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

• Find out about Pendal MidCap Fund

THE market is wrestling with the implications of the Iran conflict, which escalated over the course of last week.

Ahead of today’s market drop, the S&P/ASX 300 last week fell 3.3%, underperforming the S&P 500 (-2.0%) and NASDAQ (-1.2%) but holding up better than the Eurostoxx 50 (-6.8%), FTSE 100 (-5.7%) and Topix 500 (-5.7%).

Energy markets have unsurprisingly been the biggest movers so far, with West Texas Intermediate (WTI) and Brent crude oil up 36% and 28% respectively as at the week’s end.

The potential for significant knock-on impacts via energy-related prices and availability depends on the duration of the conflict.

Market expectations for interest rates and inflation also increased.

The US dollar continued to strengthen during the week as part of a “risk-off” trade. The US dollar trade weighted index (DXY) is now 2.9% up from its late January 2026 lows. The Australian dollar fell 1.2%.

Other commodities were mixed. Among base metals, copper was down 4.1% but aluminium was up 7.2%, given Middle East exposure to supply. Lithium fell 3.9%. Gold was down 1.6%, hurt by the prospect of higher rates and a stronger US dollar.

Software had some respite as the din around AI disruption softened. In the US, the software sector has outperformed the semiconductor sector by ~20% since 23rd February. 

It was a lighter week on the macro data side, but such that there was continues to point to a solid economic backdrop for both the US and Australia. 

Bond and rate markets have moved quickly to price the likelihood of higher inflation in the investment horizon and decrease the chance of short-term rate cuts (in the US) and increase the likelihood of short-term rate hikes (in Australia).

US labour markets are mixed – a surprise higher unemployment print on Friday did little to quell Fed Speak, which was incrementally hawkish largely because of the effects of the Iran conflict.

The main consideration for risk asset markets and economies is the duration of the conflict and associated disruptions/dislocations.

Iran

The conflict enters its second week causing major disruptions to all forms of air and sea traffic in the region and energy markets to inflect higher. Oil is now up 54-59% YTD.

There are some signs of fatigue from both sides. The Iranians appear to be running short of missile launch hardware and the Trump Administration appears to be starting to react to equity market weakness and oil price strength. Israel shows no signs of slowing.

The Strait of Hormuz is effectively shut for sea traffic, meaning of the ~20% of global crude that flows through it, around 90% is now choked off. Air traffic in the region is limited.

Oil and gas markets are showing significant first order consequences of the disruption and there is multiple second and third order effects starting to stack up.

For example:

• The price of aviation fuel has surged on the back of fear of shortages in Asia.
• “Crack spreads” – the margin made by refining crude into products such as petrol and diesel – have rocketed (potentially a tailwind for local refiners Viva Energy and Ampol).
• Coal prices have increased as a potential substitute.

Insurance for shipping in the region has dried up and is one of the major causes of the logjam of marine traffic in the region.

The US is planning a combination of marine escorts and insurance in an attempt to alleviate the situation, but this is likely to take more time.

Qatar, the world’s largest LNG exporter, has suspended production at its Ras Laffan Industrial City LNG complex, notwithstanding that most Iranian attacks have focused on US military instalments and civilian infrastructure as opposed to energy facilities in the region.

This has seen LNG prices – and gas prices generally – increase significantly.

The Dutch benchmark gas futures price is up 108% since its December 2025 lows to EUR53/megawatt hour (MwH), versus the 2022 (Ukraine Invasion) peak of EUR70/MwH, which caused major issues in the EU.

Some 9% of global aluminium production comes from the Middle East region – prompting the 7.2% gain.

Risk Asset Health

To date markets have been largely rational and fairly moderate in the interpretation of events.

There are, so far, few obvious signs of distress. This could change if the war drags on. 

Volatility

The VIX volatility index only shows signs of moderate stress and while it has spiked, it remains far lower than 2nd April 2025 (when Trump announced the tariffs) and Covid.

However, underneath this there is higher single stock volatility being masked at the headline level by high dispersion.

The point being is that this needs monitoring.

Credit spreads

At face value credit spreads are stable.

The bit that can’t be easily assessed is private credit stress, where defaults have been rising, with one of the big risks being software private credit on the back of AI disruption.

The market profile of this narrative is reaching high levels with private credit entering 2026 under clear strain, rising default rates, rising restructurings, dividend cuts at business development companies, and growing concern over opaque, floating rate middle market loans.

While losses have so far been contained, defaults and credit erosion have increased meaningfully, particularly among smaller borrowers and retail facing private credit vehicles.

The widespread adoption of the asset class poses a broader market risk if defaults continue to rise.

US Macro and policy

Activity data in the US was solid, with both the ISM manufacturing index and the Fed’s Beige Book indicating fairly broad-based strength.

Labour data was weaker and tax returns lower than expected, questioning the expectations around consumption strength in 1H 26.

The latest Beige Book (information collected on or before February 23) suggests that:

• Economic growth was broadly unchanged, with activity increasing at a slight to moderate pace in the majority of districts.
• AI-related spending was seen as an important driver of economic growth.
• Consumer spending continued to grow although at a slower pace and notably K-shaped. 
• Employment levels were generally stable, and wage growth was also roughly unchanged, continuing at a moderate pace.
• The US ISM continues to be solid and point toward a manufacturing upturn.
• The ISM manufacturing index dipped to 52.4 in February, from 52.6 in January, but came in ahead of the consensus of 51.5.
• One of the most notable parts was the 11.5 point increase in prices paid to 70.5. This is the highest since June 2022 and is a function of the year-to-date increase in oil prices and a delayed boost from tariffs.
• Until recently US employment data has mostly been solid with most interpreting this as the start of an upturn in employment. It is now showing signs of some softness.
• Last week’s data continues to support strong average hourly earnings growth but payrolls data on Friday was unexpectedly weak.
• February 2026 payrolls fell by 92,000, well below the consensus expectation of +55,000. The two-month net revision was -69,000.
• The unemployment rate rose to 4.4% in February, from 4.3% in January, above the consensus of 4.3%.
• Average hourly earnings rose by 0.4%, above the consensus of 0.3%.

Many commentators point to the volatility and large revisions the data frequently undergoes, but this is a weak print, nonetheless.

It should help offset some of the strength in inflation data, with respect to forward interest rates.

In that vein, it is worth noting that a $10 increase in oil prices roughly results in a 30-40-basis-point increase in headline personal consumption expenditures (PCE) inflation.

The gasoline price is up materially year-to-date but still in the range of the past four years (as of 5th March 2026).

Elsewhere:

• US Tax refunds are only up 10% year-to-date versus the +30% expectation. Given a fairly widespread expectation of accelerated tax return driven-consumption in 1H CY26, this needs to be watched.
• US Non – Farm Productivity remains strong and increased at an annualised rate of 2.8% in Q4, above the consensus of 1.9%.
• January retail sales were down -0.2%, albeit slightly above consensus and mostly unalarming as sales ex gasoline were up +0.3%.

