Investors processed the incoming US administration nominations last week, which suggest that Trump is likely to take a hardline approach to his election promises.
Despite some policy concerns, businesses are hopeful that the legislative agenda will be positive for growth, with the first post-election surveys indicating an improvement in sentiment.
However, data led to a rise in bond yields and a paring back of Federal Reserve rate cut expectations, causing a rise in the US dollar, a tightening in financial conditions, and a move lower in Friday’s Wall Street session.
The flash PMIs, Japanese CPI, and Nvidia results will likely be the most significant events this week.
Some of the positive market sentiment faded last week as investors reacted to the first MAGA loyalist nominations in the Trump cabinet, and financial conditions tightened. Bond yields rose, and the US dollar strengthened due to a combination of data releases and relatively hawkish comments from Federal Reserve officials, weighing heavily on Wall Street indices on Friday. The Australian market is expected to open -0.3% lower later this morning.
Some of the Trump nominations were broadly welcomed, such as Senator Marco Rubio taking on the role of Secretary of State.
Some were more controversial but confirmed positions that had previously been announced. These included the vaccine sceptic Robert F. Kennedy Jr. being named head of the Department of Health and Human Services and the two heads of a new Department of Government Efficiency, Elon Musk and Vivek Ramaswamy.
Others, such as former ICE head Tom Homer’s appointment as the “border czar”, suggest that the incoming administration aims to make good on the more authoritarian election promises, including large-scale deportations.
However, the prospective appointments of Matt Gaetz as Attorney General and Tulsi Gabbard as Director of National Intelligence are more controversial. Objections have been raised regarding Matt Gaetz's suitability for the head of law enforcement role, having been the subject of both criminal and House Ethics Committee investigations regarding his conduct. While this might not directly impact capital markets, the nomination of former Democratic Congresswoman Gabbard may have a bearing on the outcome of peace negotiations in Ukraine, another significant election promise.
Hillary Clinton has previously said that Gabbard appeared to be being groomed as a Russian intelligence asset. More recently, she has parroted Russian perspectives on the Ukraine conflict, raising more concerns that she might be too sympathetic to the Kremlin. Donald Trump Jr., who worked on his father’s campaigns and was a subject of the Muller investigation that overshadowed Trump’s first term, has also shared memes suggesting that funding will soon be withdrawn from Ukraine. Allegations of Russian influence over Trump have never been proven, nor have they gone away. NATO allies are increasingly concerned that the US might soon withdraw financial and military support for Ukraine. The collapse of the German government last week and the announcement of a February general election have also substantially undermined the Europeans’ ability to respond decisively at a critical moment.
At the same time, other appointments suggest that the new American government will be even more supportive of Israel and likely to adopt a tougher stance towards Iran, a supplier of arms to Russia. A week ago, the Justice Department announced federal charges in a thwarted Iranian plot to assassinate Trump before the election. The current administration has received written assurance from Iran that it was not actively trying to eliminate the Republican candidate. But the new administration is unlikely to attach much weight to assurance.
There is some scepticism that the Senate will approve the Gaetz and Gabbard appointments. Even so, taken collectively, the nominations suggest that anyone hoping for a calmer or more cautious second term will likely be disappointed.
Nevertheless, the business community remains broadly optimistic. For example, in an interview with Bloomberg, Citigroup CEO Jane Fraser said that the bank expected the new administration to focus on the “4 Ts” of tempering regulation, taxes, tariffs, and tightening immigration, a combination that she interpreted to be, on balance, more “pro-growth”. Rolling back regulation and extending corporate tax cuts would likely support earnings, while a friendlier M&A environment could lift market valuations.
The first post-election indicators were released last week. The Empire Manufacturing report showed that “activity grew substantially in New York State, according to the November survey. The general business conditions index climbed forty-three points to 31.2, its highest reading since December 2021. The new orders index climbed thirty-eight points to 28.0, and the shipments index rose thirty-five points to 32.5, pointing to sharp increases in both orders and shipments.” Economists have questioned whether the improvement will be sustained, with some suggesting that orders might have increased due to pre-tariff stockpiling. But the next ISM Manufacturing survey is also likely to show improvement.
In contrast, NFIB Chief Economist Bill Dunkelberg said, “With the election over, small business owners will begin to feel less uncertain about future business conditions. Although optimism is on the rise on Main Street, small business owners are still facing unprecedented economic adversity. Low sales, unfilled job openings, and ongoing inflationary pressures continue to challenge our Main Streets, but owners remain hopeful as they head toward the holiday season.”
