In this month’s update, we provide a snapshot of economic occurrences both nationally and from around the globe.

Key points:

• Trump suspends reciprocal tariff policy above 10% hours after introduction
• Markets respond positively to tariff hiatus, but many companies suspend forward earnings guidance
• US consumer confidence falling sharply
• RBA looks set to cut rates in May

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture

The global economy is highly dependent on the US economy. The current performance of the US economy is highly dependent on the policies of the incoming president – Donald Trump. New presidents are often judged by what they achieve in their first 100 days. That window is now closed. Trump campaigned on several initiatives. We think at least four were central to his dream to ’Make America Great Again.’ There is no doubt the US debt is unsustainable at $36 trillion. Neither Biden, nor Trump in his previous term, addressed the issue in a meaningful way. Action on debt is appropriate but is Trump misguided in his current strategy? Trump promised to end the Russia-Ukraine war on ‘day one’. He was to stop immigration at the borders and deport large swathes of existing illegal, or ‘undocumented’, immigrants; there are reportedly well over 11 million of them in the US! He was also to impose import tariffs that he claimed would rapidly generate substantial revenue to reduce US debt. And he was to reduce government wastage and inefficiencies (using deregulation) to stimulate business growth and cut debt. After 100 days there have been no noticeable improvements in the resolution of the Ukraine conflict. Trump did, however, berate the Ukrainian president, Zelenskyy, in the White House on live television. It was embarrassing to watch. No leader should be treated like that. We can only presume Trump was venting his frustrations at having made no progress on ‘stopping the war.’ It appears that some gains have been made in reducing the inflow of legal and illegal immigrants. Several attempts have been made to deport groups to Central America but some of these actions have fallen foul of the law. Various court orders were made to reverse some of the deportations. Indeed, at least three US citizens were incorrectly deported – at least two of whom were small children. The process is in chaos. Trump seems to be challenging the judicial demands more in the fashion of a dictator than an elected president. Trump did reverse his decision on student visa cancellations. The tariff policy was destined to fail before it was implemented. We know of no respected economist who supports the policy as a mechanism for redressing trade deficits. The trade advisor to Trump, Peter Navarro, has been accused of fabricating academic support for his views. Before Trump returned to the White House, the average import tariff in the US was 3%. After the so-called ‘reciprocal tariffs’ were announced, that average jumped to 27%. On delaying the introduction of the reciprocal tariffs, the average tariff fell to 23%. When China is excluded (with a 145% tariff), the average tariff is to be still massive at 18%. The reciprocal tariffs are not as named. They are penalties to attempt to reduce trade deficits on goods on a bilateral basis. There is nothing wrong per se with trade deficits. Such deficits reflect investment wishes of the US exceeding savings. There are proper ways of addressing trade deficits; imposing tariffs is not one of them. Importantly, the Smoot-Hawley tariff act of 1930 in the US most probably caused the Great Depression! The situation got to boiling point as Trump has been accused of lying about the trade deals he claims he is doing. One report we saw said Trump claimed to be negotiating with China and talking to President Xi Jinping on the phone. China claims there have been no phone calls and no negotiations. Trump blustered under questioning by the media. Navarro claimed that they could do 90 deals (with 90 countries) in 90 days. When asked why no deals had yet been announced, Trump said lots had been done. Indeed, he claims 200 have been done. Since Trump apparently has no trouble telling lies to the media there is no knowing how this will all end. However, Trump has apparently added a few more concessions here and there. He needs an exit plan. At the time of writing the US Customs and Border Protection department claimed about $500 million had been collected in tariffs over the period of a few weeks but Trump claimed they would collect about $2 billion per day. One particularly important retaliatory non-tariff response by China was the cessation of the granting of export licences for its reserves of several ‘heavy rare earth minerals’. China has a near monopoly on about six of them which are essential in the manufacture of EVs, fighter jets and drones, etc. The US has been operating on a just-in-time inventory of them so the US could soon suffer serious consequences. China has also stopped importing beef from the US. Instead, it has reverted to importing beef from Australia. Elon Musk was appointed as a non-elected official in charge of DOGE (Department of Government Efficiency). Many claims have been made about savings, but few are backed up with receipts. Trump claimed there will be $2 trillion of savings. So far only $160 billion had been recorded on their web site and 60% of that sum was not itemised. Several pre-emptive moves have been made to alleviate the impact of the tariffs. China exports grew 12.4% in March against an expected 4.4%. US orders for autos in the US soared 9.2% in March compared to 0.9% in February. People wisely bought ahead of time to reduce tariff payments. From our reading, the US Secretary of the Treasury, Scott Bessent, appears to be changing his stance. He was very pro-Trump in the beginning, but he appears to have been the architect behind delaying the reciprocal tariffs by 90 days – conducting the meeting on the topic when Navarro was known to be otherwise engaged. Equity markets have been recovering from the initial impact of the tariff saga. More than half of the loss from the recent high in the S&P 500 has been regained. The VIX ‘fear index’ has retraced from the recent high in April of 52.3 to about 25 at the end of that month. Values in the range 12 to 15 are usually considered to reflect normal conditions. Australians voted in the Federal election on May 3 and have returned the Labour government in a land slide win that has increased their majority in the House of Representatives. Our assessment is that the election outcome does not result in any material changes to the course of the Australian economy or financial markets in the near term. Australian labour force data reflected an economy that is ticking along. A total of 32,200 jobs were created in March and the unemployment rate was 4.1%, an historically low rate. Retail sales adjusted for inflation grew 1.3% over the prior 12 months. The RBA held interest rates ‘on hold’ in April but the chance of a rate cut or two in May is judged to be high by the RBA interest rate tracker tool on the ASX website. It is never an option not to have an opinion about the investment future. Even just holding cash is an actively made decision. We see more volatility in months to come but the medium term for the major asset classes does not appear to have yet been put materially off track. That said, the path of US economic policy and the many twists and turns we expect it to take will be a major source of volatility. This being the case, we may need to amend our views, but we do not consider it necessary at this juncture as we await further developments to the tariff policies. Despite the elevated inflationary risk resulting from these policies both the US Fed and the RBA look set to cut rates several more times this year as recession risk builds.