Comments from various Fed members and officials became incrementally more hawkish in the wake of the Iran conflict and despite the weak jobs print on Friday.

Oil and its impact are clearly a major issue for the committee now. 

Both Michelle Bowman (Fed Vice Chair for Supervision) and Neel Kashkari (Minneapolis Fed President) noted that their expectations on inflation have changed in recent days.

New York Fed President John Williams struck a more dovish tone, noting that the market response at that time had been muted and still pointed to further rate reductions.

Macro and policy Australia

There was something for everyone in terms of interest rate expectations last week, with a weak household consumption number offset by a strong GDP print.

• Q4 real GDP jumped 0.8% quarter/quarter and revisions lifted year/year to 2.6%, the best since Q1 2023. The composition was messy, but a strong beat nonetheless.
• Corporate profits increased a strong 5.8% in Q4 2025.
• The Household Spending Indicator (HSI) increased 0.3% month/month in January 2026, slightly below the +0.4% expected after December 2025 retraced by -0.5% month/month.

Also, housing prices continue to be strong as a national average up 9.9% year/year and rents up 5.6%.

Bond yields and interest rate expectations both rose because of this and the rise in oil prices.

Most expect the RBA to raise rates in May if not March – which is now considered “live”.

Markets

While near-term uncertainty remains high, “captive liquidity” can help markets. Retail investors via ETFs and trend following investors continue to “buy the dip” as economic liquidity remains high. Market movements in the last while need to be seen against this backdrop i.e. markets are still fully functional. 

US software had a materially better week and has outperformed semi-conductors by 20% since 23 February 2026 – still way below 2025 relative levels, but a significant improvement.

It felt like AI disruption took a bit of a back seat as the market’s understanding of the threat to Software continued to evolve.

This helped the S&P/ASX 300 Information Technology sector gain 2.4%, beaten only by Energy (+8.7%). There was a part reversal of some of the outperforming sectors year to date, like Banks (-3.2%) and Resources (-5.2%)

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

• Find out about Pendal MidCap Fund

US reporting season kicked off with a strong showing from the major banks.

Their earnings were helped by robust capital markets and loan growth against a backdrop of decent cost control.

Markets were solid last week. The S&P500 gained 1.7% and the Nasdaq lifted 2.1%, while the S&P/ASX 300 rose 0.4%.

The ongoing US Government shutdown made for another quiet week on the data front.

The economic impact of the shutdown – along with the threat of China tariff escalation – contributed to lower bond yields.

Weak labour data had the same effect on yields in Australia.

Expectations for rate cuts increased moderately in both the US and Australia after a sustained period of markets reducing estimated cuts.

Elsewhere, the International Monetary Fund raised global GDP forecasts and noted the US tariff impact had been less severe than initially expected.

US-China trade tensions escalated with Beijing further limiting rare earth exports to the US.

Some signs of risk in the system started to show up with examples of over-leveraged corporates coming to grief and affecting counterparties – notably US auto parts maker First Brands. 

There were also some signs of increasing delinquency rates in the US, with a few regional banks impacted.

Volatility has also ticked moderately higher. This is focused mostly in financials, where implied option volatility has moved materially higher.

Credit issue concerns caused major US banks to give back almost all the performance generated earlier in the week from strong earnings beats.

That said, we note that credit spreads remain benign and are not sending a warning signal.

Finally, the gold price increased 8.5%, helping the ASX higher. Iron ore and uranium stocks also featured strongly.

US macro and policy

Federal Government shut down

After 19 days, the US government shut down is now the fourth-longest in history and the longest since 2018-19.

There is a paucity of data as a result, which makes assessing the economy more problematic. 

Some 750,000 federal employees have been furloughed. Most essential services continue but many civilian workers are unpaid.

The impasse remains around the Democrats wanting an extension of the Affordable Care Act subsidies (set to expire at year end) and the Republicans wanting a “clean” continuing resolution without policy add-ons.

Neither side is yielding.

The shutdown is estimated to reduce GDP by 0.1–0.15 percentage points per week.

Economic data

There was a positive data point for US homebuilding with an increase in US homebuilder sentiment.

The latest monthly survey of the US National Association of Home Builders showed confidence rising from 32 to 37.

There was an improvement in the current sales component of the index and a bigger increase in future sales. This demonstrates how the recent rate cut improved sentiment.

This momentum should continue with two more rate cuts expected to come in 2025. 

Regionally the picture continues to diverge. There are patches of strength in the north-east of the US and real weakness in the south and south-east.

There was a rebound in the health of manufacturing in New York state.

The Empire State Manufacturing Index increased to 10.7 in October, up from -8.7 in September. The consensus had been -1.8.

This suggests a positive trend in manufacturing output will be maintained into the fourth quarter.

The three-month average of the general business conditions component rose to its highest level since April 2022. It is consistent with annualised growth in manufacturing output (excluding autos) of roughly 2%.

Elsewhere, the Michigan consumer sentiment index dipped to 55 in October, down from 55.1 in September.

Fed speak

The overall tone of comments from Fed spokespeople suggests broad support for continued easing.

However officials remain divided on the appropriate pace, given trade uncertainty and labour market conditions.

Governor Christoper Waller, for example, is backing another rate cut while urging caution. He suggests quarter-point increments and believes the Fed must “move with care”.

On the other hand Governor Stephen Miran is advocating a larger, half-point rate cut, noting that trade tensions are increasing downside risks.

Fed Chair Jerome Powell has indicated conditions may warrant rate cuts, but remains cautious due to persistent inflation and labour market uncertainty.

He also indicated the Fed might stop shrinking its balance sheet in coming months, representing a potential shift in quantitative tightening policy.

US Interest Rates

Implied rate expectations have increased to slightly more than two cuts priced by year end, due to growth concerns related to the shut down and increasing nervousness in equity markets.

US markets have close to five more cuts still priced by late 2026, taking the reference rate to 2.8% from 4.105% currently implied.

The next Fed rate decision on October 28-29 is expected to cut another 25 basis points to a range of 3.75% to 4%.

US-China trade

There was further re-escalation of tensions, with Beijing putting more restrictions around the export of rare earths and rare earth magnets to the US and Washington threatening to increase tariffs by 100%.

Both of those outcomes would be bad for markets, but in the interim the expectation is for talks and extensions of the imposition of tariffs from the US in the hope of a deal.

There are concerns China is only prepared to accept a deal on its terms and is prepared to manage the consequences of not reaching agreement.

In the interim, more deals and funding continues to flow to rare earth producers – and critical minerals generally – with talk of an alliance between the US and EU on policies around rare earths and China.

Israel-Hamas cease fire

The previous weekend saw the long-awaited announcement of an Israel-Hamas ceasefire, allowing for aid to flow and hostage exchange.

