Fin-X Weekly Update 17th February 2025

Capital markets were surprisingly steady last week, given that the White House issued a raft of consequential policy announcements covering tariffs, domestic spending cuts, and a dramatic reversal on the future of Ukraine. European leaders convened an emergency meeting on Sunday.

Earnings generally supported stock indices and Australian business confidence rose despite a dip in conditions.

The RBA is priced to cut this week, although we would not be surprised if the Board chooses to hold.

It will be a busy week for Australian earnings reports before the latest flash PMI surveys are released on Friday.

Markets were surprisingly calm last week, given the significance of the Trump administration’s announcements concerning tariffs and the future of Ukraine and European defence.

Beginning with the more ordinary developments, the global quarterly earnings season continued. According to Bloomberg, S&P500 earnings are up +10.4% compared to last year, with 384 / 500 companies having reported. Industrials (-7.4%), Materials (-10.7%) and Energy (-33.0%) are the notable laggards.

Chevron announced last week that it will lay off 15% to 20% of its global workforce by the end of 2026 as it seeks to trim $3 billion in costs, simplify its business, and complete a significant acquisition in Guyana, a company that it is competing against Exxon to control. The news came despite the Trump administration’s promise to unleash oil production. The share price rose by +1.8% over the week in US dollar terms.

In the Australian market, CBA added +1.7% after announcing a +3% increase in half-yearly operating income to $14.1 billion and a +2% rise in after-tax profits despite a +6% rise in operating expenses.

CSL slightly missed analyst expectations, falling by -4.8% after reporting a +3% increase in net profits after tax and reaffirming guidance of 10-13% annual growth.

Shares in Origin Energy rose by +3.2% after announcing +7.4% EPS growth compared to a year ago, while AGL slipped -8.6% as underlying profits fell by -7%.

Westpac’s Australian Consumer Confidence survey was stable in February, while the January NAB business survey showed a deterioration in conditions as trading, orders, and profitability softened. But business confidence improved.

The market-implied probability of an RBA cut has fallen slightly to 87% but maintains pressure on the Board to cut tomorrow. Australian inflation is widely expected to follow the easing inflation observed in other currencies. However, we continue to see a cut as somewhat less likely given the strength of the labour market and recent upside surprises in household spending (+4.3% yoy), Melbourne Inst. Consumer Inflation Expectations (+4.6%) and credit (+6.5% yoy).

Source: Bloomberg

One significant reason to cut rates would be downside risks emanating from a sluggish global economy outside of the US (+2.5% yoy) and China (+5.0% yoy), according to official statistics.

Last week, UK Q4 real GDP growth of +0.1% followed a 0.0% reading in Q3, avoiding a technical recession but lowering the annual result to just +1.4%. The Eurozone also produced a yearly increase of just +0.9%. Later today, Japan is also expected to announce annual economic growth below +1%.

Against this backdrop, the latest White House announcements have not been welcomed. On Monday evening, the president imposed 25% tariffs on all steel and aluminium imports “without exception”, despite previously telling Prime Minister Albanese that an exception for Australia was “under consideration”. America’s final position on Australian imports is still unclear.

The move will impact Canadians hardest, with approximately 90% of Canada's steel and aluminium exports sent to the United States. The order seemingly went against the previous week’s decision to suspend 25% tariffs on Canada and Mexico for one month.

On Thursday, President Trump signed a measure to propose reciprocal tariffs on a country-by-country basis, but there was no precise date for when they would take effect. The vagueness of the statement allowed for some investor optimism that tariffs would take some time to implement and likely after some form of negotiation. However, the president has also said that he interprets taxes on consumer spending, such as the GST, as equivalent to unfair tariffs on American products, even though they are also applied to other goods and services. The president also said he would enact additional import levies on cars, chips, and pharmaceuticals.

These additional tariffs are generally understood to be directed at the European Union. In Brussels last week, Prime Minister Trudeau and European Union leaders floated the idea of Canada joining the bloc. It is not clear whether the discussions are serious or simply a bargaining tool to use against the US. In any event, the energy and resource benefits to Europe would be significant. Although Prime Minister Trudeau's tenure will soon end, anti-American sentiment is already the dominant theme in the campaigns to replace him.

The Americans went on to further upset European and NATO partners by seeming to suddenly and severely undermine the Ukrainian bargaining position in peace talks with Russia.

