Market performance: It is all about Trump, again

United States   |   China   |   Australia   |   Outlook

 

We start again with a new episode of our podcast The Active Investor w/SGH, in which Rob Hogg and Steve Hiscock discuss the February developments, reporting season and all things that impact investors decisions.

And then we look at

•        The early impact of President Trump’s policy announcements on economic data and market expectations – higher uncertainty and inflation expectations
•        Elon Musk’s DOGE-related job cuts may already be impacting
•        Sharply rising US policy uncertainty
•        US March quarter GDP losing momentum
•        Higher than expected US January CPI makes further rate cuts more difficult
•        Market impact of slowing US growth
•        Is the Chinese economy improving?
•        The Reserve Bank’s “hawkish” rate cut
•        Australian employment surprises to the upside again (limiting the likelihood of further RBA rate cuts)
•        Australian reporting season trends and comments.

…

 

| It’s all about Trump, again

Market performances in February were again heavily influenced by the response of investors to President Trump’s raft of Executive Orders and other announcements.

While in January equity markets rallied as tariff-related pronouncements were less significant than feared, this narrative changed on the first day of February as the President’s rhetoric became stronger and as the impact of his early announcements began showing up in data – particularly US employment, and household confidence data, and inflation expectations.

Shaped by these factors, US equity markets lost ground in February, more so as the month progressed. Australian equity markets also went backwards in February as the company reporting season and the as-expected Reserve Bank rate cut failed to inspire investors.

Bond market performances were impacted by the same factors as equities, but for bonds these factors caused bond prices to rise (bond yields to fall), particularly toward the end of the month as the weakening data became more apparent.

Over the full month US bond yields fell significantly with the US 10-year yield ending the month 0.33% lower at 4.21% (from 4.54% at end January) while the move lower in Australian yields was less dramatic with the Australian 10-year yield ending lower by 0.13% at 4.30% (from 4.43% at end January).

The Australian dollar finished the month little changed at USD 0.6210.

 

In recent monthlies we have noted that we were cautious but optimistic about the market outlook. However, this view is changing – while the typical macroeconomic catalysts for a significant equity market selloff are still not present, it seems that the new US administration’s policy announcements are driving greater investor, corporate and household uncertainty.

This has caused us to become a little more cautious about the outlook. As well, trends in US inflation are not yet conducive to additional rate cutting by the US central bank if that were to be required (if, for example, US growth continues to slow or unless the slowing causes renewed disinflation.

With global and Australian equity market valuations toward the top of historic ranges, markets would be at risk if the US (and other countries) were to enter recession caused by rising uncertainty, job cuts (DOGE-inspired in the case of the US), and tariffs.

While the outlook for Australian growth and earnings is likely to improve from here, it may not be enough to insulate the local market from global (especially US) influences.

It’s likely that an improvement in US economic data will be required to improve the US and global equity market outlook – improving data combined with further disinflation would be extremely positive, but continued economic weakness with no further improvement in inflation pressures (no further disinflation) would be quite negative.

 

| United States

Early reactions to President Trump’s policy announcements include increased uncertainty and higher consumer and market inflation expectations. Equities slip and bond yields decline.

Showing up most clearly in surveys of consumer confidence, it appears that President Trump’s early announcements are beginning to negatively impact the US economy. In the second half of February equity markets slipped and bond yields rallied (yields fell) in reaction to these reports.

Pointing to the unsettling impact of Trump’s announcements, the Conference Board’s February Consumer Confidence survey experienced its sharpest monthly decline since August 2021, with the index falling for the third consecutive month. While choppy month-to-month, the index is now back down at the bottom of the range that has prevailed since 2022. Reasons cited for the fall in confidence included:

• a sharp increase in the mentions (by survey participants) of trade and tariffs
• comments on the current Administration and its policies
• higher inflation expectations (12-month consumer inflation expectations rose from 5.2% to 6%).

A similar finding was displayed by the University of Michigan’s monthly consumer confidence index.