The agreement is tenuous and has a much bigger ambition around the ultimate demilitarisation and reconstruction of Gaza.

Estimates are for as many 50,000 military personnel to oversee peace and security in the region, which is a big ask.

Apart from the obvious humanitarian need for this process, some market observers point to this – and a possible Ukraine-Russia cease fire – as two cornerstones for the Trump administration in the pre-amble to the 2026 mid-term elections.

Based on history, Trump is highly likely to lose control of the House of Representatives.

IMF global growth

In a bright spot, the IMF upgraded its global GDP forecasts, noting the US tariff impact had been less than initially expected.

Expectations for 2025 were revised up to 3.2%, compared to 3% in July. The forecast for 2026 remains at 3.1%.

However these figures remain below the pre-Liberation Day forecasts, reflecting headwinds from protectionism, labour supply shocks, and fading temporary supports like the front-loading of trade.

Developed countries are forecast to grow 1.5% in 2025 and 2026.

The US forecast was lifted to 2% in 2025 and 2.1% in 2026, helped by strong real income growth and better-than-expected private sector responses to tariffs.

The Euro area is expected to grow 1% in 2025 and 1.2% in 2026, while Japan is forecast to grow 1.1% and 0.6% respectively.

Australia macro and policy

Economic data

Australian data was mixed last week.

Unemployment increased to 4.5% after a smaller-than-expected increase of 15,000 jobs. This put unemployment above the RBA’s peak forecast of 4.3%.

Business conditions in NAB’s monthly survey remained steady at +7.6 in September.

Dwelling commencements fell 4.4% in the second quarter. This was the biggest quarterly fall since Q3 2023, driven by a fall in new private sector house commencements.

This is against the run of play with annualised numbers up 9.2%.

Australia interest rates

Commentary suggests the Reserve Bank remains cautious about inflation risks. But weaker employment data shows the RBA is walking a tightrope of inflation versus employment.

Weaker labour data saw expectations increase to slightly more than one cut priced by the year’s end.

The market has close to two more cuts still priced by mid-2026, taking the reference rate to 3.1%, down from 3.6%.

The next RBA interest rate decision is scheduled for Melbourne Cup day on November 4.

Markets

US Q3 Earnings

Leading into earnings season, Goldman Sachs noted consensus expectations on year-on-year S&P 500 earnings growth had decelerated to 6%, down from 11% in the previous quarter.

This was partly due to a smaller FX tailwind and higher tariff payments.

Consensus expects S&P 500 sales growth will slow from 6% in Q2 to 4% in Q3. Customs duties in Q3 totalled $93 billion, a 33% increase relative to Q2.

Companies are generally expected to maintained profit margins near recent levels, but substantial margin expansion seems unlikely.

The consensus Magnificent Seven EPS growth rate of 14% in Q3 is half the pace of realised earnings growth in Q1 and Q2.

AI-related capex spending has been a key issue in recent weeks. Hyperscaler commentary regarding AI demand and capex spending will be critical to the durability of the AI trade.

Consensus estimates imply hyperscaler capex growth will remain robust this quarter at 75% year-on-year but slow sharply to 42% in Q4 and to roughly 20% in 2026.

However, AI capex spending has consistently exceeded bottom-up estimates in recent quarters.

Banks were the first to report, with most delivering strong results and earnings beats.

The message was broadly reassuring about the state of the US consumer, risks to credit quality and the overall outlook for earnings and returns.

Loan growth is picking up, helped by AI-linked capex and some easing in underwriting standards.

However most large banks have small exposure to sub-prime borrowers, where market concerns are focused.

Earnings reports from consumer finance companies will provide more detail here.

Liquidity and risk markers

The First Brands issue was followed by US regional bank Zions Bancorporation disclosing $60 million in loans were unlikely to be repaid and JP Morgan CEO Jamie Dimon warning of more “cockroaches”.

This has seen some concern about the degree of leverage in the system, manifesting mainly in the performance of the financial sector, with US major banks giving back almost all the stock gains made in the wake of strong results earlier in the week.

A large amount of incremental credit extension has been to Non-Depository Financial Institutions (NDFIs) such as mortgage-credit intermediaries, private equity, business-credit intermediaries and consumer-credit intermediaries.

The biggest part of this lending comes from commercial banks – the big four US banks hold about half of this.

This funding is then extended from these intermediaries into a raft of end-user sectors including corporates and consumers.

In Australia the collapse of two credit-related funds held on a number of investment platforms caused issues for a number of product and fund vendors.

Macquarie Group agreed to make clients whole on one of the funds (at a cost of $321 million), and began reducing the number of funds eligible on its superannuation platform.

This played into the question around risk in the financial sector more generally, with the ASX financial sector in aggregate mirroring the underperformance US financials.

Most other risk metrics in the market relating to credit and liquidity remain reasonably benign.

For example, the Goldman Sachs Total Financial Conditions index remains near its lowest level since mid-2022.

For the most part, credit spreads remain fairly mundane and supportive of markets. They rose moderately last week, but well within the normal range of movement.

The volatility index (VIX) has risen, with the concerns in US financials and credit more broadly seeing the largest increase in implied volatility in the banking sector for some time.

This has not yet coincided with a big move lower in markets, but is a warning signal of the potential for contagion.

The gold price is probably the most notable of the widely followed macro indicators that is potentially suggesting bigger issues ahead.

A mostly younger demographic of buyers continue lining up around the block to buy gold at ABC Bullion in Sydney’s Martin Place.

Australian equities

The ASX trailed a strong US market over the past week with the ASX300 up 0.4%. The ASX50 rose 0.7%, the S&P/ASX Midcaps 50 shed 0.7% and the ASX Small Ordinaries retreated 0.5%.

Resources led the way, up 3.4% helped by the ASX Gold Index (+9.2%) and strong performances from BHP (BHP +3.3%), Rio Tinto (RIO, +4.6%), Fortescue (FMG +5.3%) and South32 (S32, +2.5%).

The losers were mostly in the growth space with IT down 4.4% and consumer discretionary falling 1.8%.

At a stock level, there was a fair bit going on, helped by the start of AGM confession season.

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

• Find out about Pendal MidCap Fund

THE approval of President Trump’s Big Beautiful Bill and stronger-than-expected US labour data saw bond yields move higher, imputed US interest rate cuts push out, and inflation expectations increase last week.

US two-year bond yields rose 14 basis points (bps) to 3.88% while 10-year yields were up 6bps to 4.35%.

Equity markets closed the week up 1.8% in the US (S&P 500) and 1.0% in Australia (S&P/ASX 300). Calendar year-to-date, those markets are up 7.5% and 7.1%, respectively, on a total return basis. 

Many equity indices are making new all-time highs, with the S&P 500 having rebounded 26% from the April/Liberation Day low.