After a conversation between the White House and President Putin, Defence Secretary Pete Hegseth, also in Brussels, said to NATO partners that it was “unrealistic” for Ukraine to return to the 2014 borders or to join NATO. He added that American troops would not be committed to peacekeeping efforts, and any attack on European peacekeeping troops would not be interpreted as triggering Article 5, which would otherwise require a combined response. In response, German Chancellor Olaf Scholz called for a national state of emergency.

President Trump added that he hopes to add Russia to the G7, saying, “I’d love to have them back. I think it was a mistake to throw them out”. The Russian MOEX stock index leapt +7.4% last week, compared to a +1.5% gain in the MSCI emerging market index.

Source: Statista, US International Trade Administration, 14th February 2025

To other NATO members, the move seems to be, at best, an attempt to fulfil the election promise of a speedy end to the war, regardless of the cost. At worst, it suggests President Putin has much greater influence over Mr Trump than America’s historical allies.

However, the president has long held that Europeans should spend more on their own defence. Last week, the Americans suggested that an appropriate level could be as high as 5% of GDP. With European defence companies unable to produce the material that would quickly be required, Mr Hegseth said that American suppliers were ready to step in to fill the orders.

At the same time, the move could be an attempt to strongarm President Zelenskyy of Ukraine into accepting the terms of a rare earth metals agreement delivered to Kyiv last week by Treasury Secretary Scott Bessent. Speaking at the Munich Security Conference, Senator Lindsey Graham said that such an opportunity would help explain to American voters why defending Ukraine is important.

The Ukrainians have yet to respond, but President Zelenskyy was applauded at the Munich Security Conference as he rejected accepting any negotiated deal between Russia and the US that did not include the Ukrainian government.

President Macron of France then called an emergency summit of EU leaders on Sunday. The British Prime Minister was also invited to attend.

The Trump administration would like Russia to return to the global oil market, increase global supply, and lower inflation.

US CPI (+3.0% yoy) and PPI (+3.5% yoy) figures surprised to the upside in January. The monthly headline CPI increase of +0.5% was the highest since August 2023. Almost 30% of the total CPI gain came from shelter costs (+0.4% in January and +4.4% yoy), but rising energy costs were also a factor (+1.1%). Closely linked to wages, the Fed's "supercore" measure of core services ex-shelter held at +4.0% yoy. However, early estimates of core PCE inflation suggest it could still dip slightly to a more benign +2.5% yoy in January.

Speaking to oversight committees in Congress, Federal Reserve Chair Jerome Powell said the central bank doesn't need to rush to adjust interest rates, signalling that officials will be patient before lowering borrowing costs further. Traders have largely left their expectations for rates unchanged, with a cut not fully priced until September and less than two cuts priced in by the end of the year.

President Trump responded to the prospect of slower rate cuts by posting, "Interest Rates should be lowered, something which would go hand in hand with upcoming Tariffs!!!".

He might not have to wait so long for additional rate cuts if consumer spending continues to soften. American retail sales dropped by -0.9% and -0.5% ex-autos and gas in January, much more than anticipated. Industrial production increased by more than expected (+0.5%) on higher utility output due to cold weather, a factor that can also weigh on retail sales. However, consumer discretionary companies such as McDonald’s have also reported that consumers are increasingly cautious and spending less on each visit.

In addition, the administration is pushing ahead with enormous federal spending cuts that could slow economic growth beyond the impact of tariffs.

Last week, President Trump signed an order targeting several federal agencies, including the Consumer Financial Protection Bureau (CFPB), the US Agency for International Development (USAID) and the Department of Education.

Elon Musk’s DOGE team has commenced large-scale layoffs, which are expected to total 200k, or roughly 8% of the federal workforce, excluding postal service employees.

The actions are already being challenged legally on the grounds that the orders are going beyond the powers of the executive since Congress is responsible for public spending decisions. However, Congress seems likely to follow with the necessary legislation. On Friday, the Republican-controlled House Budget Committee voted to advance a massive budget blueprint to slash taxes and spending by trillions of dollars over the next decade.

Investors fear that spending cuts and tariffs would be felt immediately, while tax cuts and deregulation would take longer to produce benefits. The more complicated reciprocal tariff structures and court challenges to spending cuts allayed fears surrounding a weaker and more inflationary growth outlook, helping equities rally towards the end of the week.

Besides tomorrow’s RBA meeting, the latest wage and employment data will be published this week, along with the FOMC minutes and Japanese growth and inflation figures. Flash PMIs are due out on Friday.

Goodman Group, QBE, Transurban, Spark New Zealand, Brambles and Santos are among the 94 S&P/ASX300 companies reporting this week.

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