Bond yields fell while stock markets were little changed in response to a series of tariff-related announcements by Donald Trump last week. Affected trade partners did not welcome the news.
A ceasefire between Israel and Hezbollah contributed to lower oil prices last week. OPEC+ postponed its meeting until later this week.
More rate cuts arrived for New Zealand and Korea. However, the governor of the RBA indicated that Australian cuts were still some way off. In a busy Thursday night sitting, the Senate also passed the legislation that will lead to the creation of a specialist monetary policy Board at the Reserve Bank.
Australian Q3 GDP will be published on Wednesday this week, along with a large quantity of US data, including the monthly labour report on Friday night.
Global markets experienced relatively low trading volumes due to the American Thanksgiving holidays. Nevertheless, the S&P/ASX300 and S&P500 indices reached new closing highs as bond yields receded. The domestic and global property indices were the top performers among the major asset class indices.
Market sentiment was initially buoyed by the announcement that President-elect Trump had selected Scott Bessent as Treasury Secretary. The respected hedged fund manager previously served as Chief Investment Officer at Soros Fund Management and is seen by investors as a relatively safe pick, likely to reign in Donald Trump’s most erratic impulses.
Republicans also vowed to extend the 2017 GOP tax law in the first 100 days in power. The law reduced the corporate tax rate from 28% to 21% and was set to expire at the end of 2025. The law should pass despite the party likely to secure a narrow two-seat majority in the House of Representatives with one seat left to call. A slim majority will make significant reforms harder to pass than initially appeared to be the case when the first results came in on November 6th.
However, markets were soon roiled by several messages promising to implement tariffs on the first day in office posted by Mr Trump on his Truth Social app. The “truths” announced that a 25% tariff would immediately be applied to imports from Canada and Mexico, with an additional +10% added to Chinese tariffs. Tariffs can likely be applied more easily by the president via executive order. Mexico said it would respond with targeted tariffs in kind, while Prime Minister Trudeau responded to Canadian domestic political pressure by flying to Florida to meet with Mr Trump.
The outgoing Biden administration announced further curbs on chip exports to China, although these were less severe than anticipated.
Another “truth” followed over the weekend, warning the so-called BRICS nations that he would require commitments that they would not move to create a new currency as an alternative to using the US dollar and repeated threats to levy a 100% tariff. “The idea that the BRICS Countries are trying to move away from the Dollar while we stand by and watch is OVER,” Mr Trump posted.
A sudden increase in tariffs would likely produce the effects of a short-term inflationary shock, similar to a rise in GST. Affordability would then decrease, weighing on economic growth but without necessarily leading to higher longer-term inflationary pressure.
The news arrived as data revisions cast doubt on the US economy's strength. The second estimate of real GDP growth was released for the third quarter, with growth estimates remaining at an annualised +2.8%. However, the accompanying first estimate of real Gross Domestic Income (GDI) was materially weaker at just +2.2%. Moreover, the second quarter’s surprisingly strong initial +3.4% GDI estimate was revised down by as much as -1.4% to +2.0% (annualised), close to the long-term trend but suggesting the economy is decelerating.
The minutes of the last FOMC meeting on Tuesday showed that members expect the Federal Reserve to continue to cut Us interest rates, albeit at a more gradual pace.
The monthly PCE inflation data was in line with estimates and showed that headline inflation remains on a downward trajectory. However, firmer core PCE inflation suggested that some prices could reaccelerate, prompting Citi’s interest rate strategists to say that the Fed should pause rate cuts in December.
This week’s surveys and labour data could provide a clearer picture of economic activity after hurricanes and the strike at Boeing heavily impacted last month’s reports. Due to be released on Friday, American unemployment is expected to remain at 4.1%. Any deviation could tip interest rate probabilities away from the current two-thirds chance of a cut currently priced by markets. Fed chair Jerome Powell is also due to speak this week.
Lower oil prices are helping lower global headline inflation rates. The Brent crude price has fallen by more than -10% over the last three months in US dollar terms, aided by news last week that Israel had reached a ceasefire agreement with Hezbollah. Less directly related, President Zelensky of Ukraine also outlined a possible path to a ceasefire with Russia in an interview with Sky News. The OPEC+ oil exporting nations had been due to meet online yesterday. However, the meeting was delayed until later this week, suggesting that a deal was proving elusive as the group discussed delaying the supply increase planned for January.