Commodities had a reasonable week, but in the wake of the ceasefire with Iran – and a possible Gaza ceasefire – the heat has come out of the oil/energy markets.

It’s by no means an “all clear” on the Middle Eastern geopolitical front, but there is significant spare OPEC capacity that can be used to keep a lid on prices.

This is important for inflation, especially within the context of the issues central banks are facing globally.

We are seeing a material rotation within equity markets, probably exacerbated on the local bourse by trading activity around the end of financial year.

This saw notable moves last week away from banks, insurers, growth stocks, gold miners and other FY25 winners towards value stocks, resources and FY25 losers.

US macro data and policy

Most of last week’s developments were supportive for markets, with approval of the tax bill and strong headline labour data being the biggest drivers.

Activities data was mixed – while reasonable at a headline level it was weaker in composition, with softer demand and employment components offset by expectations and manufacturing.

The Big Beautiful Tax Bill 

This was a big win for President Trump. After just getting approved in the Senate earlier last week, the bill – to the surprise of many and despite all Democrats voting against it – passed the House of Representatives on the first attempt.

It was signed into law on Independence Day.

This should be broadly supportive for markets, if not the US budget deficit and the US dollar.

US labour data

US June non-farm payrolls came in strong at 147k jobs, ahead of 110k expected by consensus.

However, compositionally, the government sector accounted for most all of the beat while private payrolls were weak.

The unemployment rate also dropped to 4.1%, driven by lower participation rate.

Despite strength in payrolls, wage growth moderated – with total private hourly earnings growing at 0.2% versus 0.4% prior and below consensus expectations of 0.3%. This suggests little sign of labour market tightening.

There has been some focus on the “neutral employment rate” – the payrolls growth required to keep the unemployment rate unchanged.

The primary inputs into this are population growth and labour force participation, both of which have had wild gyrations through the Covid and post-Covid era.

The US requires a rising immigration rate to offset a declining population of working age.

This highlights the importance of potential consequences from possible changes to immigration policy under the Trump administration for employment, labour market tightness and inflation.

Work by Deutsche Bank suggests that the near-term breakeven rate is around 100k new jobs per month.

However, this could fall to as low as 50k per month, based on potential scenarios around labour force participation and population growth rates.

This suggests that wage costs have a high likelihood of being inflationary under most moderate economic conditions.

Elsewhere, JOLTS job openings rose to 7,769k in May from 7,395K in April and was well above the 7,300K consensus.

The jump in total job postings is at odds with a broad range of other indicators suggesting a waning appetite among businesses to hire more workers.

This discrepancy may be due to some businesses advertising jobs in order to replace workers that have unauthorised immigrant status.

The private sector quits rate edged up to 2.3% in May, from 2.2% in April, but remains in line with last year’s average.

Other US data

The US ISM Services Index rose to 50.8 in June, up from 49.9 in May and just ahead of the 50.6 expected by consensus. 

The increase was mostly in the expectations component, with weakness in the services employment and prices components

This suggests services activity has stabilised but is not likely to make a large incremental contribution to inflation.

The US ISM Manufacturing Index printed 49.0 in June, rising from 48.5 in May and marginally ahead of the consensus at 48.8.

In the detail, it appears that manufacturing production and imports have recovered from the worst of the tariff disruption with some modest price inflation – but that demand was soft, with weaker new orders and employment.

US Consumer Spending fell 0.3% in May, which was weaker than expectations – as was personal income growth at -0.4% versus +0.3% consensus. Revisions were also lower.

That said, May’s spending fall was driven by a 7% decline in spending on autos following a binge of auto buying in April, so there is some noise in the numbers.

US Mortgage Applications rose by 2.7% for the week ending 27June, with gains in both refinancing (+7%) and new home applications (+0.1%) as 30-year fixed mortgage rates fell.

The US housing market remains weak in most quarters, which is something only lower interest rates and mortgage rates can rectify.

US interest rates

Expectations around rate cuts moderated during the week and bonds sold off modestly in the wake of the Trump tax package approval and stronger-than-expected labour data – both of which point towards increased likelihood of an inflation increase.

President Trump again ramped up rhetoric around replacing Fed Chair Powell for not cutting rates, calling for his resignation – with Treasury Secretary Bessent seemingly seen as a preferred option.

Powell himself attributed the slower pace of rate cuts to uncertainty around the impact of tariffs.

The Fed’s June Summary of Economic Projections (SEP) for the year ending 2025 has a median estimate of rates at 3.9% versus 4.5% currently.

This is more or less in line with current market implied rates.

There have been moderations in the likelihood of July and September rate cuts, with close to no chance of a July rate cut given data flow and developments in the last week.

Tariff update

Tariff information is flowing thick and fast and in the days before the 9July deadline.

Several countries and regions are working towards framework agreements (e.g. EU, China, UK, India) before 9 July, with a view that extensions can continue until US Labour Day (1September) while the details are finalised.

Trump has threatened to impose full sanctions on any countries failing to meet the deadline.

Developments include:

• Canada scrapping its proposed digital tax, a sticking point in negotiations with the US.
• Indonesia announced it is set to sign a trade and investment pact with the US this week.
• The US announced an agreement with Vietnam, with the minimum tariff rate at 20%, down from 46% under the Liberation Day rates, and no tariff on US imports. There are higher tariff tiers for goods with Chinese-produced content. The US is specifically looking to counter moves by Chinese companies to reroute exports to the US via other countries to avoid maximum tariffs.
• The Administration seem to be suggesting that there is some “wriggle room” around the 9 July deadline and that although there is a relatively small number of deals signed, there are a number in the offing, notably with India. Japan continues to dig its heels in and is attracting the ire of Trump.   
• The process of applying Section 232 tariffs – linked to national security and being used as a means of circumventing legal challenges – is notionally well advanced and should be finalised by the end of US summer. This affects steel, lumber, copper, Al and semiconductors.

Australia macro data and policy

There is less ambiguity around the interest rate trajectory in Australia than in the US.

The domestic economy is in reasonable shape, though some segments are still weak as consumers are saving the additional disposable income flowing from interest rate cuts.

An expectation of two to three further rate cuts from the RBA in CY25 appears reasonable and should be supportive of both the economy and asset prices.

The market is pricing close to three 25bpts cuts by year’s end, though the probability of an August rate cut has decreased from 90% to 70% in the past week.

Housing

The Cotality Home Value Index rose 0.6% in June, with gains in every major mainland city.

Darwin led the list, rising 1.5%, with Canberra up 0.9%, Sydney 0.6%, and Melbourne 0.5%.

RBA Governor Bullock made it clear in May that rising house prices would not prevent rate cuts. That said, record-high house prices might stir discomfort in some quarters.

Residential building approvals rose 3.2% in May, softer than consensus expectations of 4.0%.

