Financial Markets
Financial markets were generally higher over the week, with global equities leading the way. Locally, the Australian Securities Exchange 200 Index was impacted by the weakness in the resources sector, which was a drag on overall performance.
The US & China
The inauguration of President Trump took center stage over the week, and his comments that he would impose tariffs on imports from Canada and Mexico of 25% starting on 1st February resulted in sharp movements in currencies and bond markets. However, fixed income markets were little changed over the week. Trump’s approach to China has so far taken a less aggressive stance, with the President canvassing a range of potential options. As previously noted, we expect that the new United States Administration will be more circumspect in taking action over rhetoric regarding tariffs, given the wider implications and potential for a retaliatory response, particularly from China.
Oil Prices
The other major comment was the push for lower oil prices, with Trump indicating that the United States would work with the major global oil producers, such as Saudi Arabia and other members of the Organization of the Petroleum Exporting Countries, to reduce oil prices as a means of reducing revenues to Russia while lowering energy-related inflationary pressures. However, with the United States Federal Reserve meeting this week, Trump’s call for lower interest rates was the notable comment.
The US Federal Reserve
While we expect no change in the Federal Funds Rate (4.5%), it is clear that the new Administration will be looking to pressure the Federal Reserve on rate decisions. Financial markets will continue to be sensitive to United States political involvement in any Federal Reserve decision. Developments are expected to be limited, given the relative lack of economic data or events until later next week. The release of fourth-quarter 2024 Gross Domestic Product data (2.7% year-on-year, -0.4% quarter-on-quarter) is also set for release, along with core Personal Consumption Expenditures data (2.8% year-on-year, no change), which is the Federal Reserve’s key measure of inflationary expectations.
Australia
In Australia, headline Consumer Price Index data for the fourth quarter of 2024 is also set for release (forecast 2.5% year-on-year, +0.2% quarter-on-quarter), while the trimmed mean is forecast to decline by 0.2% to 3.3%. Retail sales, as well as building approvals, will also provide additional data on the strength of the economy. With the next Reserve Bank of Australia Board meeting not until mid-February, markets will remain focused on any weakness in consumer data.
Chinese New Year
In China, economic activity is set to slow over the next two weeks with Chinese New Year, although the release of December industrial profit and Purchasing Managers’ Index data will be the main focus for markets this week.
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