Global Markets
Markets experienced little overall change throughout the week, with both equities and bonds trading within a narrow range. Investors continue to navigate the ongoing and persistent policy changes emerging from the newly established administration of U.S. President Donald Trump, which impact both domestic and international matters. While the proposed new tariff policies continue to dominate discussions across financial markets, the possibility of a ceasefire and resolution of the ongoing war in Ukraine is also becoming increasingly significant for market participants. Despite these uncertainties, several European stock markets have performed well over the past year. For example, Germany’s DAX index has risen by 31% year-over-year, while the Euro Stoxx Index has increased by 15% over the same period.
The US
On the economic front, the recent release of U.S. Consumer Price Index (CPI) data showed that inflation remains elevated relative to the Federal Reserve’s target. The Personal Consumption Expenditures (PCE) price index, a key inflation gauge, recorded a 3.3% year-over-year increase, with a 0.1% increase from the previous comparable period. However, what drew greater market attention regarding the potential direction of U.S. interest rates was the significant decline in retail sales, which fell more than forecasted, with all key metrics showing negative results for January.
Consumer Spending
While the wildfires in Los Angeles had some effect on consumer spending, the extent of the downturn was an unexpected development for markets. Given that consumer spending accounts for approximately two-thirds of U.S. Gross Domestic Product (GDP), any contraction in retail sales is a negative signal for economic growth and could also negatively impact corporate earnings forecasts. With the prospect of new tariffs and rising prices, consumer spending may face additional downward pressure. In the coming week, aside from geopolitical developments, U.S. economic focus will shift to the release of housing market data (including housing starts), jobless claims figures, and Purchasing Managers’ Index (PMI) data, which is anticipated to indicate continued expansionary economic activity.
Australia
On the domestic front, the primary focus this week will be the Reserve Bank of Australia (RBA) Board meeting, scheduled for the 18th. In recent months, market expectations have shifted towards a 0.25% (25 basis points) reduction in the official cash rate, bringing it down to 4.10%. For some time, we have advocated for a lower cash rate, as inflation has remained well contained and is currently within the midpoint of the RBA’s target range, with headline CPI recorded at 2.4%. However, on a trimmed mean basis, which excludes extreme price movements, inflation remains at the upper end of the target range at 3.2%. Historically, the trimmed mean measure has closely tracked core inflation over the past two decades, and we anticipate that it will continue to decline, as has been the trend since December 2023. Over this period, it has fallen by 100 basis points in total, with a decline of 40 basis points in each of the last three quarters. While the RBA has cited strength in the labor market as a key reason for maintaining the current interest rate level, we believe that a greater focus should be placed on the future trajectory of inflation expectations in determining monetary policy decisions.
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