Fin-X Weekly Update 3rd March 2025
- Brett Careedy
- Mar 3
- 5 min read
The shocking breakdown of talks between American and Ukrainian leaders dominated the weekend’s news flow, opening the door to a significant increase in European defence spending.
The week’s data included Nvidia's earnings release, generally benign inflation data, and signs that public spending cuts may already be slowing the American economy.
Australian GDP figures are due out this week, along with the ISM surveys and labour report in the US, and an interest rate cut is expected from the ECB.
Bond prices rallied and yields fell as investor concerns switched from inflationary pressures to the growth outlook and an increasingly volatile geopolitical backdrop.
Global stocks finished slightly down last week, and the VIX volatility index briefly hit 20 for the first time this year. However, returns were positive for Australian investors on an unhedged basis as the US dollar strengthened.
Nvidia shares rebounded in late trading on Friday after dropping more than -8% on Thursday. The share price finished the week down -7.1%, despite beating on revenues and profits. CEO Jensen Huang remained optimistic about the outlook and the impacts of the Chinese Deep Seek model. But investors seemed concerned about the prospect of tariff impacts and narrowing margins.
Australian property was the worst performing asset class as the Goodman Group share price fell by -14.1% in February after the company raised capital to fund its expanding datacentre business.
Australian monthly CPI remained at +2.5% yoy in January instead of rising to +2.6% yoy as economists had expected. The monthly series is heavily distorted by electricity subsidies and has seen substantial differences with the superior quarterly series in recent months. Weakening monthly inflation alone is unlikely to lead to earlier RBA rate cuts, particularly as the main political parties continued to discuss fiscal giveaways last week ahead of the anticipated federal election. However, private credit growth appeared to level off at +6.5% yoy for the second consecutive month, and this week's GDP print is expected to improve on the September quarter, but only marginally. Q4 growth is forecast to be up +0.5%, representing an annual increase of just +1.2%.
Fridays US PCE inflation figures were broadly in line with estimates. The headline index slowed as anticipated from +2.6% yoy in December to +2.5% yoy in January, while the core index slowed from a revised +2.9% to +2.6%.
However, several disappointing growth indicators overshadowed the good news on inflation. Following the subdued PMI surveys in the previous week, consumer confidence fell by more than expected in February (98.3). At the same time, weekly initial jobless claims surged by +22k to 242k. Weaknesses were also apparent in home sales, building permits, and regional manufacturing surveys, and there was a -0.5% drop in January’s real personal spending. Consequently, the Atlanta Fed’s forecast of Q1 GDP plunged from an estimate of +2.3% (annualised) a week ago to as low as -1.5 %.
Markets also reacted to the House of Representatives passing a budget resolution that included approximately $ -2 trillion in spending cuts, including to Medicaid, and extending $ -4.5 trillion in tax cuts over the next 10 years.
The plan now passes to the Senate and, once passed, Republicans in Congress can start a process known as “reconciliation” and ultimately pass the legislation without Democratic support.
Tariff talk continued at the White House. The president confirmed that tariffs would come into effect on Mexican and Canadian imports on or after tomorrow, 4th March. However, the Mexican president continued negotiating, offering to match US tariffs on Chinese imports. The proposal was warmly received by Treasury Secretary Scott Bessent on Saturday, who said, “I think it would be a nice gesture if the Canadians did it also, so in a way we could have ‘Fortress North America’ from the flood of Chinese imports”.
The US recently announced that an additional 10% tariff would soon be applied to Chinese imports. Tariffs on EU imports are also expected to follow.
Over the weekend, the official Chinese manufacturing PMI improved from slight contraction (49.1) to slight expansion (50.2) in February. The non-manufacturing PMI increased from 50.2 to 50.4, also indicating near-zero growth. On Wednesday, Bloomberg reported that Chinese authorities would inject at least 400 billion yuan (US$55.13 billion) into its biggest banks in the coming months as part of a broader stimulus package to revive the economy. Bloomberg said that the first batch of banks will include Agricultural Bank of China and the Bank of Communications, citing unidentified people familiar with the matter.
Mr Bessent went on to reiterate that the administration was in the process of re-privatising the economy and reducing the role of the public sector. However, he admitted that there may be a gap between the drop in public spending and the building up of the private sector.
US Treasury yields are now at a critical juncture. They could soon fall below critical levels of support at the 200-day moving average if more investors judge as we do that the short-term growth shock will outweigh the longer-term effects of tax cuts and deregulation.
Mr Bessent also expressed dismay that the Ukrainians did not sign the rare earths deal, which he had recently travelled to Kyiv to present. As discussions spectacularly broke down in the Oval Office on Friday, President Zelenskyy said he could not sign a deal that did not include American security guarantees.
President Macron of France and the UK's Prime Minister Starmer had earlier travelled to Washington and sought assurances that NATO would continue to support Ukraine and halt Russia’s advance to the west.
However, the US twice sided with Russia in votes at the United Nations held to mark the third anniversary of the Russian invasion of Ukraine, signalling a clear change of stance on the war and possibly an intention to withdraw from NATO.
Even as the White House seems increasingly aligned with Russia, European leaders confirmed their ongoing commitment to defending Ukraine. Their comments were echoed by Prime Minister Albanese and the opposition leader, Peter Dutton.
President Zelenskyy travelled to the UK after leaving Washington and received a GBP 2.26 billion (A$4.5 billion) loan to Kyiv for military procurement, with the money coming from the profits on frozen Russian assets. He is also scheduled to meet a broader group of European leaders at a hastily organised meeting in London.
Europe is set to revive its manufacturing sector as defence spending ramps up. However, questions remain as to the shape of European defence. Only the UK and France have fully developed nuclear capabilities. With the US seeking to step back, nuclear proliferation has become significantly more likely. After last weekend’s election, the new presumptive Chancellor has already expressed interest in Germany becoming a nuclear power, as have political groups in South Korea and Japan.
Geopolitics will likely continue to occupy the headlines this week. Tropical Cyclone Alfred is also expected to make landfall, bringing heavy rain to Queensland from Thursday.
In terms of data, Australian Q4 GDP figures are due out on Wednesday. The ISM surveys and Fed Beige Book will provide more information on the US economy, while unemployment is expected to remain at 4.0% when released in Friday’s labour report. The ECB is expected to cut rates by -0.25 % to 2.5% on Thursday.
Link to US reporting season week ending 28th February 2025 by Factset
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