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Fin-X Weekly Update 3rd February 2025

Brett Careedy

Equity market volatility rose last week as a Chinese AI rival raised concerns over infrastructure spending, prompting a record sell-off in the semiconductor sector to start the week. President Trump then announced import tariffs on goods from Canada, Mexico, and China on Friday.

The Federal Reserve held rates without reacting to possible fiscal policy changes. The Bank of Canada, ECB and Swedish Riksbank lowered rates, with more cuts likely to follow after tariffs are imposed.


The market has all but fully priced an RBA rate cut in two weeks after a softer-than-anticipated Q4 CPI result.


Australian retail sales will be published later today. This week also sees the monthly ISM surveys, labour market data, and more earnings results released in the US, as well as Eurozone inflation and the Chinese Caixin PMIs.


Hedged international equity indices slipped last week after US technology stocks were hit by news of a rival Chinese AI model on Monday. President Trump later announced in Friday’s Wall Street session that he would impose the first tariffs over the weekend. Australian shares closed higher over the week, but futures indicate they are scheduled to open more than one percent lower this morning. The US dollar strengthened as markets moved into a slight “risk off” mode that was noticeable across several markets.


Just before the start of the Lunar New Year celebrations, Chinese AI startup DeepSeek announced that it had developed ways to build advanced AI models for under $6 million, significantly less than its American competitors using inferior chips. The news suggested that American AI model developers might lose pricing power and that capital expenditure on chips and other infrastructure could slow.


As the market reacted, leading chip manufacturer Nvidia broke the record for the biggest one-day loss in value for a company on the US stock market. The share price dropped by -17% on Monday, equivalent to a whopping $US -593 billion reduction in market cap, eventually finishing the week down -15.8 %. The broader Philadelphia semiconductor index also fell by -5.2%, Australia’s datacentre managers Goodman Group and NextDC traded -4.4% and -6.6% lower, respectively. In contrast, some companies that buy AI models, such as Apple and Salesforce, saw their share prices rise.


By the end of the week, suspicions had arisen that the $6 million figure might not be accurate. In addition, answers from DeepSeek suggested that the model had been trained on results from a version of ChatGPT, raising intellectual property concerns and doubts about whether the results might so easily be legally replicated by adopters of DeepSeek’s open architecture model.


Most S&P500 companies that reported earnings last week delivered a positive surprise. However, the share prices of widely held large caps did not necessarily rise once management’s guidance was considered. These included Microsoft (-6.5%), Apple (+5.9%), Meta (+6.4%), Blackstone (-5.2%), Visa (+3.5%), Mastercard (+4.1%) and ResMed (-5.7% in USD).


Intel (-6.7%) losses were not as bad as feared, while there were high profile misses from ASML (+1.0%), Tesla (-0.5%), Boeing (+0.3%), UPS (-14.1%) and energy giants Exxon (-1.7%), Chevron (-4.2%) and Shell (+0.7% in USD).


Overall, the index has seen a net +5.9% positive surprise, equivalent to a +7.4% annual increase in earnings, with 179 / 501 members having reported so far. Communications (+31.8%) and Financials (+22.3%) have led the rise in year-on-year earnings, with Energy (-33.6%), Materials (-28.5%) and Industrials (-8.6%) lagging.


Sell-side analysts still expect the index to produce double-digit earnings growth over the next two years. However, Friday's tariff announcement suggests that those forecasts may be challenged.

President Trump confirmed 25% tariffs on imports from Canada and Mexico and 10% on Chinese imports from Saturday, 1st February, adding that there was very little these countries could do through negotiation. There was an exception for Canadian oil imports which will attract a lower 10% tariff. The order included a provision that the tariffs could increase if there were a retaliatory response. Canada and Mexico had previously vowed to respond with targeted measures to impose pain on the US in return. The president added that he intended to follow with tariffs on European Union imports.


Earlier in the week, he also placed a freeze on federal aid, excluding Social Security and Medicare. Two federal judges have granted temporary relief, but the situation has yet to be resolved.


Despite the White House orders and equity market volatility, US Treasury yields were remarkably steady after a somewhat hawkish hold from the Federal Reserve last week.


