Fin-X Weekly Update 24th March 2025

Despite ongoing geopolitical tensions and further evidence of a slowing US economy, global equity markets broke a four-week losing streak. Bond yields fell, and the US dollar strengthened. Gold made a new high. 

The Federal Reserve calmly held rates steady but eased off the pace of quantitative tightening ahead of anticipated tariff announcements next week. However, comments from White House officials suggested that the last round might not be as broad or severe as previously indicated.  

The German constitution was changed to allow higher government spending on infrastructure and defence. 

Global flash PMI surveys are due out today. The Treasurer will deliver Labor’s election budget tomorrow night, and Australian, British, Japanese and American inflation numbers are due out later this week.  

More positive risk appetite was evident in global capital markets last week despite peace in Ukraine and Gaza proving to be elusive and the US conducting airstrikes against Houthi targets in Yemen. The gold price reached a new all-time high of US$ 3,048 per oz even though the US dollar strengthened. 

Bond prices rose after the Federal Reserve pared back plans to reduce its balance sheet from $60 billion to $40bn per month. Treasury holdings will be reduced by just $5 billion per month, with up to $35 billion reductions in holdings of mortgage-backed securities. The change slows the rate at which liquidity is being drained from global capital markets.  

The MSCI AC World and S&P/ASX300 indices both made gains, ending a four-week run of losses. 

Big tech names rallied in Friday’s “quadruple witching” session, which saw unusually large trading volumes due to the simultaneous expiration of stock options, index futures, index options, and single-stock futures. According to Goldman Sachs figures, $4.7 trillion in notional options expired.  

Sentiment was further supported in Friday’s Wall Street session as the White House hinted that tariffs due to be imposed in just over a week on April 2nd might be less widespread and more targeted than previously suggested. While potentially narrower in scope, the administration’s plan is still much more extensive than during the president’s first term.  

President Trump plans to unveil so-called reciprocal tariffs, which he sees as retribution for tariffs and other barriers from other countries, including US allies. However, according to Bloomberg, American officials said publicly that the list of target countries may not be universal and that other existing tariffs may not necessarily be cumulative, which could substantially lower the tariff hit to some sectors, including industrial metals. For example, Treasury Secretary Scott Bessent said last week that steel and aluminium tariffs may not necessarily increase further due to the addition of country-by-country rates, although they could. “I will have a better sense as we get closer to April 2nd. So, they could be stacked,” he told Fox Business.  

In the same interview, he signalled that only 15% of countries are considered the worst offenders. “It’s 15% of the countries, but it’s a huge amount of our trading volume,” he said, referring to them as the “dirty 15”. “And they have substantial tariffs, and as important as the tariff or some of these non-tariff barriers, where they have domestic content production, where they do testing on our - whether it’s our food, our products, that bear no resemblance to safety or anything that we do to their products,” he said.  

It’s unclear which countries Trump will include under his more targeted approach. However, he has previously cited the European Union, Mexico, Japan, South Korea, Canada, India and China as trade abusers. Australia will likely be primarily affected indirectly through tariffs on major export markets.  

Apart from slowing the pace of quantitative tightening, the Federal Reserve otherwise kept policy settings unchanged on Wednesday. However, the updated Summary of Economic Projections saw downgrades to growth and employment and an increase in inflation forecasts.  

The 2025 GDP growth forecast was lowered from last December’s +2.1% projection to +1.7%, expected unemployment was increased by +0.1% to 4.4%, while +0.2% was added to PCE inflation, bringing this year’s anticipated rate to +2.7% yoy.  

The official statement said, "Uncertainty around the economic outlook has increased” due to tariffs and other measures. However, Chair Powell resisted sounding the alarm, saying that labour market conditions remain "solid" and "broadly in balance".  

FOMC members still project two -0.25% interest rate cuts this year, maintaining the forecasts for the end-2025 and end-2026 rates at 3.9% and 3.4%, respectively.  

If inflation expectations were to move significantly above the Fed’s 2% target, Chair Powell acknowledged that it would be difficult to cut interest rates. However, he also appeared to rule out any further interest rate rises, suggesting that interest rates would instead be held higher for longer, arguing that the University of Michigan survey was an outlier and that broader inflation expectation measures were still well-anchored.  

February PCE inflation is expected to remain at +2.5% yoy when released on Friday, with core PCE accelerating to +2.7%. 

The bond market is pricing three cuts this year, suggesting that growth and inflation risks remain skewed to the downside. 

There was more evidence of a US economic slowdown last week. Previous weakness in consumer confidence began to appear in concrete data as the Census Bureau revised January retail sales from the initially released -0.9% to -1.2%. February’s expected +0.6% rebound was limited to a much more lacklustre +0.2%.  

Falling business confidence also supported the view that manufacturers are responding to slower consumer spending and higher uncertainty, indicating some further downside risks to today’s flash PMI surveys.  

Investors will be watching for an improvement in the European outlook after Germany altered its constitution to allow for an additional € 500 billion in infrastructure investment and higher defence spending. The German 10yr government yield has risen by +0.4% so far in 2025 to 2.76%, compared to a drop of -0.3% to 4.25% for the 10yr US Treasury. The euro has also strengthened by +4.5% against the American dollar. 

Chinese surveyed unemployment rose by +0.2% to 5.4% in February, even as year-to-date estimates of industrial production (+5.9% yoy) and retail sales (+4.0% yoy) exceeded consensus estimates. Property investment (-9.8% yoy) and residential property sales (-0.4% yoy) continued their disappointing run, while fixed asset investment (+4.1% yoy) was a little stronger than anticipated. The PBOC kept interest rates on hold. 

The Bank of Japan also held rates steady at 0.5%, while the Swiss National Bank lowered its policy rate to 0.25%, as widely anticipated. 

The RBA is expected to hold rates at 4.1% next week. February’s unemployment rate also held steady at 4.1%, as both labour demand and supply dropped. ABS figures suggest that -52.8k jobs were lost in February. However, the participation rate also fell from a revised 67.2% estimate to 66.8%. 

Commenting on the survey, the ABS head of labour statistics, Bjorn Jarvis, said, “Fewer older workers returning to work in February contributed to the fall in employment this month, with lower levels of employment in the older age groups in February 2025 compared with 2024. This follows higher levels of employment in these age groups in recent years, particularly in 2024 […] In contrast, we continue to see growth in employment for people aged between 15 and 54 over the year”. 

On Wednesday this week, the monthly CPI estimate is expected to remain at 2.5%. However, the monthly series has not significantly impacted policy due to substantial differences with the more complete quarterly figures. 

The Reserve Bank will also have to parse through tomorrow night’s federal budget. The forecasted deficit is expected to be close to the A$26.9 billion predicted in the December 2024 Mid-Year Economic and Fiscal Outlook (MYEFO).  

Several budget measures have already been pre-announced for the 2025 budget, including the latest extension of electricity subsidies to the end of 2025, shaving an additional $150 off household and small business bills from July.  

Other initiatives will see more funding for green energy projects and infrastructure, a proposed $8.5 billion Medicare overhaul to include expanded bulk billing of GP visits and a 20% reduction on all student loan debts.  

However, it's important to note that some of these pre-announced measures are contingent on the government being re-elected.  The latest polls indicate a very tight race, with the Coalition marginally in front. 

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