They are running at an annualised rate of 183k, which is a recovery from a rate of 177k in April, which was the lowest level since August 2024.

Retail sales

Retail sales rose 0.2% month-on-month in May, below an expected 0.5%.

The year-on-year rate slowed from 3.8% in April and is the slowest since November 2024.

Retail sales over recent months show momentum is still fading. This seems to confirm that consumers continue to save the proceeds from interest rate reductions to date.

China macro and policy

Beijing announced further population growth stimulus measures and a new programme to remove excess capacity from some manufacturing sectors, which the steel and iron ore markets interpreted favourably.

However, the economy remains challenged by low nominal GDP, PPI deflation, weak property prices and declining middle-income employment and wages growth.

Markets

Sector rotation

There was a significant rotation to value sectors and stocks that kicked off smartly with the start of July.

Trading associated with end-of-financial-year fund distributions has been elevated in the local market and contributed to a significant relative bounce in the FY25 losers across the June month-end.

In contrast, the big winners from that period were sold heavily post month-end.

While the drivers may have been different, we saw a similar trend in US equities, where the rotation from momentum to value was among the largest and sharpest in the last five years.

In Australia, this manifested in strong gains among the miners against a backdrop of modest improvements in iron ore, lithium and coal prices – some of which was driven by the Chinese government announcement to crack down on excess capacity in sectors like steel.

US equities

The breadth of the recent 25% recovery has been one of the narrowest on record.

While this still bodes well for markets, the next phase will likely be a broadening in the recovery and slowing in momentum which normally follows narrow rebounds.

The US quarterly reporting season begins on 15 July, with the S&P 500 trading at 22x price/earnings and expecting 4% year-on-year quarterly earnings growth, versus the 12% growth delivered in Q1 2025.

Weaker earnings growth expectations are being driven by commodity and cyclical sectors.

Tariff-driven margin compression for FY26 is the largest risk.

Most companies have been indicating that tariff increases will be largely absorbed through the supply chain with little evidence of tariff-driven price increases seen so far and many large US retailers vowing not to increase prices.

Australian equities

The S&P/ASX 300 eked out small successive gains most days to end up 1% for the week.

Midcaps were the biggest movers on a market cap basis (S&P/ASX Midcap 50 +2.2%).

At a sector level, resources (+2.3%) and REITS (+3.0%) were the biggest winners at the expense of banks (-1.6%), insurers and growth stocks.

The domestic economy, and potential rate cuts, augur well for mid and small caps. But investors need to be selective about what they buy, argues portfolio manager BRENTON SAUNDERS

• Domestic macro-outlook positive for mid and small caps
• REITs, select retailers and quality growth companies to benefit most
• Find out about Pendal MidCap Fund

THERE is now a helpful macro tailwind for domestic focused companies driven by the prospect of more interest rate cuts and high fiscal spend, says Pendal portfolio manager Brenton Saunders.

“The main issue outstanding, from a domestic perspective, is valuation. That’s a constant nagging question in the back of investors’ minds”, he says.

The S&P/ASX200 in recent days has hit a new record and some stocks, notably market leader Commonwealth Bank, are trading are historically high multiples.

Domestic outlook

“The international landscape remains complex, but the domestic economy is panning out pretty well,” Saunders says.

“We are through the election and companies that don’t have unanswered questions around tariffs can be reasonably confident about the second half of 2025, particularly if the playbook sees a couple more rate cuts.”

Sustainable, self-funded growth companies

With that macro-economic backdrop, what types of stocks should investors be looking for?

“It comes back to a few key thematics. Companies with reliable growth, that are self-funded, in growth parts of the economy,” Saunders says.

“We will play the interest rate cycle through selected REITs (real estate investment trusts) and growth stocks that have longer duration and benefit from lower discount and interest rates.”

He nominates tracking company Life 360 and software group Technology One as examples of well-run, high-quality companies with a positive, sustainable earnings outlook. Buy now, pay later group ZIP is another example.

“ZIP is growing very strongly, and it currently has very low penetration in the US so there is opportunity,” Saunders says.

Discretionary retailers

Discretionary retailers should also benefit from the interest rate environment, but Saunders cautions investors need to be discerning about what they buy.

“In this space you need to be a little bit more circumspect. Apparel is very tough. There’s a lot of discounting and plenty of competition. There’s also a couple of new apparel and sportswear retailers wanting to come to Australia.”

By contrast, car dealership group Eagers Automotive has done very well in 2025 and should benefit from lower interest rates, Saunders says.

“There have been two specific things going on in that stock. The biggest one is BYD volumes, and secondly, margins haven’t fallen as precipitously as expected in both new and used car sales.”

REITs

The real estate investment trusts (REITs) benefit from lower interest rate cycles, Saunders says, and should do well in the second half of the year. He says investors are slightly wary of data centre operators, in part due to outsized capital raisings last year and early this year.

“Also, the pace of writing new contracts stalled somewhat with the advent of the Deep Seek AI platform. This caused hyper-scalers like Microsoft to pause and rethink their infrastructure intensive approach.”

Life360, Technology One, Zip and Eagers Automotive are held in various Pendal portfolios.

The price of gold has seen an uptick in recent times, but how much higher can it go? Portfolio manager BRENTON SAUNDERS explains

• ASX gold index up 20% this year
• Two stocks to watch: Capricorn Metals and Genesis Minerals
• Find out about Pendal MidCap Fund

GOLD is up more than 40 per cent over the past year and plenty of analysts see more records ahead.

Can it keep going? And how best to gain exposure through the ASX?

“Gold is being helped by elevated inflation and strong liquidity,” says Pendal portfolio manager Brenton Saunders

Brenton manages Pendal MidCap Fund and is also a geologist with experience in gold mining and gold-related equities investing.

While no one knows for sure how far gold will run, Saunders notes that the rising price has “very quickly repaired some of the issues with balance sheets in the gold sector and elevated dividends in some cases.

“Gold companies have very high profit leverage to higher gold prices. This makes them very cash generative and, in turn, they become acquisitive.”

Saunders has long been an advocate for selected stocks in the ASX-listed gold sector.

“Gold has worked well in our portfolio.

“The gold price is up 9 per cent in Australian dollar terms year-to-date and the ASX Gold Index is up around 20 per cent. That’s been incredibly helpful to our portfolio.

“We have held positions for a long time, and it has all come together in the last three months.”

Stock examples

Saunders highlights several ASX gold stocks held by Pendal’s midcap fund including Capricorn Metals (ASX: CMM) and Genesis Minerals (ASX: GMD).

“Capricorn is a reliable, low-cost, highly cash-generative producer permitting a new project in the Murchison to effectively double production by FY 2027-28,” says Saunders.

“Strong gold price exposure and growth make it an ideal midcap stock. 

“Genesis has taken the best of the successful Saracen (ASX: SAR) team and packaged them into a high-growth, very well-run WA gold company.

