FinX Weekly 11th March 2025

Yields increased sharply on European spending increases, tariff announcements, and inflation concerns. Every asset class lost ground as tensions rose and investors worried about the impacts on inflation, interest rates and economic growth. Yields and indices are now testing key technical levels as the market looks for direction.

Australian GDP exceeded RBA estimates. But the deputy governor confirmed that tariff uncertainty was a consideration as the Board decided to trim rates last month.

This week, Congress will need to pass a continuing budget resolution to avoid a US government shutdown. American CPI figures and the main Australian business and consumer confidence surveys will also be published.

Every asset class retreated last week in a difficult week for investors. The US 10yr Treasury yield, S&P500, and MSCI World are trading at the 200-day moving averages, indicating that investors are perhaps undecided on the market's direction from here. However, the Nasdaq Composite has breached the 200-day, falling just over -10% from the January high.

The US Dollar (DXY) index has also slipped below the 200-day despite a rise in the VIX index, indicating a rising probability of risk-off moves.

There were several reasons for the bearish sentiment. Bond yields surged after a substantial ramp-up in European spending, inflationary signals in US business surveys, and multiple tariff announcements and reversals leading to a perception of policy uncertainty.

As the US withdrew aid and intelligence support for the Ukrainians, European leaders met to try to fill the gap as best as possible. The EU announced an €800 billion total defence package. 

Friedrich Mertz, the likely next Chancellor of Germany, announced even more expenditure, committing another €+500 billion to infrastructure spending to kickstart Germany’s ailing economy, departing from an important election promise before even being sworn in.

After the announcement on Wednesday, German bonds had their worst day since 1990 with 10yr yields soaring +0.30%. Rates in France, Italy and Spain also jumped more than +0.25%. The increase in yields was then slowed by the ECB cutting the policy rate by -0.25 % on Thursday to 2.50%, as widely anticipated. ECB President Christine Lagarde said increased defence spending may boost economic growth while acknowledging potential inflation risks from geopolitical tensions.

President Trump’s address to the joint session of Congress, equivalent to a State of the Union speech during the first year of a new president’s term, was the longest ever by some margin. He revisited several campaign themes and reiterated that the US would take control of Greenland “one way or another”, as well as the Panama Canal.

Blackrock reclaimed some favour with conservatives after announcing the acquisition of two important ports on either side of the canal under a US$22.8 billion deal with Hong Kong-based CK Hutchison. According to Reuters, BlackRock had previously been restricted, or outright banned, by several Republican-led states from managing funds over the company's ESG policies.

The President applauded Elon Musk and the work of the DOGE team. Nevertheless, Mr Musk was encouraged at a meeting with Republican Senators to push his spending cuts through Congress after several decisions had been successfully challenged in court. Later in the week, after tension boiled over in a cabinet meeting, it was reported by several news agencies that the president had asked the DOGE team to advise department heads on the cuts to put through rather than firing staff directly.

The president also announced the creation of a national cryptocurrency reserve with Bitcoin and Ethereum serving as “the heart of the reserve”, adding that it would also include Solana, XRP and Cardano. The investment of taxpayer money in the fund likely requires approval from Congress, which might not be easy to obtain.

This week, the president faces his first significant challenge in Congress, seeking a continuing resolution to raise the debt ceiling. Despite controlling both chambers of Congress, Republicans enjoy only a slim majority in the House, with some members concerned about the prospect of further increases in the debt burden.

President Trump initially went ahead with imposing 25% tariffs on imports from Canada and Mexico and increasing tariffs on Chinese goods from 10% to 20%, affecting roughly US$1.5 trillion in annual imports.

Canada and China have already retaliated, with Canada imposing phased levies on US$107 billion worth of US goods and China imposing tariffs of up to 15% on American agricultural shipments. President Sheinbaum said that Mexico would announce retaliatory tariffs over the weekend.

However, President Trump subsequently delayed tariffs on Canadian and Mexican goods compliant with the USMCA trade deal until April 2nd after a request from auto manufacturers. Tariffs will remain on roughly 62% of Canadian and half of Mexican products. The Canadians decided to keep their tariffs in place.

Further announcements on reciprocal tariffs targeting a wider range of countries are expected in the coming weeks. The US trade deficit widened to a record in January as companies scrambled to secure goods before they come into force. At the same time, the prices paid sub-series of the February ISM Manufacturing survey surged to 62.4.

Philadelphia Fed President Patrick Harker said he’s increasingly concerned that the decline in inflation “is at risk” amid mounting pressures. Chair Jay Powell said that officials “do not need to be in a hurry” to cut interest rates as he played down concerns over US growth, even though American car owners are missing their monthly payments at the highest rate in more than 30 years and the Atlanta Fed GDP Nowcast fell further last week to below -2%.

