of additional liquidity for the market.

Officials also announced additional measures including a re-lending tool to finance several key sectors, including technology and real estate, and reduced the mortgage rates on five-year loans for first-time homebuyers to 2.60% from 2.85%.

The broad stimulus announcements showed that officials are acting with increased urgency to bolster the economy, though some analysts believe it may have limited impact on boosting domestic confidence and credit demand levels.

Oil/LNG

OPEC+ agreed to increase output by 411,000 barrels a day next month, following a similar increase last month.

The move is seen as a strategy to punish over-producing members, particularly Kazakhstan, and to lower oil prices.

The decision sent crude prices falling, though they recovered later in the week.

The EU also set a 2027 deadline to end any remaining gas contracts that are currently being fulfilled by Russia. Russia is still supplying 19% of EU gas needs.

Markets

The nine-session “winning streak” in the S&P 500 that came to an end last Monday was the longest in more than 20 years

From a technical perspective the S&P 500 is getting close to 200-day moving average levels, which may cap any further rise in the short term

Sentiment is mixed. There are some very supportive indicators – such as bull/bear ratios – while others such as the 10-day put/call ration and equity ETF flows are less so.

Crypto funds have had best inflow in three months while Tech fund flows continue to be weak

Credit markets are a good indicator if anything in the economy or markets are showing signs of serious distress.

In this vein, US credit spreads continue to fall from their spike from a month ago. International credit spreads are up from the beginning of April, but are not ringing any alarm bells.

Australian equities

Last week saw the Macquarie Conference which is a quasi “3rd quarter” reporting season. With companies across numerous sectors updating the market, it typically presents a good read on conditions – but especially so in a period of heightened macro uncertainly.

Companies presenting at the conference experienced an average outperformance of +1.4% on their presentation day.

Companies in Energy and Tech were the strongest with 2.3% and 1.9% average relative outperformance in the day. Utilities (-0.2%) was the only underperformer.

While the Australian equity market was flat for the week, there was significant variation within the various components.

Poor performance in the banks, dragged down the top 20 while the Small Ords and Resources had a better week.

 

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About Rajinder Singh and Pendal’s responsible investing strategies

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

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

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

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

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Looming rate cuts are making ASX-listed smaller companies more attractive, argues Pendal portfolio manager LEWIS EDGLEY

• Small caps buoyed by rate cuts
• Careful stock selection matters
• Find out about the Pendal Smaller Companies Fund

THE prospect of rate cuts over the remainder of 2025 should buoy small cap stocks, says Pendal portfolio manager Lewis Edgley.

Markets are increasingly confident that falling interest rates over the next 12 months will help Australia avoid a prolonged economic downturn, assisted by strong employment and continued immigration.

That kind of macro-economic background has traditionally been positive for small caps, which are more cyclical and growth-oriented than their larger counterparts and hence tend to outperform during periods of monetary easing.

“We know from experience that when rates go down, small caps, as a category, tend to outperform large caps,” says Edgley.

“So, if we believe that there’s not going to be a recession but there is going to be a rate cutting cycle, then running a small cap fund is going to go from feeling like we’ve been driving with a hand brake on the last few years to letting the hand brake off and maybe even getting a bit of a wind behind us.”

Edgley and fellow portfolio manager Patrick Teodorowski co-manage the Pendal Smaller Companies Fund, an actively managed portfolio investing in companies outside the top 100 in Australia and NZ.

Stock selection matters

Edgley says investors are often turned off small caps due to the poor performance of the benchmark ASX Small Ordinaries Index, which has returned 5.4 per cent a year over the past two decades, well below the S&P ASX 100’s 8.8 per cent return.

But the headline performance disguises the fact that the median small cap manager returned 11.15 per cent a year over the same period.

“Small cap investing requires time and resources and the index returns have been lower than large caps,” he says.

“But if you do it well, there’s a huge opportunity to add value and beat the broader market return, while benefiting from diversification.

“We tell people, focus on earnings, not on macro — that’s where you make money in smalls.”

Beware cheap stocks

Edgley says from a valuation perspective, small caps are currently trading in line with their large cap counterparts, despite historically trading at an 8 to 10 per cent premium.

“So, you could say small caps are a bit cheap, and maybe that’s a good time to buy.”

