The Point

Tim Hext: Five key takeaways from the latest GDP data

The latest GDP data shows a weak Australian economy, but the numbers should pick up from here, says Pendal’s head of government bonds, Tim Hext. Here are five takeaways.

1. Government spending remains strong despite government investment tapering off. “This remains a central factor behind strong employment and inflation – and the animated debate between Treasurer Chalmers and RBA Governor Bullock,” says Tim.

2. Households are going backwards again. “Tax cuts and subsidies could bring the consumer back in Q3, but early data from July suggests it may be a slow burn.”

3. Households are barely saving anything. This likely indicates incomes not keeping up with prices rather than exuberant consumer spending, says Tim.

4. Australia’s commodity boom is waning (a negative for GDP) but remains historically strong

5. GDP should pick up from here. The RBA is forecasting 1.7% GDP this year and 2.6% in 2024-25. Since the first two quarters are up 0.4%, the RBA is expecting 0.6% to 0.7% quarterly rises over the next year.

“That may seem a bit optimistic, but the possibility of rate cuts and falling inflation could well see a decent rebound in the economy.”

Read Pendal’s latest fixed-income report

Emerging markets: Why China is unlikely to face a Japanese-style ‘lost decade’ despite its cloudy outlook

There is a temptation to see China falling into the same kind of balance-sheet recession that Japan experienced after its late 1980s boom, says Pendal’s emerging markets team.

Japan’s Nikkei index has only just this year regained its 1989 peak after a series of so-called “lost decades”.

Given the historical pattern of a decade-long, debt-driven real-estate boom followed by what looks like a debt-deflationary slowdown, do Chinese equities also face a similar “lost decade”?

From beer to luxury products to cosmetics to cars, a clear pattern has emerged among western multinational companies warning about weak Chinese demand.

But a closer look at company results shows a different, more promising pattern, argues Pendal’s team in a new article.

Many Chinese domestic companies are reporting good results and earnings growth. Consensus estimates of future earnings are also being revised up.

There are opportunities to be found in Chinese equities, the team argues. “We remain overweight Chinese equities in the portfolio, with exposure to a highly selective set of stocks.”

Read more here

Elise McKay: What’s driving equities this week?

The world’s most-watched company, AI chip-maker Nvidia, tumbled this week after disappointing profit guidance and a regulatory speedbump.

Is Nvidia still a buy? And what do the results mean for ASX-listed, AI-related stocks?

Even before its latest share price tumble, Nvidia’s valuation wasn’t unreasonable at around 15 per cent below its five-year average multiple, says Pendal analyst and PM Elise McKay.

“Data-centre demand remains strong and broad-based across hyperscale (the biggest data-centre customers), consumer internet and enterprise,” says Elise.

Sales forecasts in the sovereign sector have strengthened to low double-digit billions in FY25, she points out.

“This reflects desire among sovereign states to build AI models based on local datasets, language and cultures.”

Nvidia’s profit margin guidance reflected the introduction of its latest “Blackwell” chips, which start at a higher cost before reaching scale during 2025, Elise says.

Strong growth in data centre revenue (154 per cent year-on-year) is supportive for ASX-listed plays such as Goodman (GMG), NextDC (NXT), Macquarie Telecom (MAQ) and Infratil (IFT), says Elise. (Pendal holds GMG, NXT and MAQ).

Read Pendal’s latest weekly equities overview

Crispin Murray: What’s driving the market this week?

MARKETS continued trailing back toward their July highs last week, driven by commentary from Federal Reserve Chairman Jay Powell.

Powell expressed confidence that a soft landing is achievable and said that the Fed would focus on keeping the labour market strong as it makes progress towards its inflation target.

The “Fed put” is back in terms of monetary policy, providing important insurance against recession risk.

US bonds rallied and the market is now pricing in a roughly 50% chance of a 50 basis point (bp) rate cut in September.

The US Dollar weakened, which is supportive for risk assets, and crypto rallied, indicating that liquidity is coming back to markets.

The S&P 500 gained 1.47%, while the S&P/ASX 300 finished up 0.90%.

The main check on equities is the fear of September, which is seasonally the weakest month.

Local earnings results remain supportive, albeit with some pockets of weakness which tend to reflect specific industry issues rather than broader economic malaise.

Tim Hext: RBA minutes – inside a meeting of two-handed economists

Despite a narrative around re-emerging inflation, Australian investors are remarkably relaxed about the outlook for prices, observes Pendal’s head of government bond strategies, Tim Hext.

April’s inflation numbers – released yesterday – show a 3.6% increase in the annual Consumer Price Index. That’s slightly higher than March (3.5%) and more than the 3.4% markets were hoping for.

A rise in goods prices – mainly furniture, footwear and clothing – will not go unnoticed by the Reserve Bank and will require further investigation, says Tim.

But overall, the market is backing the RBA to do its job, he says. Implied 10-year inflation levels remain reasonably well anchored at 2.77%.

“Three-year yields in Australia moved back above 4 per cent after the data. We view this as a buying opportunity, since our medium-term view on inflation is positive.

“US inflation numbers come out on Friday and should show lower rental data feeding through to lower outcomes.

“Unless our concerns ramp up, we will be happy to be long duration into the winter months.”

Crispin Murray: What’s driving the ASX this week?