
It’s all about Trump (and the US CPI)
United States | Australia | Outlook
This month we start with the second episode of our new podcast The Active Investor w/SGH.
And then we look at
- The December US CPI and its impact changing market trends during the month.
- The outcome of the latest US central bank meeting – no clear forward guidance.
- President Trump’s early policy announcements – less significant than feared.
- DeepSeek and Stargate and the challenge to US exceptionalism.
- The December quarter Australian CPI and it’s likely policy (easing) implications.
- Whether the Australian economy is poised for an upturn.
- Key issues for the Australian economy in 2025.
- The upcoming February Australian company reporting season.
…
The active Investors w/SGH Ep#2: Politics and Markets Collide: Exec Orders, Tariffs, Tik Tok and DeepSeek
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| It’s all about Trump (and the US CPI)
Market performances in January were shaped by the response of investors to incoming President Trump’s raft of Executive Orders, the mid-month release of the better-than-expected US December Consumer Price Index (CPI) and, after that, pronouncements by President Trump regarding tariffs.
Trump’s tariff announcements in January were less significant than feared, and none with immediate effect. (However, this narrative changed the day after the end of the month).
Ahead of the mid-month release of the US CPI, equities globally trod water but began rising following that release. Equities were also impacted by positive sentiment following the new US Administration’s Stargate policy announcement, a USD500 billion artificial intelligence (AI) infrastructure project, and then volatility following DeepSeek’s announcement – which investors initially feared could completely disrupt the prevailing AI narrative.
Shaped by these factors, equity markets produced generally positive returns over the month with continental European markets strongest, likely in part reflecting their relatively poor performances at end-2024 but also the better than feared pronouncements about tariffs.
Bond market performances were mainly impacted by the US CPI with yields rising (bond prices falling) ahead of the CPI, but then yields slipped lower (prices rose) in the second half of the month.
Over the full month global bond yields ended little changed with the US 10-year yield at 4.54% (from 4.575% at end December) and the Australian 10-year yield ending at 4.43% (from 4.365% at end December).
The Australian dollar finished the month slightly higher at USD 0.6220, up from USD 0.6190 at end December.
Key market movements over the month of January
As noted in recent monthlies, we remain optimistic but cautious about the market outlook and, while we expect a modest consolidation of recent equity market moves, at this stage the macroeconomic catalysts for a significant equity market selloff are not present.
However, if market interest rates revert to rising at the pace they were in the fourth quarter of 2024 (before consolidating in January) there would likely be increased pressure on equity market valuations – the relatively high valuations currently exhibited in many global equity markets would not be compatible with continued increases in bond yields.
Against this bond market constraint, how interest rate expectations evolve as the tariff scenario plays out will be key in setting the equity market’s path – especially if the tariffs are judged to be inflationary and necessitate a change in policy direction by the US central (from rate cuts to rate hikes).
| United States
“Core” US CPI release causes a change in market direction, boosting equity and bond prices
Ahead of the January 14 release of the December CPI, most equity markets had been treading water month-to-date, and bond yields had been rising. But the better-than-expected “core” December CPI served as a catalyst for equity market performances to improve, with equity performances subsequently boosted further by Trump’s more conciliatory pronouncements on tariffs later in the month.
The CPI also caused bond yields to peak and then drift lower in the second half of the month. Also assisting the downward trend in yields was a mid-month change in direction (from up to down) for oil and gas prices, and a trend lower in US economic data surprises.
Annual change in the US CPI (Dec. 2023 – Dec. 2024)

Source: US Bureau of Labor Statistics, Consumer Price Index Summary, released 15 January 2025
The “headline” US CPI rose by 0.4% in December after rising 0.3% in November, but the more market-moving “core” measure rose by just 0.2% after increasing 0.3% in each of the previous four months. This pattern caused annual growth in the core index to decelerate to 3.2% in December from 3.3% in the prior three months.
It’s the core measure that usually gets most market focus as it strips out elements of the CPI that often cause volatility, including prices for items that may be fluctuating for reasons that have little to do with trends in the underlying economy such as food and energy (e.g. weather factors).