“The company is turning a series of highly systematic acquisitions in WA, made at lower gold prices, into an integrated production complex with strong growth and cash flow.”

Opportunities in cyclical industrials

Elsewhere, market focus has turned to opportunities in ASX-listed cyclical industrials, Saunders believes.

“Some stocks are looking quite attractive on a valuation perspective and cyclical headwinds associated with high interest rates are starting to abate.

“In some cases it comes down to company specifics. If stocks can address specific issues they can do well.

“During results season Domino’s Pizza Enterprises (ASX: DMP, not held in Pendal MidCap Fund) was an example. They have started to address some of the headwinds they’ve had in the last couple of years and the market was very receptive to that.”

Wall Street’s recent earnings season was reasonably strong and the current reporting season in Australia has “so far been strong too”, Saunders says.

“The share market has been strong so far this year. Share price appreciation has been relatively broad-based, though the main drivers are banks, gold stocks and consumer discretionary stocks.”

Saunders is also closely watching how potential Trump administration tariffs might impact ASX stocks.

A number have potential exposure but there is limited clarity of how and where tariffs will land.

“So far what markets were most worried about hasn’t really eventuated, and investors have just gotten on with it.”

Sweeping policy changes under a unified US Republican government signal shifts for investors, with traditional energy and nuclear set to benefit, argues Pendal’s BRENTON SAUNDERS

• Unified Republican government means significant policy changes
• Traditional energy and nuclear set to benefit
• Find out about Pendal MidCap Fund

SWEEPING policy changes in the US are expected to bring shifts for investors, with traditional energy and nuclear set to benefit amid a slower path to rate cuts.

That’s the view of Pendal PM Brenton Saunders, who has more than 25 years of experience in resources and started his career as an underground mining geologist.

Brenton leads Pendal MidCap Fund, which offers exposure to fast-growing ASX sectors.

Unified Republican control of the US House, Senate, and presidency is set to drive rapid policy changes that will shape market performance over the coming year, says Saunders.

Donald Trump’s decisive victory delivered a clear Republican mandate, defying expectations of a tight race and threats of a hamstrung administration.

The sweep of all three arms of government paves the way for significant shifts in energy policy, a renewed focus on nuclear power, and has heightened expectations for a slower path to interest rate cuts and higher-for-longer bond yields.

“For a long time, it looked like the election was going to be tight but that hasn’t happened.

“We’ve had a convincing Republican win which gives them a broad mandate for change,” says Saunders, who manages the Pendal MidCap Fund.

Energy and renewables

The new Trump administration signals a sharp shift in US energy policy, with implications for global energy markets and the renewables transition, says Saunders.

“As a broad brush, you could see a more of a reversion to traditional energy. There’s an expectation for more traditional oil and gas production, certainly in the US and the Gulf of Mexico,” he says.

“That should keep energy availability relatively elevated, which ultimately should benefit economic growth and the consumer.”

In Australia, engineering group Worley and industrial services group SGH, formerly Seven Group Holdings, should be beneficiaries.

Worley plays a key role in the design and engineering of oil and gas facilities. SGH has first and second derivative exposure to energy through its direct investments and portfolio of heavy equipment suppliers.

The Trump administration may also accelerate the global shift to nuclear energy, says Saunders. This should benefit ASX-listed Canadian uranium developer NexGen Energy.

“Nuclear has risen to prominence and acceptability in most circles as a source of power under the decarbonisation banner – previously it was thought of as very old world,” he says.

The changing energy environment should also benefit local refiners Ampol and Viva Energy and should bolster Whitehaven Coal as metallurgical coal demand continues.

Gold is another sector set to benefit.

“We hold a considerable amount in the portfolio through companies like Capricorn Metals, De Grey Mining, Bellevue Gold and Genesis Minerals. Despite doing very well the whole year, gold has had a bit of a breather in the last month or so and we see that as a useful opportunity to buy the dip.”

On the downside, Saunders says he is cautious about the consumer discretionary sector as it battles high interest rates.

“Despite the fact that companies like JB Hi Fi have done well, most of the other discretionary categories are reasonably depressed, and potentially more so in the next six months or so until we see the effect of lower interest rates come through and help consumers.”

Diversification the key

The US is somewhat unusual in having such a lengthy period between November elections and the January inauguration of a new administration. This interregnum presents uncertainty for investors as markets speculate on what changes the political transition will bring, says Saunders.

“We’re again seeing binary macro scenarios being debated. That’s where the benefit of diversification comes into play – not taking big macro bets in your portfolios is key because the outcomes are likely to be more extreme than normal.

Geopolitics remains a significant driver of risk, with events in Russia, China, Ukraine, the Middle East, Israel and Iran all carrying the potential to disrupt markets, from oil prices to broader economic conditions, he says.

“You’ve got to be relatively conservative – diversification is probably the most important part of the next three to six months.”

Rate cuts delayed

Markets have performed strongly this year, and it has been difficult to disentangle the impact of Trump’s candidacy from the broader strength as markets adjust to the prospect of rate cuts, says Saunders.

“In the US, interest rates have dropped 75 basis points off the peak and, until recently,  there was the expectation of a lot more to come. But inflation and labour markets have stabilised and now there are question marks around the pace and the timing of rate cuts, not just in the US, but also domestically as well.

“Bond yields and forward interest rate expectations have risen and look like they might stay higher for longer.” Trump policies are likely to be more inflationary.

That has driven a rotation away from interest rate-sensitive sectors. REITS for example have stalled and partly reversed.

“We think that interest rate cuts are still fairly likely to happen within the course of next year, albeit at slower rate and possibly to a slightly higher neutral level than was previously thought.

“But domestically and internationally, more rate cuts in the offing should see some of the interest rate sensitive sectors do reasonably well again – once rate cuts resume.”

Saunders says the slower trajectory for cutting interest rates should change how investors approach the market over the next six months.

“It will likely prolong the downturn for home builders and suppliers – those companies that are reliant on the construction cycle to improve. You also run the risk of a poor consumption season if consumer sentiment takes a dip because of the expectation of higher for longer interest rates.

“So, you have to be very focused about where you’re taking your exposure.”

In times of geopolitical tensions and shifting economic policies, it’s important to adopt a balanced portfolio approach, says Pendal portfolio manager BRENTON SAUNDERS

• Markets facing geopolitical tensions, economic shifts
• Value in focusing on stock opportunities, not taking big macro bets
• Find out about Pendal MidCap Fund

EQUITIES investors are forced to consider a complex interplay of factors when making asset allocation decisions today.

“Escalation of tensions in the Middle East has had a tangible impact on energy markets, raising concerns about inflation and causing bond yields to rise,” notes Brenton Saunders, who manages Pendal MidCap Fund.

In the US, next month’s presidential poll remains too close to call, while strong jobs numbers have contributed to the upward pressure on yields.