Asset Classes

Australian Equities

After a wild ride in April, the ASX 200 finished up 3.6% on the month which was much stronger than most major indexes. In April, only the Energy sector (-7.7%) returned a capital loss on sharply falling oil prices The index is now 10.0% off the low for 2025 but still -5.0% from the high.

International Equities

The S&P 500 finished April strongly with seven consecutive daily gains. However, it was still down -0.8% on the month and -5.3% on the year. Most of the other major indexes made modest gains or losses in April. The ASX 200 was the stand-out performer at +3.6%! The March 2025 quarter reporting season in the US has produced some big earnings forecast beats, mainly in Financials and the ‘Mag 7’. Most companies were limited in their forward guidance given the uncertainty over the Trump tariff policies and the impacts that they may have.

Bonds and Interest Rates

The Fed has been in a public conflict with Trump. Trump keeps saying rates should be lower and he “can’t wait until he gets a new Fed chair.” Jerome Powell, the current Fed chairperson has been steadfast in his calm view that he is poised to react to any new situation. Nobody really knows what will happen with tariffs and whether they would cause inflation. They will certainly increase prices, but will the change just be transitory? If long-term inflation does ensue, changing rates would not be the solution. It would be appropriate to reverse the cause and cut tariffs! The 10-year US Treasury yield fell to 4.0% before the reciprocal tariff narrative took centre stage. This yield shot up to 4.5% and this rise caused consternation. A huge tranche of US Treasurys is set to mature in June and needs to be rolled over (refinanced). The last thing Trump, the Treasury or the Fed wants is higher yields for this big roll-over. It was the day that the 10-year US Government Bond yield hit 4.5% that the reciprocal tariffs got delayed by 90 days! There is some common sense in the governing bodies. Since the delay, the 10-year yield has got back to under 4.2% and equity markets have stabilised. The US dollar is weaker. The RBA kept interest rates on hold in April as was widely expected as a move then might have been seen to be political given the impending general election. The market has all but priced in at least one RBA cut on May 20th with a reasonable probability of a double cut of 50 bps. We think it is quite possible the RBA will cut by 35 bps to restore the pre-emergency rates of simple multiples of 0.25%. 3.75% in May rather than 3.6% wouldn’t make a big difference to the economy. The official cash rate can always be cut again in June if the RBA wants. Cutting by 60 bps in May might be seen as destabilising.

