Fin-X Weekly Update 10th February 2025

Source: Bloomberg, S&P Dow Jones, MSCI, FTSE Russell, 8th February 2025

Tariff talk continued to dominate the first half of the trading week. Gold rallied to a new all-time high after China announced retaliatory measures.

Treasury Secretary Scott Bessent revealed how the new administration sees tariffs and interest rates, before the jobs report and rising inflation expectations rattled bond markets on Friday.

The Bank of England and the Bank of India trimmed policy rates, and the earnings outlook somewhat soured despite robust Q4 results. Australian reporting season picks up this week.

The NAB business and Westpac consumer surveys are due out tomorrow, followed by American CPI figures on Wednesday night.

Tariff discussions kept global equities under pressure last week and contributed to the gold price reaching a new all-time high of US$2,887 per oz.

President Trump agreed to pause the imposition of 25% tariffs on imports from Canada and Mexico for one month. Both countries reiterated previously announced border security measures, leaving it unclear whether the tariffs will eventually be imposed. The president also said that tariffs will soon be added to imports from the EU.

The US proceeded with 10% tariffs on Chinese imports, prompting retaliatory measures. From today, China will charge a 15% import tax on US coal and liquefied natural gas and 10% on crude oil, agricultural machinery, pick-up trucks, and some sports cars. The value of goods attracting a tariff is significantly lower than on the American side. Authorities also announced a monopoly investigation into Google, which appears to be a warning since the search engine is unavailable in China.

Source: Bloomberg

The president also signed an order to create an American sovereign wealth fund, although the fund's objectives are not yet clear.

There was general confusion regarding changes in government spending and federal employment throughout the week as several broad executive orders instigated by the DOGE team were challenged and temporary restraining orders granted by courts.

Treasury Secretary Scott Bessent sat down with Bloomberg and provided a little more clarity than his colleagues. The Treasury intends to issue $815 billion in new debt this quarter and $123 billion next quarter when tax receipts are due. He told investors not to expect any changes to the new issuance program, suggesting that the recently higher proportion of Treasury bills will continue.

Mr Bessent said several additional tax measures for lower-income households were under discussion, including auto loan deductibility and removing taxes on tips and overtime.

It has also been reported that the tax exemption was extended to Social Security payments in discussions between the White House and Republican members of Congress last week. The administration also proposed extending the expiring pieces of the 2017 Tax Cuts and Jobs Act (TCJA), expanding the State and Local Tax (SALT) deduction, enacting tax breaks for goods made in America, and eliminating tax breaks for carried interest and stadium owners.

However, several analysts suggest that Congress might struggle to enact tax cuts without concrete progress on spending cuts. The bipartisan Committee for a Responsible Federal Budget estimates that revenue could fall by $5.0 trillion to $11.2 trillion over ten years, increasing debt from the current level of approximately 100% of GDP to between 132% and 149% by 2035.

Regarding interest rates, Mr Bessent said that the administration sought lower yields all along the curve, not just a lower Fed Funds rate. "One of the things I wanted to emphasise is that we are not focused on whether the Fed is going to cut or not cut. What we are focused on is lowering rates. So, we are less focused on specific rate cuts, [rather] how do we get the whole curve down. I mentioned that the 10yr, I believe, is the important price to focus on. It's mortgages, it's long-term capital formation. So, look, I think with the president's policies of energy dominance, deregulation, and non-inflationary growth I think that the 10yr is naturally going to come down. And on top of it, what if we do get some big savings on the spending side from the DOGE programs?"

Suggesting that some tariffs would be permanent, he said they were not inflationary and represent a "small" one-time price adjustment.

A crucial factor for Fed policy will be the degree to which tariffs spill over into higher inflation expectations. If they no longer appear well-anchored, the FOMC might be unable to cut rates and may even feel the need to raise.

Friday brought some disappointing news as the University of Michigan consumer survey showed a spike in one-year inflation expectations to +4.3%, while 5-10yr expectations rose more modestly to +3.3%. Due out this week, January CPI figures are expected to remain steady at around 3%, still some way above the Fed’s 2% target.

Bond yields were also pushed higher on Friday by a jobs report which appeared to show renewed strength with +143k new jobs, +100k of revisions to November and December figures, and a -0.1% drop in the unemployment rate to 4.0%.

Source: Bloomberg, BLS, 8th February 2025

The jobs data appears to show an acceleration in hiring. However, the dataset was heavily affected by the annual benchmark changes. -589k jobs were removed from the previously announced statistics to March 2024 as the QCEW census data was incorporated, with the smoothing process removing jobs from 2023 and early 2024, and increasing the more recent figures.

The apparent acceleration may be further exaggerated by the bounce back from the October hurricanes and is otherwise difficult to reconcile with other data series. For example, the JOLTS report showed a -6.8% drop in December openings and hiring remained at 2014 levels. The average workweek also fell to 34.1 hrs, the same as in March 2020 when the pandemic first struck, and otherwise the lowest level since April 2010.

In addition, the pick-up in ISM new manufacturing orders (55.1) was potentially ambiguous, as regional surveys had previously suggested some front-running of anticipated tariffs. Moreover, the strength was not reflected more broadly in monthly factory orders (+0.3% ex-transportation).

Source: Institute for Supply Management

Even if the US economy is beginning to accelerate, policymakers elsewhere are more concerned about a slowing global economy. The Bank of England cut interest rates last week by -0.25% to 4.5%, and the Reserve Bank of India cut for the first time since May 2020 to 6.25%. Japan remains the exception, with Bank of Japan officials suggesting last week that two more rate rises could come this year.

Market pricing still suggests that a cut from the RBA next week is a foregone conclusion. However, we see an early cut as far less likely as the Australian economy has proved far more resilient than anticipated. Last week’s -0.1% fall in December retail sales was much less than expected after strong Cyber Monday figures in the preceding two months. Moreover, the jobs market remains tight in the eyes of policymakers, and the government has recently announced a mild fiscal expansion with more measures likely leading up to the federal election.

As well as an avalanche of macroeconomic policy changes, analysts are still digesting quarterly earnings reports.

With 308 / 501 S&P companies having reported, earnings are now showing a +12.6% annual increase to December, a surprise of +6.6%. However, there were signs of decelerating sales growth and guidance from Amazon and Alphabet was disappointing relative to expectations. Tesla shares also slipped by -10.6% after reports of falling sales.

More positively, the Palantir share price climbed +34.4% over the week after announcing results, and Novo Nordisk ADRs rose by +2.3% after a +107% uplift in quarterly Wegovy sales.

Source: Bloomberg, ABS, 8th February 2025

In the local market, Insignia received a third $4.60 bid from Brookfield Capital Partners.

This week, 77 S&P500 companies will publish quarterly reports, including Coca-Cola and Deere.

32 S&P/ASX200 companies will also release semi-annual updates, including CSL, JB Hi-Fi, CBA, Suncorp, AMP, Computershare, AGL, and Treasury Wine Estates.

In terms of data, US inflation figures will be the global focus on Wednesday, with retail sales and production data following on Friday. There will also be European production and GDP figures, while Australia will receive the latest NAB business and Westpac consumer confidence surveys tomorrow.

Source: Bloomberg, BLS, University of Michigan, 8th February 2025

Significant Upcoming Data:

Source: Bloomberg, S&P Dow Jones, MSCI, FTSE Russell, 8th February 2025

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