In China there have been significant developments, with Beijing outlining stimulus measures.

“This has sparked a notable rotation in the Australian market, with investors shifting away from large-cap financials and growth stocks and towards resources and value-oriented equities,” Saunders says.

“The continuation of this rotation will largely depend on whether China implements more direct stimulus initiatives.”

China’s Politburo and the National People’s Congress both meet in late October – the latter would need to approve any policy requiring higher deficit spending.

A balanced approach

In the face of these competing forces, Saunders emphasises the importance of a balanced portfolio approach.

“We tend not to take big thematic bets in our portfolios,” Saunders says. “While we’re very alive to how these market developments manifest, we typically don’t have much directional exposure to any specific outcome.”

A balanced approach in the current environment mitigates risks during inflection points in the economic cycle.

By avoiding large exposures to any specific economic outcome, a portfolio may be able to generate steady returns regardless of how a situation unfolds, Saunders argues.

“Our base view is that markets will remain strong through the end of the year, as interest rates are expected to come down, albeit slightly slower than previously anticipated.

“Liquidity in the market is also seen as a strong underpinning for equities.”

There are risks, however.

“There’s the potential for higher-than-expected inflation and for a material deterioration in the Middle East conflict. In this environment, the balanced portfolio approach becomes even more crucial,” Saunders says.

“It is important not to have big macro tilts in your portfolio and to be able to produce steady returns through any outcome.”

Investing in companies that will be beneficiaries of an interest rate-easing cycle should provide rewards, says mid-caps portfolio manager BRENTON SAUNDERS

• Real estate trusts, long duration could benefit
• Discretionary retail and commodities “tough to call”
• Find out about Pendal MidCap Fund

FINDING early cycle opportunities and bond-sensitive stocks should pay dividends for investors.

That’s according to Brenton Saunders, who manages the Pendal MidCap Fund.

“Investing in companies that will be beneficiaries of an ongoing interest rate easing cycle – real estate investment trusts being an obvious one – along with long duration, high multiple sectors, especially the growth stocks, should provide rewards,” Saunders says.

But that doesn’t mean investors should buy into all interest rate-sensitive sectors.

“Discretionary retail is still a tough one to call – some parts of it are doing really well and others are quite challenged,” he explains, adding that it depends on the landing scenario and whether we get a soft or hard landing.

“Some of the deeper cyclicals, whether they be industrials or resources, will probably take longer to improve in a convincing way,” Saunders continues.

“Commodities will depend on the efficacy of ongoing Chinese stimulus which, to date, has been unconvincing.”

The main macroeconomic driver of equity markets is the turning economic – and interest rate – cycle.

Saunders expects two or three rate cuts in the US, adding that so far, Australia is an exception to the rate-cutting trend and likely to remain the case until 2025.

Turns in economic cycles introduces a level of uncertainty in markets, and Saunders says the most recent earnings season demonstrates nervousness about the economic outlook.

“The market disproportionately rewarded companies with either earnings surprises and/or higher guidance, and disproportionately punished companies that had an issue,” he says.

“The re-rating and de-rating during reporting seasons is still about two-and-a-half times what we were seeing pre-COVID.”

What this means is stocks that are doing well are doing even better, and those on the nose remain that way.

“Turn-around stories for earnings, especially among cyclical stocks, remain difficult. Some stocks that investors have been buying in the expectation of an earnings recovery continue to battle,” Saunders says.

Among sectors, banking stocks continue to rally – in some cases ahead of what fundamental analysis suggests.

“During the earnings season, in aggregate there was some margin compression among industrials, though there were some exceptions to that. What it shows is the ability to pass price on is slowly starting to get undermined,” he continues.

“The growth sectors [such as technology] continue to do well both in terms of the numbers they are reporting and their price performance,” Saunders explains.

“The sector that continues to do really badly, based on the global cyclical theme, is resources. Most parts of resources are on the nose, with the exception of gold.

“Iron ore prices fell below $US90 a tonne, lithium is incredibly cheap – highlighting how a lot of future facing commodities are challenged. Oil is normally a good barometer of global economic activity and aggregate demand, and oil prices have been falling.”

For ASX mid-cap investors, three mega-trends remain central to markets, says Pendal portfolio manager Brenton Saunders

• AI accelerates demand for data centres
• Gold an opportunity, up 20 per cent in AUD terms
• Find out about Pendal MidCap Fund

THREE major trends continue to underpin ASX investing in 2024, says portfolio manager Brenton Saunders, who manages Pendal MidCap Fund.

“The first one is international and ubiquitous – data centres and artificial intelligence,” he says.

“Demand for data centres has been a trend for a long time and AI has accelerated that demand.”

“More recently, we’ve seen a very tangible escalation in demand for data centres among big and small corporations.

“There’s a land grab going on and there’s limited availability that meets all the criteria corporates want.”

New supply isn’t meeting demand, making established players like NextDC (ASX: NXT) attractive investments, he says. (Pendal holds NXT).

But investors should keep an eye on data-centre power requirements, which continues to present a growing challenge.

“Data centres are very power intensive and in the brave new world of decarbonising baseload energy, power is becoming harder to access, more volatile and more expensive.

“The advent of AI and its adoption and commercialisation has focused the minds of the bigger corporations on procuring data, storage space, and finding areas where they can train large language models for AI,” Saunders says. “Power is part of that.”

Decarbonisation

The second big trend is around the ongoing decarbonisation of the mainstream electricity supply and the length of time it is taking.

“Renewable generation capacity is continuing with reasonable success, but there have been delays in terms of both timing and capacity.

“That means a range of sectors — from coal and gas producers to electricity producers and even refiners — have benefited, even though some thought demand for their fossil-fuel-generated power would be downscaling by now.

“This is enabling many of these companies to generate good profits for longer.”

Whitehaven Coal (held by Pendal) has benefited, Saunders says.

In regard to coal, because many corporates are no longer investing in the sector, the coal companies are able to buy good assets at cheaper prices. Whitehaven’s purchase of two mines from BHP last year is an example.

The trend has also benefited uranium stocks.

“Uranium has belatedly been recognised and accepted as part of the decarbonisation of the grid.

“Several OECD countries are reversing plans they had to reduce their reliance on uranium and have recommissioned old facilities and are contemplating new ones.”

Electrification

The third trend is around electric vehicles and battery-aided power, as well as the inputs needed for the sector.

“The performance of some stocks in the sector, particularly lithium companies, has been disappointing.

“High prices stimulated new lithium production faster than the growth in market demand. A similar issue has plagued the market for rare earth elements.

“There is also the maturing of the electric vehicle market globally alongside a softer macroeconomic environment. We have seen a notable shift away from battery electric vehicles towards plug-in hybrids.”

While these ripples have arisen in recent times, the electrification trend remains intact.

