Despite the furore surrounding Donald Trump’s shift in policy on Ukraine, investors remained focused on fundamentals. However, various survey updates suggested that stagflation is becoming a significant concern for businesses and consumers. The S&P500 and MSCI AC World indices retreated from record highs towards the end of the week as the outlook soured.
On Tuesday, the RBA cut interest rates for the first time in four years. However, a more challenging earnings backdrop and a hawkish outlook weighed on the local share market, even before Friday’s Wall Street losses.
The leaders of France and the UK are due to visit the White House this week, with the German election results likely to be available this morning. US PCE and Australian monthly inflation figures are also due to be published.
The S&P500 and MSCI All Country World indices made new record highs during the week before disappointing flash PMI reports, stagflation concerns, and options expiries prompted a sell-off in Friday’s Wall Street trading. Futures indicate the Australian market will open -0.8% lower later this morning.
It was a big week for earnings. With more than half of the S&P/ASX300 having reported, earnings are so far down -8.1% over the last twelve months compared to a rise of +11.8 for the S&P500, according to figures compiled by Bloomberg.
The NAB share price slipped by -14.4% and Westpac’s by -10.6% over the week after reporting margin pressures. BHP rose by +0.8% despite announcing a dividend cut. Rio Tinto also rose by +1.9% after missing estimates.
The largest stock in the property sector, Goodman Group, fell by -3.0% despite springing back to profitability. The company announced it would seek to raise A$ 4 billion in new capital to develop data centres.
Overseas, there were concerns that the US consumer might be increasingly challenged. Walmart followed Amazon in warning of slower spending. The share price of Walmart slipped by -9.0%, while shares in Block Inc. traded -18.8% lower after missing analyst estimates but providing reasonable guidance.
On Saturday, Berkshire Hathaway announced a +71% surge in Q4 earnings as the insurance business recovered. However, the cash pile grew to a record US$ 334.2 billion. Warren Buffett said in his letter to investors that he would still prefer to own stocks.
The RBA cut the cash rate for the first time in four years on Tuesday, lowering the cash rate by -0.25 %to 4.10%. However, the governor emphasised that market expectations for several more cuts this year were unrealistic. Plugging in the market cash rate expectations as usual, the quarterly Statement on Monetary Policy showed that modelled CPI inflation would not return to the target band until the end of 2026.
One factor supporting the higher rate outlook is the better-than-expected labour market outcomes. Unemployment ticked up slightly to 4.1% in January, as the participation rate rose by +0.2% to 67.3%. The economy added +44.0k new jobs, and the employment-to-population ratio rose to a new record of 64.6%. However, rate optimists would quickly point out that wage growth was slightly lower than anticipated at +3.2% yoy, although the RBA expects wage growth to reaccelerate.
The RBA may also be forced to hold rates higher for longer if election promises result in further support for households. Over the weekend, the government pledged to boost Medicare spending, saying that 9/10 GP visits would be bulk billed within five years. The Coalition set that it would not oppose the move.
The minutes of the latest Federal Reserve meeting also reinforced a steady rate outlook. Members said the current policy provides “time to assess the evolving outlook for economic activity, the labour market, and inflation, with the vast majority pointing to a still-restrictive policy stance. Participants indicated that, provided the economy remained near maximum employment, they would want to see further progress on inflation before making additional adjustments to the target range for the federal funds rate.” They further noted “upside risks to the inflation outlook. In particular, participants cited the possible effects of potential changes in trade and immigration policy”.
Several business surveys indicated rising price pressures before the University of Michigan consumer sentiment survey provided another warning on Friday as long-term inflation expectations increased to +3.5%, the highest level since 1995.
At the same time, concerns are building that Elon Musk’s DOGE team may hamper growth with deep spending cuts when the expansion is already fragile, even before tariffs are taken into account.
Commenting on the results of the American flash PMI, S&P Global’s Chief Business Economist, Chris Williamson, said:
“The upbeat mood seen among US businesses at the start of the year has evaporated, replaced with a darkening picture of heightened uncertainty, stalling business activity and rising prices.
Optimism about the year ahead has slumped from the near-three-year highs seen at the turn of the year to one of the gloomiest since the pandemic. Companies report widespread concerns about the impact of federal government policies, ranging from spending cuts to tariffs and geopolitical developments. Sales are reportedly being hit by the uncertainty caused by the changing political landscape, and prices are rising amid tariff-related price hikes from suppliers”.
