The Point

Bonds vs equities: the double-rally dilemma

Jim Taylor: What’s driving the ASX this week?

Aussies are spending again. But what does it mean for rate cuts?

AUSSIE consumers are spending again – that’s the main message from the June-quarter GDP data out this week.

Overall, growth was slightly higher than expected at 0.6% versus a 0.5% forecast. Annually we are 1.8% stronger than a year ago.

But increased consumer spending comes through as a clear trend, notes Pendal’s head of government bonds Tim Hext.

Despite last year’s tax cuts and February’s rate cuts, for a while it seemed consumers were more interested in saving than spending.

However, household spending rose 0.9% in the last quarter, led by a 1.4% rise in discretionary spending.

Now rate-cut expectations have dropped from 100% chance of one cut by November to 90%.

“It does all feed into the idea that the RBA has time and optionality on its side,” says Tim.

“If the consumer gets more confident from here, some may ask if any more rate cuts are needed.”

How to identify emerging markets benefitting from a weaker US dollar

A weaker US dollar is creating support for emerging-market equities – but not all countries will benefit equally.

The US Dollar Index – which measures the USD against other major currencies – is down about 10 per cent this year.

EM returns have historically been strongest when the US dollar is weak, because servicing US-dollar debt becomes cheaper; domestic purchasing power in EMs improves; and cheaper imports help keep inflation under control, creating room for rate cuts.

Still, while EM performance lifts as the US dollar weakens, the effect is uneven and investors should be discriminating in country selection, cautions Pendal’s EM team.

Economies with a current account deficit – common in Latin America and South-East Asia – benefit most from cheaper borrowing, lower imported inflation and stronger consumer demand.

But big exporters that run a surplus such as Taiwan and Korea can face headwinds as their products become more expensive in US-dollar terms.

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

Pendal identified five major themes this ASX reporting season.
1. Overall earnings were okay, with similar trends to February in terms of misses and beats. A third of companies beat by 5% or more and 22% missed.
2. Stock volatililty reached new highs on result days, driven by the tone of messaging and revisions. Almost a third of companies experienced stock moves more than three standard deviations away from their average on reporting day.
3. Rating changes were the most material driver of returns. The biggest re-ratings were generally stocks beginning to stabilise or those that affirmed their status as safe havens.
4. Disappointing large caps were hit harder than smalls. The average two-day relative return for industrial large caps that missed consensus EPS by more than 5% was -7.2% for the ASX 100, versus -3.8% for small caps.
5. Domestic stocks generally performed better than internationally-exposed companies.

Amy Xie Patrick: What the Fed’s shift from inflation to employment means for investors

A shift in focus from inflation to employment hints at a likely rate cut in September observes Pendal’s head of income strategies AMY XIE PATRICK

In her latest article, Amy explains how she is positioning Pendal’s income funds in response to these and other global factors.