Other Assets

Brent Crude oil (-15.5%) and West Texas Intermediate crude oil (WTI) (-18.4%) prices were down sharply in April. The price of gold continued its strong rally with a gain of +5.9% in April. The price of copper (-2.4%) was down, as was the price of iron ore (-4.7%). The VIX ‘fear’ index is still elevated at 24.7 but well down from its intra-month high of 52.3. The Australian dollar (AUD) traded in a wide range ($US0.5975 to $US0.6437) over April finishing near its high ($US0.6402).

Regional Review

Australia

Australian jobs data for the latest month provided some evidence of an economy that is ticking along. The 32,200 new jobs in the month translates to a growth rate over the year of 2.2%. The full and part-time growth rates for the year are 1.6% and 3.3%. The big bulge in part-time growth rates above 6% last year have now dissipated. The unemployment rate was 4.1% maintaining a range of 3.9% to 4.3% for the last 12 months. Retail sales for the month were up 0.2% and 3.6% for the year. When adjusted for inflation, sales were up 0.1% and 1.3%, respectively.

China

There were a few surprises in China macro data in April. GDP growth came in at 5.4% against an expected 5.1%. Exports were 12.4% against an expectation of 4.4% but imports missed at -4.3% against and expected -2.0%. We put these big discrepancies down to a reorganisation of trade flows to try to beat the new US tariffs that were to kick-in during April. The 10% points outperformance of exports in March translates to about a month’s worth of exports. CNBC reported that about 25% of container ships from China to the US were cancelled for April. Since US Treasury Secretary Scott Bessent is freely commenting that the tariffs with China are unsustainable, we expect some mollification of the current situation. Trump even signed an executive order to that effect on the last day of April.

US

US jobs were up +228,000 in the latest month with an unemployment rate of 4.2%. The wage rate was up 0.3% for the month or 3.8% for the year. US CPI inflation came in at 2.8% from 3.1%. With shelter inflation at 4.0%, CPI-less-shelter inflation was well under target at 1.5%. There are well-known problems with the shelter inflation calculations. We deduce that inflation is under control when measured properly but the future of inflation is now uncertain. The Fed-preferred Private Consumption Expenditure (PCE) inflation measure was flat for the month in both headline and core but up 2.3% headline and 2.6% core on the year. The respected University of Michigan consumer sentiment survey reported another big monthly drop in the index – down to 47.3 from 76.9 last November at the time of the presidential election. The 1-year inflation expectations data came in at 6.5% – the worst result since November 1981. The 5-year inflation expectations were 4.4%. Both inflation expectations are sharply above those of last November. The Conference Board consumer confidence index also fell sharply – to 86.0 from 93.9 in the prior month and down from 112.8 in November 2024. The volatility/uncertainty created by Trump’s tariff policy has caused the US consumer to be less confident hence the decline in the confidence measure which is expected to feed into consumption data. The preliminary GDP growth rate for the March quarter of 2025 was published on the last day of April. The prior Atlanta Fed forecast was -2.5% for the quarter (annualised). The official estimate was -0.3%. While this rate may alarm some there are three sets of unusual circumstances to explain the big change from the 2.5% level reported for the December quarter of 2024. There were several devastating hurricanes on the East Coast early in the March quarter; the wildfires in California around the northern region of Los Angeles were significantly larger and far more impactful than normally experienced. Finally, there is reasonable evidence that imports boomed in the March quarter to get in ahead of the tariffs that were scheduled to start on April 2nd. The way GDP is calculated, imports detract from growth unless they are offset by inventories or investment in the same period. We expect this negative to be a one-off result, but we still expect growth to be lower in 2025 than 2024. Whether there is a recession, a slight recession or low growth is too hard to predict at this point in time given the fluidity of Trump’s policy changes. The latest Fed forecast is for trend GDP growth of 1.7% in 2025.