US Conference Board Consumer Confidence Index
Index, 1985 = 100

Source: US Conference Board, US Consumer Confidence Dropped Sharply in February, released 25 February 2025

Market-implied inflation expectations rose further over the month also, likely due to increased concerns about the potential inflationary impact of tariffs. The chart below shows the rise in inflation expectations implied by US 2-year bonds (“break-even” inflation expectations).

Calculated by subtracting the yield on Inflation-protected bonds from nominal bonds of the same term-to-maturity, the breakeven rate can clearly be seen rising from the beginning of this year.

Two-year US Treasury bond implied inflation

 

Elon Musk’s Department of Government Expenditure (DOGE)-inspired Federal employee cuts seem to be beginning to impact the data

In the past two weeks there have been signs that the initial impact of Musk’s DOGE-related job cuts might be beginning to have an impact on the number of people filing for initial unemployment claims. The most recent week witnessed an increase of 22,000 (to 242,000) in initial claims for unemployment insurance payments, and the four-week moving average is also now rising.

Washington DC claims rose to their highest level since March 2023 in the latest week, but claims in Maryland and Virginia, which also have a high concentration of federal government employees, fell in the past week. So it’s still too early to form a clear view on the impact of DOGE job cuts.

Federal employees filing initial unemployment claims

(24 February 2024 – 24 February 2025)

While these numbers can be volatile, and the recent few weeks of increase are only nascent, the recent sharp increase in the initial jobless claims data will increase the market’s attention on the monthly non-farm payroll data where most focus will be on the government jobs number given the planned historically large cuts in the Federal workforce by the Trump Administration.

If DOGE-related job cuts cause total government employment numbers to fall, the negative impact of these cuts will be a sharp contrast with the contribution of government job creation to overall employment growth in recent years – in 2023 around 30% of new jobs were government employees (61,000 average per month), and some of this momentum spilled over into 2024 (38,000 average per month).

US civilian Federal employees
(ex-postal service and temporary census workers)

 

US Economic Policy uncertainty rising sharply

Unsurprisingly, economic policy uncertainty has risen sharply in recent weeks. The measure of policy uncertainty charted below is compiled by university academics and uses a range of inputs including newspaper coverage of policy-related economic uncertainty, the number of federal tax code provisions set to expire (as reported by the Congressional Budget Office) and disagreement among economic forecasters (from the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters).

The academics that compile the index have found that policy uncertainty foreshadows declines in investment, output, and employment in the United States.

US Economic Policy Uncertainty

 

Atlanta Fed GDP-now estimate losing momentum as US growth slows

Reflecting the softening momentum in US growth in recent weeks, the Atlanta Federal Reserve’s “GDPNow” forecast for the current quarter has dropped in the past few weeks from a high of 3.9% (real annualised quarterly growth estimated for the March quarter) to just 2.3% (in the week ending 19 February).

This measure uses available economic data to produce a running estimate of real GDP growth and its overall decline in recent weeks has been caused by weakening economic data reports.

Evolution of Atlanta Fed GDPNow GDP estimate for March quarter 2025

 

Higher-than-expected January inflation report causes expected US rate cut expectations to be revised lower as the Fed’s capacity to cut rates diminishes.

The US CPI increased 0.5% in January, after rising 0.4% in December, and has now accelerated (on a monthly-change basis) each month since October.

This pattern has caused the annual growth in the CPI to accelerate, reaching 3.0% in January.

Twelve-month change in the US CPI (Total and “Core”)

 

It will be problematic to say the least if US economic data continue to soften while inflation pressures remain present as this will make it increasingly difficult for the US central bank to cut official rates further to support the economy.

Market impact of slowing US economic momentum – falling US bond yields and underperformance of US cyclical sectors

As the data has unfolded as described above, so bond yields have fallen, and US cyclical equity sectors have begun to underperform, as can be seen in the chart below.

It’s likely that an improvement in US economic data will be required to improve the equity market outlook – improving data combined with further disinflation would be extremely positive, but continued economic weakness with no further improvement in inflation pressures (no further disinflation) would be quite negative.

The relative performance of US cyclical/defensive equity sectors compared with bond yields

| China

Is the Chinese economy improving?