Gold

Gold is an investable thematic in 2024, though possibly not as long-lived as the other three trends, Saunders says.

“We’re now seeing a number of developed markets cut interest rates and gold has reacted.

“It is up more than 20 per cent year-to-date in AUD, allowing the gold producers to more than offset the high cost inflation of the past two years,” Brenton says.

“Margins have expanded, and companies have been able to generate more cash. They are paying down debt and there’s been more M&A activity, making the sector more buoyant.

“It’s a thematic we think will play into next year.”

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

• RBA board “not ruling anything out” on interest rates
• Market-implied pricing suggests a rate cut before 2025 looks unlikely
• Find out about Pendal MidCap Fund

THE artificial intelligence revolution marches on, with Nvidia touching a US$3.2 trillion market cap last week – second only to Microsoft – and the broader S&P 500 gaining another 0.63%.

Markets look technically extended on momentum indicators, but corporates continue to trade reasonably well – with economies remaining resilient in the face of high interest rates.

Labour markets have weakened at the margin, but slower than anticipated, and remain in good shape.

Strong interest income and asset price strength has supported the top end of the consumption cohort. 

The fixed interest market continues to contemplate the potential for rate cuts in the US, while many emerging markets and some developed markets have already started easing.

The Swiss National Bank cut interest rates by 25 basis points (bps), while the Bank of England said it was close to cuts, with inflation having reached the target range in May.

The RBA, on the other hand, delivered what was seen by some as a hawkish pivot in its comments around the decision to hold rates steady.

It implied that the potential for one or possibly two rates hikes before year’s end was firmly back on the table, much to the dismay of the Federal Government.

The S&P/ASX 300 gained 0.93% for the week.

Elsewhere, US bond markets were largely unchanged, with ten-year treasury yields rising 5bps to 4.25%.

Brent crude oil rose 3.2%, base metals and gold were down between 0.5% and 1.5%, and iron ore was flat.

Lithium marched lower on weak auto sales and continued share gains from plug-in hybrids – which require less lithium – at the expense of battery electric and internal combustion engine vehicles.

US economy and policy

Data points last week tended to underpin the view of an economy softening at the margin, but holding up reasonably well:

• Industrial production beat expectations, with manufacturing output up 0.9 per cent in May – recouping all the declines of the previous two months.
• The March quarter current account deficit widened by $15.9 billion (7.2%), largely reflecting an expansion in the goods deficit. The deficit represents 3.4 % of nominal GDP, up from 3.2% in the previous quarter.
• Advance retail sales for May came in at 0.1% versus the 0.3% forecast. April was revised 0.2% lower to -0.2%. Sales excluding auto and gas rose 0.1% versus the 0.4% expected. April was also revised down on this measure, from -0.1% to -0.3%. 
• Initial Jobless claims declined 5,000 to 238,000. Continuing claims decreased 10,000 to 1.81 million.
• Housing starts fell 5.5% in May (the lowest level since June 2020) and permits fell by 3.8%, the third consecutive monthly decline. The weather is having some impact, but new home construction is now at a four-year low.
• The NAHB Housing market indicator slipped to 43, with weakness across the sub-indices and against the expectation for some improvement.
• The Composite Purchasing Managers Index (PMI) was 54.6, moderately ahead of the 53.5 forecast. The Manufacturing PMI was 51.7 (51 forecast) and Service PMI was 55.1 (54 forecast).

Several comments from US Federal Reserve policymakers noted recent encouraging trends on inflation.

New York Fed President John Williams noted that the labour market is slowing to more sustainable levels and that he expects rates to come down over the course of the year.

Thomas Barkin and Susan Collins, Presidents of the Richmond and Boston Feds respectively, both noted the encouraging inflation figures and said that, while patience was required, there were scenarios where rates were cut once or twice this year.

Dallas Fed President Lorie Logan also saw recent indicators of colling inflation as “welcome news”, but said that several more months of data is required to confirm the trend.

The net effect was very little change over the week in market-implied expectations around rate cuts.

China

May’s retail sales surprised to the upside, rising 3.7% year-on-year – the first monthly reading to beat expectations after six misses.

That said, sales – in part – reflected strength in spending on electronic and communications devices as several new products were launched in the month.

Despite this, the dynamics in China remain weak.

Infrastructure investment is slowing, the housing sector is yet to bottom, and the consumer is losing some tailwinds.

Industrial production was weaker than expected and slowed to 5.6% year-on-year in May, from 6.7% the previous month.

Electricity output also slowed from 3.1% to 2.3%.

Australia

The most interesting thing domestically last week was the debate around the RBA following the Tuesday meeting where it left rates on hold at 4.35%, as expected.

There are a lot of “known unknowns” facing the RBA, including the lagged effect of previous hikes, the impact of tax cuts and the wealth effect of higher home prices and lower inflation on consumption, the effect of tighter labour markets and slowing demand on prices, as well as an improving outlook for the US and possibly China, and higher commodity prices.

At the end of its minutes, the RBA noted: “Inflation is easing but has been doing so more slowly than previously expected and it remains high. The Board expects that it will be some time yet before inflation is sustainably in the target range.”

The Board is also not ruling anything in or out in terms of interest rates.

Some economists have a hawkish take on the statement and Governor Bullock’s press conference.

This view is that the RBA and Federal Government’s views are diverging, and that the central bank may be positioning for a potential hike depending on inflation data from Q2 2024.

Key points for this argument are that inflation remains persistent and above target and that the pace of decline has slowed, while data suggests continued excess demand and elevated costs in the economy.

Real disposable incomes have also stabilised and may be bolstered by lower inflation and tax cuts.

This view was reinforced by Governor Bullock’s comments that the case for a hike was discussed at Tuesday’s meeting, while the case for a cut was not considered.

Market-implied pricing suggests that an interest rate cuts before 2025 looks highly unlikely.

All of this suggests the Australian economy is six-to-nine months behind the US in terms of its economic and interest rate trajectory.

Elsewhere, job ads on the Indeed platform declined 2.1% in May and are down 8.2% year-on-year. Demand for labour continues to weaken and, with population growth supporting an expanding workforce, the unemployment rate should continue to trend higher.

Despite weaker consumer sentiment, higher-for-longer interest rates and the threat of more rate rises, consumption data remains resilient in nominal terms, which is supportive for corporate Australia.

Price inflation has materially offset volume weakness in most categories and, so far, corporate margins have been maintained by the ability to pass on price.

The question is whether margins come under pressure the longer interest rates remain high.

We are seeing signs of pressure on margins in the consumer electronics space, which was reinforced by feedback during the week and suggests risk are building for retailers in this space.

Aggregate household spending remains strong and rose in April versus March, but is slowing in a number of discretionary categories.

Aggregate household expenditure is buoyed by high wage increases, resilient employment data and population growth.

The resulting inflation remains resilient at levels above RBA targets, with few inflation categories showing much decline.