Europe

The European Central Bank (ECB) cut its reserve interest rate by 0.25% points to 2.4%. UK inflation dropped to 2.6% from 2.8%.

Rest of the World

Egypt cut its official interest rate by 2.25% points to 25.5% while Turkey hiked its rate by 3.5% points to 46% to defend the value of its currency. Japan’s inflation climbed to 3.6% for the headline rate and 3.2% for the core rate which strips out volatile items. Japan is still on course to raise its interest rate from its current 0.5% to end the year at 1.0%. After decades of weak or negative inflation, a reading of 3.6% is not yet a problem for them. The Reserve Bank of India cut its rate by 0.25% points to 6.0%.

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What is the 50/30/20 Rule?

The 50/30/20 rule separates your income after-tax into three broad categories, allowing for budgeting made easy and more organised: 

1. 50% Needs – All essential expenses that are a necessity for your basic living and well-being. 
2. 30% Wants – Non-essential spending that adds value to your life. T 
3. 20% Savings and Debt Repayment – Money that is put toward savings for your future and paying off any current debts. 

Why does the 50/30/20 rule work? 

This method is popular because it’s simple, flexible, and practical. There’s no need to track every individual expense—just allocate your income to these three main categories. It reduces financial stress by allowing you to enjoy life’s pleasures while still building a financial safety net. Plus, it’s adaptable; if you want to focus more on saving or paying off debt, you can adjust the percentages to suit your priorities.

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Step 1: Calculate your income after tax 

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In this month’s update, we provide a snapshot of economic occurrences both nationally and from around the globe.

Key points:

• Trump policy changes continue to drive instability and uncertainty
• Trump’s global tariff policy has the potential to bring on economy sapping trade wars
• The US Federal Reserve keeps interest rates on hold as it awaits the outcome of tariffs on the economy
• Markets reflecting concerns that US tariffs could result in slower growth and consumption

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture

It is nigh impossible to keep up with Trump’s claims and executive orders. Even if we compiled a detailed list, Trump changes his direction – sometimes within 24 hours – and judges have thrown out many of his attempts to change policy. Trump has already signed more than double the number of executive orders he did in his first term as president (Trump 1.0) during the first 100 days!

Trump’s strong supporter, and unelected official leading the Department of Government Efficiency (DOGE), Elon Musk, seems to be accountable only to Trump. He appears to try and close departments without reasoning, and he too gets some of his policies overturned by judges when his actions are challenged through the courts.

There has been a very strong pushback against Musk both within and outside the US. The share price of his flagship company, Tesla, has fallen from over $400 to nearly $250 since Trumps inauguration on 20 January. Sales of Tesla cars have fallen by 30% to 40% in a number of countries, including the US, and by a reported 70% in Germany. To make matters worse Tesla was forced to recall nearly every cyber truck to fix a defect. And there are reports of the vandalising of Tesla vehicles in the street and in car dealerships as a protest. With the apparent chaotic approach of this Trump administration there are very few parallels with that of the former Biden presidency.

Here in Australia, we have had a Federal Budget and Prime Minister Albanese called an election for May 3rd. The importance of this has been overwhelmed by events in the US this week.

We are uniquely in the position of being able to count on Dr Janet Yellen’s expertise. We recently heard her speak on this topic to a closed room. She spent a five-year term as Governor of the US Federal Reserve – the equivalent of the Governor of the Reserve Bank of Australia (RBA) – and a four-year term as Secretary to the US Treasury. She held several other public offices, including leading the White House Council of Economic Advisers – and she has been a long-serving Professor of Economics at the prestigious University of California – Berkeley (since 1980).

There is no one more qualified to speak on these issues from both an academic and a public office perspective.