But he cautions that low valuations can be misleading.

“Don’t be allured into buying cheap stocks. Because they’re often cheap for a reason. Might be a bad management team, might be a poor industry, might be a poor capital structure.

“We’ve made money out of cheap stocks in the past, but we’ve also made money out of buying expensive stocks that get more expensive.

“The key is to focus on earnings – if you get that right, you make money.”

Why earnings matter: Breville vs Myer

Edgley says a striking example of the power of focusing on earnings is the long divergence between two household names: Breville and Myer, both of which are held within the small-caps portfolio.

In the 1970s, both were regarded as standout businesses. Each offered exposure to the Australian consumer, and both were widely seen as credible, reliable options for discretionary spending.

But over the decades, their fortunes have sharply diverged.

Breville has consistently innovated and delivered on what consumers want, from the 70s cult hit Melitta drip coffee machine to today’s fully automated espresso stations. That has delivered sustained earnings growth.

“As an investor 15 years ago, you probably would have thought Myer was the bigger, seemingly more credible, safer business to invest in than Breville,” says Edgley.

“But look what happened. Breville has had a five times increase in its earnings per share over this period, whereas Myer’s earnings have faced significant challenges, down almost 90%.”

However, Edgley notes that Myer is currently embarking on a “self-help” journey, which presents a potential opportunity for improvement.

“While Myer has had a tough history, we see a scenario where they could materially improve their earnings through a number of cost and productivity-related improvements that aren’t necessarily understood or captured in today’s share price,” he says.

“This reinforces the point that small caps are all about understanding earnings.”

According to Edgley, both Breville and Myer present as interesting investment prospects today.

“Breville continues to have a robust outlook as it innovates and grows into new markets globally while carefully navigating the short-term uncertainties of US tariffs, while Myer has the potential to significantly improve its earnings through strategic internal changes.

“Understanding these dynamics is key to making informed investment decisions in the small cap space.”

Here are the main factors driving Australian equities this week, according to portfolio manager JIM TAYLOR. Reported by head investment specialist Chris Adams

• Find out about Pendal Focus Australian Share Fund

POSITIVE developments on US-China trade and a decent US reporting season helped support a continued rebound in equities last week.

US Treasury Secretary Scott Bessant noted last week that it was up to Beijing to de-escalate the trade situation.

By Friday there were signals from China which the market interpreted as a slight softening of its stance and a willingness to negotiate and calm the rhetoric.

Quarterly reporting in the US has been generally robust so far.

There are some pockets of weakness – such as low-end consumer exposures in airlines and in McDonalds – and a number of companies withdrawing FY25 guidance, including General Motors and the airline companies.

However positive commentary from Meta and Microsoft on AI and demand for data centre capacity reignited the tech space – prompting a direct follow-through in Australian tech.

Last week’s US economic data fortified the equity market rebound. The flipside is that there wasn’t really anything that could justify the Fed doing anything with rates in the near-term.

The consensus now expects no rate cut in May and less than a 50 per cent chance of a cut in June – down from about 70 per cent four weeks ago.

There are now about 80bps of rate cuts priced in this year.

US bonds sold off a touch, with 10-year Treasury yields rising 5 bps to 4.31%. This needs to be closer to 4%, but still-reasonable economic data is working against them.

Elsewhere, commodities and resource stocks lagged last week, in what was otherwise a sea of green. The S&P 500 rose 2.9%, the NASDAQ gained 3.4% and the S&P/ASX 300 moved ahead 3.4%.

Finally, the Trumpian politics “ripple effect” that we saw in the Canadian elections were replicated in the Australian federal election over the weekend.

Australia macro and policy

The key takeaway from last week’s Q1 consumer price index (CPI) is that the current data does not include any areas of great concern and that categories which have been sticky – such as rent and construction costs – are heading in the right direction.

The key risk to watch is whether tariffs result in an inflationary pulse.

The headline CPI increased 0.9% quarter-on-quarter (qoq) in Q1 2025, versus consensus expectations of 0.8%.

It rose 2.4% year-on-year (yoy) – the same as in the December quarter – slightly ahead of the 2.3% consensus expectation.

Higher prices for food (+1.2% qoq), fuel (+1.9% qoq) and utilities (+8.2% qoq) drove the quarterly uplift.

