Global Markets Overview
Global equities ended the week on a positive note, demonstrating resilience despite a higher-than-expected U.S. inflation report. Markets were buoyed by the postponement of planned U.S. tariffs and optimism surrounding potential Russia-Ukraine peace talks.
The U.S. core Consumer Price Index (CPI) rose by 0.4% in January, slightly above the expected 0.3%, pushing annual core inflation up to 3.3% from 3.1%. However, there is speculation that seasonal distortions may have influenced this result, as more businesses appear to implement price increases in January than seasonal adjustments account for. Additionally, rising hotel and car prices—potentially linked to shortages caused by the Los Angeles fires—may have contributed to the inflation uptick. The fires are also believed to have impacted January retail sales, which showed unexpected weakness.
Certain components of last week's CPI and Producer Price Index (PPI) reports, including health care, insurance, and airline rates, suggested a relatively subdued result for the Federal Reserve's preferred inflation gauge, the Personal Consumption Expenditures Deflator (PCED). If the core PCED increased by just 0.3% in January, the annual rate could decline from 2.8% to 2.6%, marking the first drop in several months.
President Trump’s influence on markets was mixed. His announcement of a 25% tariff increase on steel and aluminum imports initially alarmed investors. However, relief followed when he delayed reciprocal tariffs until April to allow for further review of global trade restrictions. Additionally, reports that the U.S. and Russia may engage in peace discussions—potentially including Ukraine—provided further optimism.
Federal Reserve Chair Jerome Powell, in his Congressional testimony, reaffirmed the Fed's cautious stance, stating that there is no urgency to cut interest rates but confirming that the next likely move remains downward.
Global Week Ahead
This week holds few major market-moving events. Key highlights include U.S. economic activity data, minutes from the recent Federal Open Market Committee (FOMC) meeting, and speeches from Federal Reserve officials. Given the firm state of the U.S. economy and the Fed's current wait-and-see approach, these events are unlikely to shift market sentiment significantly. Inflation trends and geopolitical developments remain the primary focus.
Outside the U.S., the Reserve Bank of New Zealand is widely expected to cut interest rates by 0.5% on Wednesday, bringing the rate down to 3.75%, in response to weak economic conditions and declining inflation.
Global Market Trends
European stocks continued their strong performance last week, maintaining their year-to-date trend of outperformance. However, the NASDAQ 100 also posted solid gains, rising 2.9%.
So far this year, there has been a pullback in the relative performance of the NASDAQ 100 and global growth stocks compared to value stocks, while European equities have shown strength. Additionally, last year's underperformance of high-quality global assets appears to be stabilizing.
Australian Market Outlook
Australian stocks rose last week, supported by global market strength and growing expectations of an interest rate cut from the Reserve Bank of Australia (RBA) this week.
Domestic economic data confirmed continued sluggishness, reinforcing the case for a rate cut to stimulate growth. Despite ongoing discussions about rate reductions, both consumer confidence (Westpac) and business conditions (NAB) remained subdued.
The key focus for the Australian market this week is the RBA’s rate decision on Tuesday. Given the sharp decline in underlying inflation—faster than the RBA anticipated—a rate cut appears warranted. A failure to cut rates would contradict previous guidance and risk undermining the RBA’s credibility. A 0.35% cut to 4.0% could align the cash rate with cleaner 0.25% increments, providing clarity for future policy moves. The RBA could then adopt a ‘hawkish cut’ stance, signaling limited prospects for further reductions in the near term.
Supporting a rate cut, Wednesday’s wage price index report is expected to show a slowdown in annual wage growth from 3.5% to 3.2%. This suggests that inflation can be contained without requiring the unemployment rate to rise to 4.5%, contrary to previous RBA assumptions. Additionally, Thursday’s employment report is likely to show strong job growth driven by robust population increases, though the unemployment rate is anticipated to tick up slightly to 4.1%.
Overall, the coming week is likely to be shaped by monetary policy decisions, economic data, and geopolitical developments, with inflation and central bank actions remaining the primary market drivers.
Rick Maggi CFP, Financial Advisor Perth, Westmount Financial