CPI figures are expected to improve slightly this week, and the market is pricing three more cuts to 3.6% this year, having priced just one cut a month ago.

Friday’s jobs report offered investors some relief. The BLS reported that +151k new jobs were added to the US economy in February, only slightly below the +160k estimate. However, unemployment rose by +0.1 %to 4.1% despite a -0.2% decrease in participation. A more significant rise in underemployment from 7.5 %to 8.0%, weekly hours remaining at recessionary levels, and a surge in Challenger Job Cut Announcements also indicate renewed upward pressure on unemployment.

On the other side of the Pacific, China’s ministry of foreign affairs has warned that China will “fight to the end” against the US in a “tariff war, trade war or any other war” in a stark escalation of rhetoric.

Finance Minister Lan Fo’an also said that China has ample fiscal room and tools to respond to possible domestic and external challenges.

On Wednesday, China set its 2025 GDP growth target at “around 5%” at the start of its annual parliamentary meeting (NPC). Beijing also raised its budget deficit target to “around 4%” of GDP from 3% last year. According to data accessed via Wind Information, the 4% deficit would be the highest on record going back to 2010. The prior high was 3.6% in 2020.

Over the weekend, Chinese CPI slipped into deflationary territory, dropping more than anticipated from +0.5% yoy in January to -0.7 % yoy, justifying the plans for further stimulus.

China is also boosting support for its tech sector in a challenge to American dominance in AI. A new bond platform will be created to help firms issue debt onshore, PBOC Governor Pan Gongsheng said at an NPC briefing. An industry re-lending program will also be expanded.

Alibaba Group Holding Ltd. unveiled its latest open-sourced AI model, QwQ-32B, which marked a big leap over the previous version using just a fraction of the data that DeepSeek’s R1 employs. Tencent has also announced a new open-source AI video model, Hunyuan, and there is also a similar new product from short-video platform Kuaishou Technology. The CSI300 index of Chinese stocks added +1.4% over the week. Alibaba and Tencent's US ADRs traded +6.1% and 10.3% higher, respectively, in US dollar terms. 

Despite the drop in the local share market, Australian data was far more positive compared to overseas.

ABS estimates of Q4 GDP growth were surprisingly strong and ended the run of seven quarters of negative GDP-per-capita changes. Annual GDP growth increased from +0.8% yoy in the September quarter to +1.3% yoy, in line with estimates but ahead of the RBA’s February 2024 estimate of +1.1% yoy. Pleasingly, the report also showed an increase in the strength of consumer spending and a recovery in the household savings ratio.

The figures appear to justify the RBA’s attempt to reign in expectations of future rate cuts. However, downside risks remain, and more rate cuts are still possible later in the year.

Speaking at the Australian Financial Review Business Summit on Wednesday, Deputy Governor Andrew Hauser commented on the muted equity market reaction to American tariff announcements:

“There are several possible reasons […]. Investors may have believed tariff threats were being used primarily as a negotiating tool, with relatively limited longer term economic effects. They may have believed other promised US policy initiatives, including fiscal measures and deregulation initiatives, would more than outweigh the impact on global activity. They may have believed that demand in countries outside the US, including Australia, would be insulated by adjustments in exchange rates and extra stimulus in key overseas markets. Or they may simply have believed that US policymakers would again show limited tolerance for declines in equity prices, as happened in 2018/19.

That confidence has taken a bit of a knock in recent days. Some of that reflects recent US data, and some evolution in the direction of tariff policy. But it may also reflect a growing recognition that, if companies and households come to conclude that trade policy uncertainty has moved on from classical Uncertainty (‘carry on till the fog lifts’) to genuine Ambiguity (‘almost anything could happen’), they may choose to batten down the hatches – postponing planned spending, particularly on longer term capital investment, until things become clearer. Such ‘watchful waiting’ could prove rational individually, but economically damaging in aggregate. As The Economist put it recently, ‘tariff uncertainty can be as ruinous as tariffs themselves’. The Federal Reserve estimated that heightened uncertainty over trade policy in 2018 reduced global GDP by nearly 1 per cent in 2019 – and […] the pick-up in policy uncertainty [could be] much larger this time around. The possibility of such an effect played a part in the Board’s policy deliberations in February.

This week, the NAB Business and Westpac Consumer surveys are top of the agenda, ahead of US inflation data, JOLTS figures, and European production reports. Congress will address the debt ceiling and attempt to avoid a US government shutdown.

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