Chair Powell indicated that FOMC members are reasonably confident that inflation will continue to moderate and that the labour market is balanced, although hiring is low. January unemployment is expected to remain at 4.1% when released with this Friday’s labour report.


PCE (+2.6% yoy) and core PCE inflation (+2.8%) were in line with forecasts when released after the meeting on Friday. However, real Q4 GDP of +2.3% (annualised) was -0.3% below consensus forecasts, bringing the real annual change down to +2.5%, the lowest level since Q1 2023.


Even though business surveys had previously suggested that businesses were front-running tariffs with higher imports, the BEA said, “The increase in real GDP in the fourth quarter primarily reflected increases in consumer and government spending that were partly offset by a decrease in investment. Imports, which are a subtraction in the calculation of GDP, decreased”.


Waning consumer confidence suggests that the pick-up in consumer spending is unlikely to accelerate. The Conference Board’s chief economist, Dana M. Peterson, said, “Consumer confidence has been moving sideways in a relatively stable, narrow range since 2022. January was no exception. The Index weakened for a second straight month, but still remained in that range, even if in the lower part. All five components of the Index deteriorated but consumers’ assessments of the present situation experienced the largest decline. Notably, views of current labor market conditions fell for the first time since September, while assessments of business conditions weakened for the second month in a row. Meanwhile, consumers were also less optimistic about future business conditions and, to a lesser extent, income. The return of pessimism about future employment prospects seen in December was confirmed in January”.


Consumer pessimism contrasts with bullish business surveys. But both may be distorted by reactions to the recent election.


While the Federal Reserve had refrained from speculating on specific policy measures, other G10 central banks cut interest rates by -0.25% as expected, highlighting tariffs as a significant downside risk to growth.


The Bank of Canada lowered the policy rate for the 6th consecutive meeting to 3.0%. Governor Tiff Macklem said that previous cuts were expected to stimulate growth but warned that “a long-lasting and broad-based trade conflict would badly hurt economic activity in Canada”. According to modelled scenarios, if Canada and other nations slapped a retaliatory 25% tariff on the US, this could hit Canadian growth by -2.5% percentage points in the first year and another -1.5% in the second.


Lowering the deposit rate to 2.75%, the ECB expects inflation to settle around the 2% target in 2025. ECB President Christine Lagarde commented on the lack of clarity surrounding tariffs, responses and the combined impacts, saying, “All we know for sure is that it will have a global negative impact”.


The Swedish central bank perceives that inflation is already at target and suggested that an economic rebound might be underway despite weak headline activity. US trade policy was cited as the most significant downside risk. The policy rate stands at 2.25%.


The Bank of England is expected to deliver another -0.25% cut this Thursday. European and Canadian bond yields moved lower over the week.


Australian yields were a few basis points higher after the market moved to price a near certainty that the RBA would cut the cash rate by -0.25% to 4.1% later this month. The quarterly headline CPI figure of +2.4% yoy came in below forecasts but is substantially distorted by electricity subsidies. More significantly, from a policy perspective, the trimmed mean measure fell from a revised +3.6% yoy in Q3 to +3.2% yoy in the last quarter of 2024. The result was -0.1% below consensus forecasts and -0.2% below the RBA’s November forecast for 2024. However, we suspect that the timing of the first rate cut is far less certain and will depend on whether the Board still perceives the economy to be operating above full capacity. The same forecasts showed that the RBA had also expected unemployment to rise to 4.3% in December instead of the 4.0% number published by the ABS in January.


Most Australian data arrive early this week, including retail sales later today. They are anticipated to show a monthly decline of -0.7% in December.


Eurozone CPI figures are due out tonight, with a large volume production data set to follow later the week.


Also tonight, the ISM Manufacturing survey will kick off a busy week of US data, culminating in Friday’s labour report. 130 more S&P500 companies will also publish Q4 results, including Palantir, AMD, Uber, Qualcomm, Eli Lilly and Amazon.


Lunar New Year celebrations continue in Asia today and tomorrow, and the Caixin PMIs will be released.



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