Fin-X Weekly Update 12th May 2025

Capital markets were relatively steady last week, despite significant updates to US trade policy and a closely watched Federal Reserve meeting.

The FOMC held policy settings steady, while the Bank of England trimmed UK interest rates by a quarter point despite the UK reaching an early trade agreement with the US.

Bank earnings dominated Australian market news.

Trade negotiations with China and American inflation updates will be the most eagerly anticipated updates this week. The monthly consumer and business surveys will be the most important Australian updates.

Capital markets remained generally stable over the past week, with the A-REIT and infrastructure sectors leading with modest gains.

As Australian investors continued to digest last week's federal election result, data was relatively light. But the +3.5% annual increase in household spending and steady job advertisements were indicative of a low-growth economy.

The Australian share index was little changed after a week of bank earnings. Global trade uncertainty and a challenging mortgage market were recurring themes. ANZ delivered a +16% increase in net profits in results that included the first full contribution from the acquisition of Suncorp Bank, completed in mid-2024. Westpac and Macquarie saw a +4.9% and +4.7% annual increase in earnings per share, respectively, while NAB’s first-half profits rose by +1.8% yoy, slightly ahead of analyst expectations.

Bond yields moved only marginally higher, except in the United States, where the 10yr Treasury added +0.11% after the Federal Reserve meeting.

The FOMC kept policy settings unchanged, as widely anticipated. Chair Jerome Powell reiterated the central bank’s ability to remain patient, underscoring the increased complexity of policy decisions in the face of simultaneous inflation and growth risks. “We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension,” he said, acknowledging the distorting effects of recent tariff measures and trade uncertainty.

Economic data, meanwhile, painted a mixed picture. Although the national ISM surveys have not yet confirmed the recent weakness indicated by the Fed’s regional reports, which highlighted scattered job losses and cooling activity, price pressures remain prominent. In particular, the ISM prices-paid sub-indices rose sharply, flagging upside risks to inflation in the near term. Upcoming CPI and PPI prints are expected to show steady annual increases that are still above the target rate of 2%. But market participants will watch closely for any upside surprises that might force the Fed’s hand at the next meeting in mid-June.

Markets were alert to developments in trade negotiations. Treasury Secretary Scott Bessent testified before Congress that the US is close to concluding new tariff arrangements with 17 trading partners, with formal announcements potentially arriving this week. Secretary Bessent said optimistically that 80–90% of these agreements could be finalised by year-end.

In parallel, President Trump met with Canadian Prime Minister Mark Carney, taking a more unilateral approach to setting trade terms. “We’re going to put very fair numbers down,” the President said, indicating a preference for setting tariff levels unilaterally rather than through negotiation.

The most concrete breakthrough came in the form of a new agreement with the United Kingdom. After nearly a decade of post-Brexit negotiations, the two sides reached a limited but strategically significant deal. While falling short of a full free trade agreement, the arrangement eliminates or reduces tariffs on key goods such as cars, steel, aluminium, and agricultural products. US officials secured improved access for services and beef exports, as well as commitments supporting Boeing. In return, the UK won a tariff cap of 10% on up to 100,000 vehicles and Rolls-Royce engines.

Despite the news, the Bank of England followed through with a widely expected rate cut of -0.25%, bringing the base rate to 4.25%.

The agreement drew criticism from US automakers who are still facing 25% levies on components sourced from other jurisdictions.

For Britain, the agreement offers job protection to a small number of high-employment industries. However, it also signals a broader direction for US trade policy, with the Commerce Secretary Howard Lutnick confirming that 10% tariffs would be the new baseline for bilateral arrangements.

Trade relations with the European Union, however, remain tense. In the same interview, the Commerce Secretary accused the EU of enabling tariff arbitrage through its trade with China. Brussels is reportedly readying retaliatory duties on $113 billion of imports from the US if negotiations do not lead to a satisfactory result.

Eyebrows were raised last week as the more recent rhetoric suggests an expansion of the tariff debate beyond goods into services. Secretary Lutnick’s reference to US services exports to the UK was noted, while the President’s remark about a potential 100% tariff on foreign films unsettled markets. Media stocks initially sold off, but Disney rallied +14.5% on the week after reporting robust theme park and streaming performance.

Over the weekend, initial talks were held between US and Chinese officials in Switzerland, with investors hoping for a breakthrough. Leading up to the meeting, President Trump remarked that tariffs could come down, and that an 80% tariff on Chinese goods “seems about right.”

Chinese trade data released earlier in the week showed an expanding surplus, with exports up +8.1% compared to last year and imports essentially unchanged. However, volumes through the Port of Los Angeles have reportedly halved since the most recent tariffs came into force.

Geopolitically, President Xi’s appearance at the May 9th Victory Day parade in Moscow was significant. Seen as a signal of solidarity, Xi’s visit came just as European leaders called on Russia to extend its brief ceasefire with Ukraine into a 30-day truce. After a Vatican meeting between Presidents Trump and Zelenskyy, many EU governments hope the US will step up its military and logistical support, abandoning its appeasement of the Kremlin and bringing the US back into closer alignment with NATO partners.

Besides US inflation prints, this week’s key data includes US retail sales, the European ZEW surveys, and the Australian monthly consumer and business surveys.

Disclaimer

The contents of this communication is prepared by Brerona Capital Asset Management Pty Ltd (A.C.N. 627 650 293; AFSL 520526). The information contained in this communication is general in nature and does not take into consideration any investors personal objectives, goals, needs and financial situation. You should not rely on the information contained in this document to make any investment decisions without first consulting an investment professional such as your financial adviser. Any unauthorised use of this document is prohibited. This document (including any attachments) is intended only for the addressee, it may contain information of a privileged and confidential nature. If you are not the addressee of this communication, you must not copy, reproduce, disseminate or use this email and its contents. If this communication has been received in error by you, please inform us immediately and securely delete. Sharing, transmitting, copying, disseminating all or part of the contents of this document may result in a breach of the Federal Privacy Legislation and or copyright and trademark infringement of Brerona Capital Asset Management Pty Ltd and its related entities.