As inflationary pressures recede, more policy rate cuts arrived last week. The RBNZ cut the overnight cash rate by -0.5% to 4.25%, as widely expected. But the Bank of Korea surprised with a second consecutive -0.25% interest rate cut to 3.0% amid gloomy forecasts.
In contrast, the governor of the RBA continues to resist calls to cut rates, reiterating that Australia’s core inflation is “too high”. Governor Michele Bullock said that she expects underlying inflation to return to target in 2026 after trimmed mean inflation was +3.5% yoy in the ABS monthly estimate, the same as the last quarterly report.
Forty-five bills passed in Canberra last week. These included the ban on social media for children under 16, $3 billion in student debt forgiveness, and the legislation to split the RBA Board, creating a new specialist committee to oversee monetary policy.
The official Chinese manufacturing (50.3) and non-manufacturing (50.0) PMIs held steady on the cusp between expansion and contraction over the weekend.
Due to be released on Wednesday, Australia’s economy is expected to have grown by +0.5% in Q3, equivalent to a +1.1% increase over the last year. October retail sales and building approvals are among the data updates scheduled for later today.
Significant Upcoming Data:
| Monday | Tuesday | Wednesday | Thursday | Friday |
Australia | Retail Sales; Melbourne Inst. Inflation; ANZ Indeed Job Ads; Building Apps; Private Sector Houses; Inventories; Company Operating Profits; BoP Curr. Acc. & Net Exports; S&P Global Mfg. PMI (F)
|
| Q3 GDP; S&P Global Serv. & Comp. PMI (F)
| Household Spending; Trade; |
|
US | ISM Manuf.; Constr. Spending; S&P Global Mfg. PMI (F)
| JOLTS Report | Fed. Beige Book; ADP Employment; Factory & Durable Goods Orders; ISM Services; Wards Total Vehicle Sales; S&P Global Serv. & Comp. PMI (F); MBA Mortgage Apps
| Challenger Job Cuts; Trade; Weekly Jobless Claims
| Labour Report; Cons. Credit; UMich Cons. Sent. |
Europe | 2nd Tier Manuf. PMIs; EZ, Italian & Belgian Unempl.; Dutch Ret. Sales; UK Lloyds Bus. Barometer & Nationwide House Prices;
| Swiss CPI; French Budget Bal.; Spanish Unempl.; Italian New Car Reg.
| 2nd Tier Serv. & Comp. PMIs; EZ PPI; OECD Econ. Outlook; Norwegian Curr. Acc.; Irish Unempl. | EZ Ret. Sales; German Factory Orders; French & Spanish Ind. Prod.; Swiss Unempl.; Swedish CPI & Curr. Acc.; UK S&P Global & German HCOB Constr. PMI; UK New Car Reg.; Spanish INE House Prices; Finnish Trade
| German Danish & Norwegian Ind. Prod.; Italian Ret. Sales; German Trade; French Trade & Curr. Acc.; Dutch Cons. Spending; Swedish Budget. Bal.
|
Japan | Company Sales & Profits; Capex; Jibun Bank Mfg. PMI (F)
| Monetary Base | Jibun Bank Serv. & Comp. PMI (F)
|
|
|
China | [Official PMIs]; Caixin Manuf. PMI
|
| Caixin Serv. & Comp. PMIs |
|
|
Disclaimer
The contents of this communication is prepared by Brerona Capital Asset Management Pty Ltd (A.C.N. 627 650 293; AFSL 520526). The information contained in this communication is general in nature and does not take into consideration any investors personal objectives, goals, needs and financial situation. You should not rely on the information contained in this document to make any investment decisions without first consulting an investment professional such as your financial adviser. Any unauthorised use of this document is prohibited. This document (including any attachments) is intended only for the addressee, it may contain information of a privileged and confidential nature. If you are not the addressee of this communication, you must not copy, reproduce, disseminate or use this email and its contents. If this communication has been received in error by you, please inform us immediately and securely delete. Sharing, transmitting, copying, disseminating all or part of the contents of this document may result in a breach of the Federal Privacy Legislation and or copyright and trademark infringement of Brerona Capital Asset Management Pty Ltd and its related entities.