However, while the official core measure produced by the U.S. Bureau of Labor Statistics was better than market participants expected and played a key role in driving market performances in January, other underlying measures of the CPI – such as the Cleveland Federal Reserve’s trimmed and median CPI measures – did not display the same encouraging pattern. Instead, the Cleveland Fed’s measures showed a continuation of monthly inflation readings of 0.3% and scant evidence of slowing momentum (see table below).
This pattern of consistent ongoing inflation suggests that the US central bank will be slow in making further rate cutting adjustments.
Note: The trimmed mean eliminates from its calculation the top and bottom 8% of price changes in the CPI basket while the median measure is the one-month inflation rate of the component half-way through the range of price changes in the month.
Monthly percentage change in CPI measures

Source: Source: Cleveland Federal Reserve, Median CPI, released 15 January 2025
US central bank leaves rates on hold with little forward guidance
As expected, the US central bank left policy rates unchanged at their late January meeting (targeting policy rates in the range 4.25% to 4.5%) with little market reaction.
Important in the committee’s statement was the paragraph saying that
“the risks to employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate”.
This excerpt gives no clear indication of either the timing or direction of the next move in policy rates. The market is currently priced for another rate cut by mid-June.
President Trump’s January policy announcements
In regard to President Trump’s numerous Executive Orders signed since his inauguration, it is those related to tariffs that have the greatest market-moving potential. In fact, his Inauguration Day policy announcements on tariffs were generally more benign than expected, with no tariffs actually imposed, and the proposed 10% tariff rate on China imports less hawkish than his past proposals of 60%.
In general, Trump’s first two weeks in office were less volatile than investors had feared, particularly on the tariff front. Equity and bond prices responded positively, and market volatility fell. In fact, the S&P 500 rose by 2% during the first week under Trump’s second term as President, registering a new record high.
A week ahead of month-end Trump threatened Columbia with tariffs after that country had declined entry to US military flights carrying migrants, saying the individuals needed to be flown on civilian planes and treated with “dignity and respect”. Trump immediately responded by placing 25% tariffs on imports from Colombia, which were later paused after Columbia agreed to grant entry to the military flights.
Following month-end, on 1 February, President Trump issued an executive order applying additional tariffs of 25% to all imports from Canada and Mexico, with the exception of Canadian oil and energy products, which are to face a 10% tariff. Imports from China will face a 10% tariff over and above existing US tariffs.
Trump said he used emergency powers to issue the order regarding tariffs
“because of the major threat of illegal aliens and deadly drugs killing our Citizens, including fentanyl.”
Compared with their muted response in January, markets in February are unlikely to be as sanguine with these new developments.Tariffs are inflationary as they lead to higher costs of imports, and this feeds its way through to end prices in many cases, both from imported goods, but also from locally produced goods which now suddenly face less price competition.
Our concern is that increasing inflationary expectations will feed through to higher bond yields, and interest rate expectations generally, and this could well see equity markets take a breather.
The market impact of DeepSeek and Stargate
Toward the end of the month news emerged about a potential disruption to the Artificial Intelligence (AI) thematic, particularly the narrative around how energy intensive and expensive the infrastructure to support future AI may need to be. This disruption came from a China-based Al venture – DeepSeek.
DeepSeek is a two-year-old China-based AI R&D venture operating under Chinese quant fund High-Flyer. High-Flyer was started in 2015 by friends from university using machine learning to trade equities. In 2023 they spun of fan independent research arm (DeepSeek) to use open-source models to create extremely efficient leading-edge AI models.
The supposed success of DeepSeek has called into question whether there will in fact be the requirement for as much computing power and infrastructure/investment requirements previously assumed necessary to support the continued development of AI.
DeepSeek has also partially challenged the near unanimous investor belief in “US Exceptionalism” which accelerated through 2024 as US tech equities vastly outperformed other US and global equity sectors. However, DeepSeek’s many claims are yet to be subject to independent verification.