The jump in utilities reflects electricity prices rising 16.3% as households deplete subsidies. This equates to a 30bp bump in the headline CPI.

Other large contributors include rents (+1.2% qoq, +5.5%yoy) and education (+5.2% qoq, +5.7% yoy).

The number of index categories annualising more than 2.5% quarterly growth has fallen below the long-term average over just under 50%, having peaked at 80%.

Goods inflation ticked up to 1.3%, from 0.8% the previous quarter, but this still remains relatively low.

Services inflation rose 0.4% qoq which is the slowest pace since Q3 CY21. It is at 3.35% yoy, down from 4.2% in the December quarter.

Overall construction costs have now been in deflation for the last two consecutive quarters, driven mainly by Melbourne and – to a lesser extent – Sydney.

Elsewhere, nominal retail sales were up 0.3% month-on-month (mom) and +4.3% yoy. This was a touch weaker than expected, with consensus expectations at +0.4% mom. Sales excluding food were broadly flat for the second consecutive month.

Retail volumes also came in weaker than expected and were flat for the quarter, after stronger activity in 4Q25.

US macro and policy

Consumer expectations are at new lows. But recent backward-looking data (such as earnings) are resilient and relatively real-time data is not signalling a dramatic fall-off in consumer activity.

This suggests consumers are very worried about the effect tariffs might have on prices, real income and the jobs market. However they are not taking significant actions at this stage to reign in activity and shore up their financial positions.

Consumer expectations

The Conference Board consumer confidence index plunged from 92.9 in March to 86.0 in April, below consensus expectations of 88.0.

The Conference Board expectations index has fallen to levels not seen since the GFC.

The release also signals weaker perceptions about the labour market; the proportion of people saying that jobs are currently plentiful fell from 33.6% to 31.7%, while the share saying they are hard to get rose from 16.1% to 16.6%.

Consumer spending

On the other hand, consumer spending in March was resilient, with real consumption rising 0.7% versus 0.5% consensus expectations. Nominal personal income increased by 0.5%, slightly above the consensus, 0.4%.

This suggests that consumers may be willing to continue spending until the tariff damage is actually incurred.

Healthy spending growth was broad-based across both goods and services.

Real spending on goods rose by 1.3% as people bought durable goods – especially cars – before tariffs lift prices.

But spending on services also increased, by a decent 0.4%.

Near-real time indicators of spending such as restaurants and hotels data also do not suggest much of a slowdown from March to April, despite the increased level of gloominess.

Q1 GDP

GDP fell at an annualised rate of -0.3% in Q1 CY 25, marginally below consensus expectations of -0.2%.

The contraction was driven by an unprecedented surge in imports ahead of tariffs.

Adjusting for the Imports component, it is clear that the economy was slowing modestly.

Consumer spending on services rose by 2.4% in the quarter which is the smallest increase since Q3 2023.

Private fixed investment was also relatively soft, with residential investment and non-residential investment up only 1.3% and 0.4% respectively.

Investment in industrial production and software was stronger, rising 4.1% for the quarter, but the year-on-year rate is 1.8%, down from 2.6% in Q4 and the weakest since 2018.

Jobs data

Economic data is generally getting a bit more opaque, a view evidenced by April payrolls which rose 177k, well ahead of the 138k expected by consensus.

This probably reflects a mini surge in hiring activity ahead of the April tariffs, with unseasonal strength in warehousing and transport. But it is too early to reflect the immediate near-term uncertainty from the tariffs in this data set.

There was broad-based strength across most employment categories. The healthcare and government sectors – which have been driving strength in employment over the last twelve months – have stepped down modestly.

There were -58k net revisions to the previous two months, while the unemployment rate was unchanged at 4.2%, meeting consensus, and average hourly earnings rose by 0.2%, a bit below the consensus, 0.3%.

 

Initial jobless claims rose to 241k in the week ending April 26, from 223K the previous week and above the consensus expectation of 223K.

In the last two weeks the real-time employment data is showing signs of weakness, indicating that jobless claims will trend up over coming weeks.

Data from employment website Indeed shows total job postings on April 25 were down 6% over the previous seven days and down 1% from April 2.

At the same time, outplacement firm Challenger, Gray & Christmas’s measure of layoff announcements rose 63% year-over-year-over-year in April.