Similarly, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said of the Eurozone surveys:
“Economic output in the eurozone is barely moving at all. The somewhat milder recession in the manufacturing sector is only just being overcompensated for by the barely noticeable growth in the services sector. There is certainly hope for a German government that will be able to act after the elections [that took place on Saturday], which should also provide a positive impetus for the eurozone as a whole. However, this is offset by a relatively unstable situation in France and a US customs policy that is spreading uncertainty. These figures therefore do not yet point to a recovery in the eurozone.”
The ECB is expected to cut rates at the next meeting in early March, while the Fed is expected to resume cutting in mid-2025.
The Australian PMIs were less gloomy but not without risks. Jingyi Pan, Economics Associate Director at S&P Global Market Intelligence, said:
“February’s S&P Global Flash Australia PMI data outlined further improvements in private sector business conditions. Although modest, the expansion in private sector output was the quickest in six months to suggest that economic conditions further improved in the opening quarter of 2025. Moreover, the improvements were broad-based as faster services new business growth was accompanied by a renewed rise in goods new orders, the first since November 2022.
That said, a fall in business sentiment to the lowest level since last October provided mixed signals for near-term economic performance. Anecdotal evidence reflected concerns over the economic outlook despite business activity rising over February and interest rates being lowered during the survey period. This sense of caution was also prevalent in firms’ reluctance to fully pass on cost increases, leading to lowered selling price inflation in February.”
The Japanese survey also indicated a softening in confidence. Usamah Bhatti, Economist at S&P Global Market Intelligence, said:
“Japan’s private sector experienced stronger expansion at the midpoint of the first quarter, with the Composite Output Index reaching its highest level in five months. This modest improvement was driven by sustained growth in services activity, while manufacturing output declined at a softer rate. In areas where growth was recorded, firms often attributed this to business expansion plans and improved sales.
New business received by Japanese private sector companies increased for the seventh time in eight months in February. However, the pace of expansion was only modest and the softest recorded since last November. While new orders for manufacturing continued to decrease, the decline was only mild and was more than offset by an increase in new business within the services sector.
“Confidence regarding business activity growth over the next 12 months softened in February, reaching its lowest point since January 2021”.
The Bank of Japan is one of the few central banks still expected to raise rates in 2025 after last week’s upside surprise in Q4 real GDP growth to +1.2% yoy and an acceleration in the national CPI increase to +4.0% yoy.
Inflation data is likely to remain in focus this week. Australia's monthly CPI update is due out on Wednesday, followed by American PCE inflation on Friday, which is expected to be more benign than the recent CPI reading with core PCE ticking down to +2.6% yoy. The eurozone's final January CPI figures are due out tonight and are expected to stay at +2.5% yoy.
The results of the German election should be known today before the leaders of France and the UK visit the White House this week. Ukraine's future defence and trade tariffs will likely dominate the agenda.
(a) Forecasts finalised on 12 February.
(b) Forecasts are rounded to the first decimal point. Shading indicates historical data.
(c) The cash rate is assumed to move in line with expectations derived from financial market pricing. Prior to the May 2024 Statement, the cash rate assumption also reflected information derived from surveys of professional economists. For more information, see A Change to the Cash Rate Assumption Method for the Forecasts.
(d) The daily exchange rate (TWI) is assumed to be unchanged at its current level going forward.
(e) Oil prices are assumed to remain constant at the current price over the current quarter. For the rest of the forecast period oil prices are expected to remain around the price implied by the six-month-forward rate.
(f) The population assumption draws on a range of sources, including partial indicators from the Australian Bureau of Statistics, migration policies, and estimates made by the Australian Government.
(g) GDP per hour worked (non-farm).
(h) Household savings ratio refers to the ratio of household saving (disposable income minus consumption) to household disposable income, net of depreciation.
(i) Real Wage Price Index and non-farm average earnings per hour worked are both deflated by Consumer Price Index.
Sources: ABS; Bloomberg; CEIC Data; Consensus Economics; LSEG; RBA.
Please see below for the US earnings releases in the upcoming week.
Monday 24th - Public Storage (PSA), Trip.com Group (TCOM), Zoom Communications (ZM) and SBA Communications (SBAC)
Tuesday 25th - Home Depot, Intuit Workday, Sempra (SRE)
Wednesday 26th - Nvidia (NVDA), Salesforce (CRM), Lowe's (LOW) and Stellantis (STLA)
Thursday 27th - Vistra (VST), HP (HPQ), Rocket (RKT), Warner Bros (WBD) and NetApp (NTAP)
Friday 28th - EOG Resources (EOG), Chart Industries (GTLS)
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