Fin-X Weekly Update 7th April 2025

Equity indices tumbled after President Trump’s “Liberation Day” tariff announcements. The selling broadened to other asset classes on Friday after China announced retaliatory measures and the chairman of the Federal Reserve said it would not rush to ease monetary policy.

The RBA left rates on hold. However, like much of last week's data, the statement may already be outdated.

Forward-looking surveys indicated that US economic growth is already slowing. A recession is now perceived to be much more likely this year.

American CPI figures and the first quarterly earnings announcements are due out this week. However, news on tariffs, negotiations, and retaliation may have more influence on market prices.

Equity markets plunged after the most significant shift in trade policy in over a century was launched last week. The VIX volatility index climbed to 45.3, and credit spreads widened.

The selling pressure spread to property, infrastructure and gold in Friday’s session despite a decent jobs report that saw +228k growth in non-farm payrolls added to the US economy (+194k net after prior revisions). Unemployment rose slightly to 4.2%, but the market quickly dismissed the figures in the light of new data and rapidly rising recession risks.

Earlier in the week, the ISM surveys both contained contractionary employment readings, and the Challenger survey of job cut announcements also rose by more than +200% compared to a year ago.

The ISM manufacturing survey also suggested that new orders were falling as the number of businesses already paying higher prices soared.

It was against this backdrop that President Trump surprised investors with much larger-than-anticipated import tariffs after the close on Wednesday, April 2nd, which he called “Liberation Day".

Markets initially responded positively to the announcement that a base 10% tariff would be added to all imports. This is the rate that will be applied to imports from Australia, New Zealand, and the United Kingdom.

But the mood quickly turned sour as substantially higher “reciprocal” tariffs were revealed for some countries. It later emerged that the calculations were based on an economically nonsensical estimate of the monetary and non-monetary trade barriers; the net trade balance as a ratio of the total level of imports. The rate applied would be half of the percentage calculated, which the president said was a “generous” move on the part of the United States.

Americans will pay import taxes of at least +24% on goods from all of Australia’s main Asian trading partners. Moreover, the rates are cumulative, meaning that China will see an additional +34% on top of the +20% announced last month, resulting in a total of +54% in new tariffs.

Canada and Mexico were not mentioned. The Treasury Secretary said in an interview with Bloomberg after the presentation that he “didn’t know why”.

The European Union, which will face +20% in new tariffs, has decided not to respond pending the outcome of negotiations. However, the scope for reduction is far from clear. It seems unlikely that the tariffs will be removed altogether.

Moreover, the EU has angered the White House by saying that it will increase defence spending with domestic rather than American suppliers.

Following the earlier addition of +25% tariffs to imported cars, China, Japan, and South Korea had said that they would coordinate their responses, illustrating how quickly the Western economic and defence alliance has been undermined.

China decided not to wait, responding on Friday with the addition of +34% tariffs to imports from the US.

Also on Friday, the chairman of the Federal Reserve said that tariffs would increase consumer prices and could lead to higher inflation expectations. He stated that the Fed is prepared to wait for greater clarity before making any changes to monetary policy, signalling no immediate interest rate adjustments despite market turbulence.

Equity markets subsequently plunged, experiencing the largest weekly losses since the onset of the pandemic in March 2020. The NASDAQ composite and Russell 2000 small-cap indices ended down by more than -20% from their recent highs, a threshold that many consider to be a bear market. Having previously weakened since the end of December, the US dollar (DXY) index also rose by +0.9%.

Coupled with lower government spending, the tariffs represent a significant tightening in fiscal policy. Estimates of the annual cost to households range from approximately US$2,000 to US$5,000.

The market has already moved ahead of the Fed, pricing in four quarter-point cuts by the end of the year to 3.25 – 3.50%, with a 40% chance that rates will be cut in early May.

Having held rates steady on Tuesday, the RBA was slightly less hawkish compared to February. At the press conference following the first meeting of the new Board, Governor Bullock said that the Reserve Bank was “cautious” but did not push back as hard against market expectations, stating that the inflation risks of tariffs were two-way and that the Reserve Bank was well-positioned to act, regardless of the outcome. The market now views the risks as heavily skewed to the downside, pricing in 1.3 cuts at the upcoming 20th May meeting, when the next quarterly forecasts will be released.

The Australian dollar also slipped to US$0.6040 at the end of the week as rate expectations and industrial commodity prices sank.

Oil also traded lower after OPEC+ producers agreed on Thursday to raise combined crude oil output by +411k barrels per day (bpd), more than the expected +140k bpd increase in production. The -10.6% drop in the West Texas Intermediate price is likely to ease inflationary pressure in April.

The US March CPI figures are due to be released this week. The headline number is expected to dip from +2.8% yoy to +2.6%. The core reading is expected to be +3.0% yoy, just -0.1% lower than the previous month, while headline PPI is expected to rise from +3.2% yoy to +3.3% yoy.

Chinese inflation data is also due out, along with the leading Australian business and consumer surveys, the FOMC minutes, European production data, and a likely RBNZ rate cut. In addition, the global quarterly earnings season gets underway. However, news on tariffs, retaliatory measures and negotiations are likely to dominate.

Charts that caught our attention:

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