As a result it seems likely that initial claims may be up around 250K by June.

JOLTS job openings fell to 7,192K in March, from a revised-down 7,480K in February and below the 7,500k expected by consensus.

Public sector job openings have fallen 36k (or 27%) in-line with the Trump administrations hiring freeze.

Policy uncertainty has been the primary driver of the ~230k drop in private sector job openings with particular weakness in the transportation, warehousing and utilities sectors. The post-election job openings bounce has now been totally reversed.

The private sector quits rate was steady at 2.3% in March which is in line with last year’s average.

Falls in consumer confidence and job postings could very well see reduced movement between jobs soon.

Finally, the Employment Cost Index (ECI) rose 0.9% in Q1, in line with the consensus. Year-over-year growth slowed to 3.6% in Q1 CY25, from 3.8% in the December quarter, but is expected to stabilise at this level if the first quarter run-rate is sustained.

China macro and policy

On Friday China’s Commerce Ministry said that Beijing “is currently evaluating” repeated comments and messages from U.S. officials that “expressed their willingness to negotiate with China on tariffs.”

The market took this as a positive development in the ongoing trade spat.

China’s official purchasing managers’ index (PMI) fell to 49.0 in April versus 50.5 in March versus consensus of 49.8. This is the lowest reading since December 2023.

Tariffs are being felt in order volumes for Chinese companies. Goldman Sachs estimates that order volumes are down more than 50% on pre-tariff levels in April for many categories including white goods, appliances, construction machinery and some smartphones and PCs.

Exports orders to the US in some categories such as furniture, white goods and appliances, solar inverters and modules and pet treats are being fulfilled almost entirely by countries other than China.

Markets

Investors seem to be buying the dip in the US. Retail investors bought ~US$40bn in ETFs and stocks in April, surpassing March, which was already a historical record.

US earnings

The blended earnings growth rate for Q1 S&P 500 EPS currently stands at 12.8%, well ahead of the consensus expectation of 7.2% as at the end of March.

The blended revenue growth rate is 4.8%.

Of the 72% of S&P 500 companies that have reported for Q1, 76% have beaten consensus EPS expectations, a touch below the 77% one-year and five-year averages of 77%.

62% have surpassed consensus sales expectations, which is better than the 61% one-year average but below the five-year average of 69%.

In aggregate, companies are reporting earnings that are 8.6% above expectations, better than the ten-year average of 6.9% but below the five-year average of 8.8%.

In terms of notable stocks:

• Meta was up after strong advertising demand saw it beat revenue estimates. It lifted its 2025 capex plans to between USD64bn and USD72bn from “as much as USD65bn”. CEO Mark Zuckerberg said that “The pace of progress across the industry and the opportunities ahead for us are staggering. I want to make sure that we’re working aggressively and efficiently, and I also want to make sure that we are building out the leading infrastructure and teams.” Most of the capex is going towards supporting the core business, such as supplying the computer power for ads, rather than generative AI development. The CFO said the spending was to more rapidly ready data centre capacity to support AI efforts. It reported revenues of USD42.31bn for the quarter, beating the USD41.4bn that had been expected. The midpoint of the FY25 capex guidance is 37% of FY25 Sales.
• Microsoft also jumped after the company reported stronger than expected growth in its Azure cloud computing business, with revenue up 33% in the quarter, exceeding estimates of 29.7%. AI contributed 16 percentage points of the growth, up from 13 points in Q4. It said the real outperformance was in the non-AI cloud business, with the improvement in AI simply from bringing forward its delivery to some customers. Capital expenditures were up 53% to USD21.4bn, however the proportion of longer-lived asset expenditures fell to about half of the total. It said that during FY26 capital expenditure will continue to grow but at a slower rate than in the current year, and with more emphasis on shorter lived assets. It now expects to be AI supply-constrained past June “as planned demand is growing a bit faster.” Prior guidance was for demand/supply to normalise around June.
• Apple’s CEO Tim Cook said that a “majority” of iPhones sold in the U.S. during the June quarter would come from India, while “nearly all” of the company’s other devices sold in the U.S. during the period would come from Vietnam. Tariffs are expected to add $900m to the cost base in the June quarter and would be higher in future quarters.

 

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About Jim Taylor and Pendal Focus Australian Share Fund

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

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

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