A week or so prior to DeepSeek’s announcement, AI-related stock shad been euphoric following the new US Administration’s announcement of its “Stargate” policy. The Stargate Project is a new company which intends to invest USD 500 billion over the next four years building new AI infrastructure for OpenAI in the United States.
| Australia
The composition of the Australian December quarter CPI moves the market to expect a near-certain rate cut in February
Reported by the Australian Bureau of Statistics (ABS) on 29 January, both the Trimmed Mean and Weighted Median measures of inflation printed at just below market consensus for the December quarter (both were 0.5% compared with 0.6% consensus for both). These two measures are only minimally impacted by shifts in government subsidies and taxes hence the focus on them by the RBA and the market)
Following this release, market pricing moved to a near certain expectation for a February RBA rate cut.
It is the composition of the CPI and it’s undershooting of RBA expectations that have probably been most responsible for the market’s new expectation of a near-certain rate cut in February.
For example, looking into the details of the report, analysts note that there is now a clear disinflationary trend in the prices of items in the CPI basket that usually display inflation “persistence” – items with inflation persistence have prices that change only slowly following an inflation shock. It is significant that these “sticky” items now seem to be displaying disinflation, especially rents and new dwelling costs.
Inflation trends for CPI items with low and high inflation “persistence”

Source: Barrenjoey, ABS
Showing a similar cooling in inflation pressures is a diffusion index of items in the CPI basket – diffusion indexes measure the proportion of the components that contribute positively to the index relative to those that contribute negatively.
Applying diffusion index analysis to the CPI, ANZ bank analysts have calculated that a diminishing proportion of items in the basket are now rising by more than 2.5% (the mid-point of the RBA’s target band).
Like the measure of items with inflation persistency noted above, the diffusion index also points in the direction of narrowing inflation pressures, hence the market now almost fully expects the RBA to cut in February.
CPI Diffusion Index
Source: ANZ, Australian Bureau of Statistics
While a February rate cut now seems highly likely, it is still the case that services inflation remains elevated at 4.3% in the December quarter, down from 4.6% in the prior quarter. With services inflation generally “home-grown”, until these pressures ease significantly more the RBA will have only very limited room to cut rates – perhaps “one and done” for the foreseeable future.
Slow improvement likely in Australian economic performance
Although the Australian economy has slowed to growth of just 0.2% / 0.3% in each of the past four quarters to September 2024, several indicators are suggesting that there may be improvement in 2025:
- Although there was some retracement in January, consumer sentiment is on a generally improving trend with households feeling more positive about the economy and less pessimistic regarding their financial position.
- The NAB survey of corporate sentiment has recently revealed an improvement in forward orders and confidence.
- With Inflation pressures easing, albeit slowly, inflation is moving in the right direction and will likely enable the RBA to reduce interest rates in coming months.
- Wages growth is similarly easing with annual growth slowing to 3.5% from 4.1%, and new private wage rises easing to an annual pace of 3.9% from 4.01% in the latest reading for September quarter 2024. This easing pattern should assist in giving the RBA scope to ease policy rates in coming months.
Roy Morgan/ANZ Bank Consumer Confidence

Source: Roy Morgan, ANZ
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| Looking ahead
Key issues for the Australian economy in 2025
Looking ahead to the coming year, there are several key issues for the economy and markets
- Path and size of RBA cuts
- Although a February rate cut looks reasonably likely, until services inflation eases appreciably further, there is a risk the RBA will only be able to cut rates very slowly.
- Fiscal – Election Implications:
- With the federal election due by 17 May at the latest, there will likely continue to be a near-term positive fiscal impulse.
- Global Trade Friction:
- With China to be a key focus of the new US Administration, how US-China tariff policy develops, and how the Chinese respond, will be clearly important for the Australian economy and markets this year.
Reporting season in February
It will be interesting to see whether the economy’s resiliency, albeit at an only very slow positive pace, will be reflected in company reporting.
Market outlook
With another strong month in January, the market is trading around all-time highs. The reporting season will be absolutely critical for the market, given its current valuation.
With announcements post month end regarding tariffs, and counter measures by the relevant affected countries, there will be consequent increases in inflation expectations in the US and therefore possibly higher interest rates.
On this basis, there is a distinct possibility of a modest market correction, unless the local reporting season can give comfort to investors.
Read Rob’s previous macro updates | Watch Rob Hogg’s most recent video update | Back to the top of the page
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