Having ended 2024 with a deal of negative sentiment surrounding Chinese growth prospects, not much in the way of improvement was to be required to see economic and market performance surprise positively (indeed an end to negative surprises would have been enough).

At the end of February came a positive surprise in a key manufacturing survey produced by China’s National Bureau of Statistics (NBS). China’s NBS manufacturing PMI rose to 50.2 in February from 49.1 in January.

Among the major sub-indexes, the output sub-index increased the most, followed by the new orders sub-index. The NBS non-manufacturing PMI remained in expansion territory, increasing to 50.4 in February from 50.2 in January. Also encouraging were signs that price deflation pressures eased in the month.

While it should be noted that the earlier-than usual timing of Lunar New Year Day (29 January) may bias PMIs to the downside in January but bias the February reading upward, not much of an upside surprise in forthcoming data will likely be required to see an improvement in sentiment surrounding China. A change in China sentiment could be positive for Australian mining stocks that have recently experienced significant underperformance relative to the market.

NBS Manufacturing Purchasing Managers’ Index (PMI)

| Australia

RBA’s “hawkish” rate cut

In a near fully built-in move, the Reserve Bank cut rates by 0.25% to 4.10% in February. With this move overwhelmingly expected, initial market reaction was muted.

But later in the trading day as RBA Governor Bullock conducted a press conference, market reaction turned negative as the governor went to great lengths to reinforce the RBA rate cut statement’s comments expressing caution about the scope for further cuts:

“While today’s policy decision recognises the welcome progress on inflation, the Board remains cautious on prospects for further policy easing.”

 “If monetary policy is eased too much too soon, disinflation could stall, and inflation would settle above the midpoint of the target range.”

 

Reasons for the RBA’s caution about the prospect for future cuts include upside inflation risks such as:

“The labour market may be somewhat tighter than previously thought.”

“Central forecast for underlying inflation… has been revised up a little over 2026.”

The latest employment report once again surprises on the upside – one of the factors the RBA highlighted driving their caution about the prospect for further rate cuts

The number of people employed rose by a further 44,000 in January with employment now growing by 3.5% annually. The unemployment rate rose very slightly to 4.1% as the participation rate (the proportion of the civilian population aged 15 years and older employed, unemployed or not in the labour force) rose to a new record high of 67.3%.

This was 0.8 percentage points higher than a year ago and 1.8 percentage points higher than March 2020 and is a further indication of the strength of employment growth (given that the participation rate has strongly increased while the unemployment rate has remained relatively little changed).

Employed people

 

| Reporting season trends and comments

The banks

One of the more important features from the reporting season was an update regarding the major banks given their significant outperformance over the past year. Key were updates on trends in Net Interest Margins (NIM). Banks have broadly enjoyed improving NIMs over the past year, but this may have come to an end following the RBA’s rate increase and as competition seems to be increasing in the sector – these factors could lead to NIMs becoming a drag on future profits performance, having been a boost for the past year or so, and lead to a change in sentiment on the banks.

Victoria

A large number of companies made comments about how much worse the Victorian economy is performing compared with the rest of Australia. The chart below from CBA’s result shows the proportion of CBA’s non-performing home loans by state – the proportion from Victoria is clearly increasing, now at 48%, up from 33% a year ago.

CBA non-performing loans (by state 2024-2025)

 

Resources

After a year of weakened earnings in the sector due to lower China demand and cost inflation, analysts expect resources sector earnings to remain weak with global growth seen subdued and commodity prices commensurately expected to remain at lower levels.

Outlook statements

UBS analysts noted that, although many businesses emphasised that they believe the period of toughest economic conditions has now been passed, (as seems to be reflected in the bottoming of many economic indicators and will likely be assisted by the RBA’s February rate cut), they were cautious in their outlooks. Consequently, the majority of companies chose to maintain their forward earnings guidance.

For more on recent developments you can also listen to episode #3 of our podcast (available on YouTube, Vimeo, Spotify and Apple podcasts where we discuss RBA decision, the outlook for the Australian economy and early insights from February reporting season:

 

 

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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