Underling the difference in conditions between larger and smaller firms, the Federal Reserve’s quarterly Senior Loan Officer Opinion Survey indicated “basically unchanged lending standards for commercial and industrial (C&I) loans to large and middle-market firms and tighter standards for loans to small firms. Meanwhile, banks reported weaker demand for C&I loans to firms of all sizes”. The data was compiled before the election.
Released on Wednesday, October headline CPI rose from +2.4% yoy last month to +2.6% yoy, while core CPI ex-food and energy rose from +3.3% yoy to +3.6% yoy, broadly in line with expectations. However, headline (+2.4% yoy) and core producer prices (+3.1% yoy) were both firmer than anticipated in the following day's release.
Responding to the data, Federal Reserve Chair Jerome Powell said the recent performance of the US economy has been “remarkably good”, adding that “the economy is not sending any signals that we need to be in a hurry to lower rates. The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.” His comments were echoed by Chicago Fed president Austan Goolsbee, who also clarified that the Fed remains committed to the 2% inflation target.
Friday’s data showed October industrial production was down -0.3% yoy, distorted by the Boeing strikes, while retail sales momentum was firmer (+2.8% yoy).
The combination of relatively robust data and hawkish comments saw the market attach a lower probability to a December Fed cut, with only another three cuts anticipated in total by the end of 2025. The US dollar (DXY) index strengthened by +1.6% over the week, and the 10yr Treasury yield rose by more than +14 bps.
Friday’s Chinese data also included a positive surprise in annual retail sales (+4.8% yoy), while industrial production (+5.3% yoy) fell short of estimates. Property sales (-22.0% ytd yoy) continued to languish while unemployment fell from 5.1% to 5.0%.
Nevertheless, the Bloomberg commodity index slipped by -2.1%. Iron ore prices were down nearly -6%, while Brent crude and gold fell by -3.8% and -2.7%, respectively.
The Australian dollar weakened by -1.8% against the greenback. Besides the softer commodity markets, unemployment held at 4.1% as expected in October, but the quarterly wage price index showed that wages rose +3.5% in the year ending September, down from +4.1% yoy in the preceding quarter and slightly below expectations. The market ignored a rise in NAB business confidence and a sharp +5.3% increase in the Westpac consumer confidence index, attributed to a lower probability of further RBA rate rises.
The COP29 UN climate conference opened in Baku last week. Following weeks of devastating floods in Spain and two major hurricanes hitting the US this year, UN Climate Change Executive Secretary Simon Stiell told world leaders that “the climate crisis is fast becoming an economy-killer. Right now, today, in this political cycle. Climate impacts are carving up to 5% off GDP in many countries. The climate crisis is a cost-of-living crisis. Because climate disasters are driving up costs for households and businesses. Worsening climate impacts will put inflation on steroids unless every country can take bolder climate action.” COP29 will continue until the end of this week.
Also this week, Japanese CPI is expected to put further upward pressure on Japanese rate expectations following the weakening of the yen. The latest flash PMIs are due out, while stock analysts will be busy parsing the Nvidia and Walmart earnings reports.
Significant Upcoming Data:
| Monday | Tuesday | Wednesday | Thursday | Friday |
Australia |
| RBA Minutes | Westpac Leading Index |
| S&P Global Flash PMIs |
US | NY Fed. Services Activity; NAHB Housing Market Index; TIC Flows
| Housing Starts; Building Permits | MBA Mortgage Apps | Leading Index; Philly Fed. Bus. Outlook; Existing Home Sales; Kansas City Fed. Manuf. Activity; Weekly Jobless Claims
| S&P Global Flash PMIs; UMich Cons. Sent.; Kansas City Fed. Serv. Activity;
|
Europe | EZ & Spanish Trade; Swiss Ind. Prod.; Norwegian Cons. Conf.; Spanish Home Sales; UK Rightmove House Prices
| EZ & Austrian CPI; ECB & Italian Curr. Acc.; Swiss Trade
| UK CPI & House Price Index; German PPI; EZ Constr. Output; Danish Q3 GDP; Irish Property Prices
| Norwegian Q3 GDP; Swiss M3 Money Supply; French Bus. & Manuf. Conf & Prod. Outlook; Dutch Cons. Conf. & Unempl.; UK Public Finances; Belgian Cons. Conf; EU27 New Car Reg.
| S&P Global & HCOB Flash PMIs; EZ & UK GfK Cons. Conf.; UK & French Ret. Sales; Dutch House Prices; German Q3 GDP (Final) |
Japan | Core Machine Orders |
| Trade; Tokyo Condos for Sale; Machine Tool Orders
|
| Natl. CPI; Jibun Bank Flash PMIs |
China |
|
| 1yr & 5yr Prime Loan Rates |
|
|
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