On again, Off again

Global markets

To repeat last week’s opening line, “global equities retreated further last week due to ongoing US tariff concerns and additional evidence of negative effects on the US economy.”

Trump’s tariff saga continued to dominate global market sentiment last week. Markets slumped on Monday after Trump confirmed he would press ahead with steep tariffs on Canada, Mexico and China. He then relented with at first a one-month delay on car imports and then a one-month delay on most other imports. But he ended the week saying he’ll implement ‘reciprocal’ tariffs on Canadian lumber and dairy imports!

It’s fair to say the on again/off again policy making is creating tremendous market uncertainty.  This lingering uncertainty is starting to bleed into the economy. A soft US manufacturing report added to market angst after two recent weak consumer sentiment reports.

At the end of last Thursday’s trading session, the S&P 500 had fallen 6.6% from its peak on 16 February. Friday’s February US payrolls report was a touch softer than expected. Last month, 151,000 jobs were created (economists were expecting 160,000) and the unemployment rate edged higher to 4.1%. 

Trump also conceded last week that the economy faces ‘adjustment’ and ‘transition’ as he pursues tariff increases and spending cuts. He also indicated he’s not watching the share market. This makes his repeated backtracking on tariff implementation all the more perplexing.

In other news, optimism around more stimulus in Europe and China is building. A meeting of EU leaders last week talked up the need to increase defence spending.

Incoming German Chancellor Friedrich Merz has also indicated his intention to collaborate with the existing parliament (namely the SPD and Green parties) to ease the current legislative barrier to increased German fiscal stimulus. This barrier is known as the ‘debt brake’.

Achieving this task is an urgent priority for Merz, as it will be significantly more difficult to secure the necessary votes once the new parliament convenes.

China’s Two Sessions series of policy meetings also talked up the prospect of more stimulus measures. The Xi administration has pledged a growth target of “around 5%” for this year. 

Global week ahead

The week ahead will likely continue to be dominated by tariff news. Will he or won’t he proceed with planned tariff increases?  

The February US CPI report will be of note. Economists currently expect core prices to rise by 0.3% (down from 0.4% in January) and annual price growth to ease to 3.2% from 3.3%. CPI will also provide details for the more important consumption deflator later this month. The US inflation story would still be encouraging were it not for the risk posed by tariffs!

Ongoing stimulus talk in China and Europe will also be in focus, potentially contributing to further non-US equity and currency outperformance.  

Global market trends

Non-US stocks handily outperformed US stocks again last week, with Europe and emerging markets faring especially well. This has continued the pullback in the relative performance of the NASDAQ 100 and global growth over value. Australia, alas, has not yet benefited from the rotation away from the US. 

Australian market

Local stocks slumped further last week. However, they could bounce this morning following Friday’s US stock market gains. As in the US, longer-term bond yields edged higher. This potentially reflects tariff-related inflation concerns. The Australian dollar firmed and the US dollar weakened.

The major local highlight last week was the Q4 GDP report, with growth of 0.6% coming in line with market expectations. The good news is that private spending was a bit firmer than in Q3. The bad news is that private spending still remains relatively subdued.

In other news, the minutes from the RBA’s February policy meeting – and comments from Deputy Governor Andrew Hauser – suggested the decision to cut interest rates was more finely balanced than markets thought. To my mind, however, the decision was really a no-brainer (because of the better-than-expected wage and price inflation). Further, the RBA would have embarrassed itself had it left rates on hold.

Indeed, the current debate over what cash rate is needed for RBA models to forecast inflation falling to the precise middle of its 2-3% target range is overly academic. This is especially true given the uncertainty of forecasts and the recent data surprises.

My lingering concern is that the RBA is becoming more academic and rigid in its thinking. This move would put us more akin to the Reserve Bank of New Zealand – and would be a step in the wrong direction. 

This week, the local highlights will be business and consumer confidence surveys from NAB and Westpac respectively. While the RBA rate cut should have helped to buoy confidence, concerns over Trump’s tariffs may provide an offset. 

Have a great week!