One of Trump’s main stated reasons for introducing tariffs is to redress the US trade deficit. Yellen says they won’t; exchange rates adjust to accommodate the tariffs. Historical evidence supports this view.

Trump seems to talk in terms of import tariffs being paid by the exporting country. Yellen says the US consumer will bear the brunt and consume less as a result. We agree. Even Trump urged current Fed Chair, Powell, to cut rates now to ease the burden on the consumer.

Yellen thinks tariffs might only cause a blip in inflation unless they seep into the formation of inflation expectations. The latest University of Michigan estimate of long-term inflation expectations is 4.1% which is the highest since 1993!

Some countries have already responded with new retaliatory tariffs for US exports. This tariff war could end badly. But Trump has often said – and we have written in past Updates – that Trump wants to use tariffs as a bargaining chip to get his way on other things – such as concessions on the location of industry, curbing drug importation and immigration. He said at the end of March – just before his April 2nd reciprocal tariffs are due to kick in – ‘there’s some flexibility on reciprocal tariffs’.

We, like Fed Chair Powell, think it is wise to wait for policies to be firmed up before we finalise our opinions. But the US consumer is confused (and why wouldn’t they be?). Both the well-regarded University of Michigan and Conference Board consumer confidence indexes have plummeted in the last three months.

On top of falling confidence, retail sales in the US are weakening yet, unlike in Australia, wage inflation is outpacing price inflation, so people are getting better off but not spending! The danger of stagflation is mounting as there are some signs of inflation rising a fraction – whether it be from tariffs or not.

At the time of writing, Trump has imposed or increased tariffs on Canada, Mexico and China. He has imposed tariffs on all aluminium and steel imported into the US. At the end of March, he imposed a 25% tariff on all (finished) autos but, importantly not on auto components.

Had tariffs been imposed on car parts, the US auto export industry would have been hurt. A significant proportion of the components of autos built in the US are imported. And, according to Yellen, autos cross the Mexico border six to eight times as autos pass through the production process. Will foreign auto makers like BMW start to export autos as components with final assembly in the US? We don’t know but quite likely the world might respond to Trump’s tariffs.

One point Yellen stressed was that all these new trade policies could be reversed in less than four years when a new president is elected. At the moment, US presidents can only serve two four-year terms in office. However, there is ongoing speculation that Trump will try to challenge this rule.

While all these political disruptions were taking place, some hard macroeconomic data were posted. Since data are published in hindsight and with a lag, there has not yet been much opportunity for the data to reflect Trump’s economic impact.

US inflation data has been ‘sticky’ in the sense that inflation is only slowly returning to the Fed’s 2% target. We have argued for some time, most of this stickiness is a statistical artifact created by the way in which shelter (or rent) inflation is calculated. The problem has been acknowledged by the Fed but they have not acted to correct the situation.

Our calculations based on official US data reveal that Consumer Price Index (CPI) inflation less shelter inflation has already returned to the 2% target. Moreover, there are sound economic reasons to believe further rate cuts could flow through to falls in mortgage rates and make room for landlords to cut rents. However, in the last couple of months there has been some signs of possible increases in CPI inflation.

US jobs data have continued to be reasonably strong both in terms of the number of jobs created and in the unemployment rate. The current unemployment rate is 4.1%, up from 4.0%, but low by historical standards. Of course, the nature of work has been evolving in recent times and it is not clear how appropriate it is to compare current unemployment rates with those of 5 to 10 years, or more, ago.

The US Fed is comprised of 12 regional Federal Reserve Banks. One such bank is the Atlanta Fed which provides updates on economic statistics before the official data are released. After strong GDP growth data in 2024, the Atlanta Fed came up with an early estimate of March quarter 2025 growth of 2.3% which was reasonably similar to the official 2024 growth. However, subsequent updates have turned sharply negative. The latest estimate is -1.5% which, if confirmed at the end of April, when the official data are released, could cause the Fed to quickly change tac with monetary policy.

The current year started with major hurricanes on the east coast of the US and an unusually destructive wildfire in California. They could have impacted the March quarter 2025 data. Furthermore, the Atlanta Fed’s early estimates often show some instability over the course of data collection and updating.

