The year has begun on a measured note, with resilient U.S. economic growth and persistent inflation prompting markets to scale back expectations for Federal Reserve rate cuts. This has led to higher bond yields and softer equities. Adding to market unease is speculation over Donald Trump’s potential actions during his first days as the 47th President of the United States.
Last week’s U.S. payrolls report highlighted this dynamic: stronger-than-expected employment numbers triggered a selloff in stocks, underscoring the "good news is bad news" sentiment prevailing in markets. However, some relief arrived with December’s softer-than-expected core CPI report, which showed core inflation rising just 0.2% (vs. market expectations of 0.3%). This allowed annual core inflation to ease to 3.2% from 3.3%—marking the first decline in four months.
Further optimism came from reports suggesting that Trump’s tariff policies may be less severe than initially feared, with gradual increases targeting a limited range of goods and countries. Currently, Wall Street anticipates only one or two Fed rate cuts this year at most.
Global Week Ahead
This week’s U.S. economic calendar is relatively light, with only second-tier data scheduled. The spotlight will instead fall on Donald Trump’s inauguration and his early actions as President. While Trump introduces a new layer of volatility to markets, my assumption is that he will tread cautiously, avoiding risks to both the U.S. economy and Wall Street despite his tough rhetoric.
Elsewhere, the Bank of Japan is expected to raise interest rates on Friday—its first hike since August, which caused a market downturn. This time, however, markets appear better prepared, and the recent weakness in the yen, coupled with a strengthening U.S. dollar, gives the BOJ some room to maneuver.
In New Zealand, Wednesday’s Q4 CPI report is expected to show a slight easing in annual inflation from 2.2% to 2.1%, potentially paving the way for another Reserve Bank of New Zealand rate cut next month, likely a significant 0.5%.
Global Market Trends
The year’s early trends suggest a rebound in the relative performance of Europe’s lagging markets. While global quality stocks remain under pressure, there are limited signs of a significant rotation out of U.S. and technology stocks so far.
Australian Market Insights
The S&P/ASX 200 edged up 0.2% last week, following a 0.5% gain the previous week, bringing year-to-date gains to 2%—on par with the S&P 500. Similar to the U.S., Australia is experiencing a “good news is bad news” environment. Strong labor market data last week dented hopes for a February rate cut from the Reserve Bank of Australia (RBA).
Employment rose by 59,000 in December, driven mostly by part-time jobs, while the unemployment rate ticked up to 4.0% from 3.9%. This highlights the economy’s robust job creation despite weak GDP growth and subdued consumer spending, thanks to the thriving care and infrastructure sectors.
Meanwhile, November’s CPI report showed trimmed mean inflation easing to 3.2% from 3.5%. Despite this, I believe the RBA is unlikely to cut rates next month given strong employment growth, a vulnerable Australian dollar, and the likelihood of sticky inflation in the upcoming Q4 CPI report. For a rate cut to materialize, I anticipate a sharper drop in inflation—potentially to 3.25% or below. However, I remain hopeful for a rate cut in May, assuming a further decline in Q1 inflation figures.
This week, limited local data will keep attention focused on global developments.
Enjoy your week!
Rick Maggi CFP, Westmount Financial, Financial Advisor (Perth)