Until recently, most commentators were siding with the notion of a soft landing in the US. That is, the Fed was binging inflation down to target without causing a recession. In late March, the calls for a recession increased markedly under the barrage of Trump’s executive orders.

At the latest Fed meeting on March 19th, the Fed kept interest rates on hold. Fed Chair, Jerome Powell, argued that it was in a good position to act appropriately as new data are posted. The Fed’s ‘dot plots’ showed the individual views of members of the committee on where interest rates might be heading.

The latest dot-plot has two more interest rate cuts pencilled in for the rest of 2025. Market pricing gives a reasonable chance of two or three more cuts this year.

Importantly, Powell conducted himself with calm and self-assuredness under questions from the media after the recent interest rate decision. He is not a man who fears Trump. When asked whether his job was in jeopardy, Powell calmly replied, ‘I answered that question in previous meetings. Nothing has changed’. The president has no power to dismiss the Fed chair and Powell is not a man to be bullied.

The Australian Federal Budget, delivered by Treasurer Jim Chalmers, on March 25th was ‘election-friendly’ but it didn’t announce any big policy changes. After seven successive quarters of negative per capita growth, the latest quarter’s growth was deemed to have been positive to the tune of +0.1%. That rate is very close to zero!

Australia faces a cost-of-living crisis far more than that in the US. Australian wages, after adjusting for price inflation, are over 6% below what they were at the start of 2020. Even if these so-called ‘real wages’ caught up with that 2020 level, there would still be five years of ‘lost’ wages to regain before Australia could get back to its previous position.

Chalmers did deliver some improvements in the budget: Tax, healthcare, childcare and other social conditions. Albanese announced on March 28th that there will be a general election on May 3rd. Let’s hope both parties come up with a more comprehensive plan for Australia’s future by then.

Immigration has been central to Australia’s growth and prosperity. But immigration flows must be co-ordinated to match the needs in the workforce and the supply of suitable housing. Probably because of the pandemic, immigration and housing got out of kilter causing big increases in home prices and rents. Energy prices have also become unsustainable, but for other reasons.

The government did introduce a stop-gap measure by way of a flat subsidy for electricity, but this subsidy will end this year. The way the Australian Bureau of Statistics (ABS) has calculated CPI inflation has artificially brought headline CPI inflation to within the RBA’s target band of 2% to 3%. When the subsidy ends, CPI inflation will most likely jump well above the target band. A long-run solution is needed.

Some of Australia’s macroeconomic data looks quite reasonable. The latest labour force survey indicated the unemployment rate was steady at 4.1% but 52,800 jobs were lost in February. We are not alarmed like some over the job losses because there was an unusually large jump up in the prior two months. ABS data can be volatile.

The unemployment rate might be a bit flattering for those comparing it with rates in years past. Reportedly, the NDIS has contributed a significant number of jobs – some from people previously doing similar work without pay for family and friends. We are not arguing the scheme is not worthwhile, but it should change the way economists view labour market data. These jobs are funded by the taxpayer and not market forces. They are essentially a form of fiscal stimulus.
As expected, the RBA did not change our official cash interest rate at its April 1st meeting. A cut at the following meeting – after the election – is a possibility as are a couple more later in the year.

Even with this optimistic view of monetary policy, we will end 2025 with an interest rate above the so-called neutral rate meaning that monetary policy will still be restrictive.
Any relief to mortgage holders would be most welcome. The 6% fall in real wages we wrote about would still be a major issue but households would have a greater disposable income after mortgage payments fall. Renters too might gain from rate cuts as landlords may pass on the cost savings to tenants.

Elsewhere, the Banks of China and Japan kept their interest rates on hold. Both the ECB and the Bank of Canada cut their respective interest rates by 0.25% points to 2.5% and 2.75%. It was Canada’s 7th successive cut. By comparison, our official cash interest rate stands at 4.1% which is well above the neutral rate of 2.5% to 3%.

China’s Purchasing Manager’s Index (PMI) climbed back above 50 to 50.2 from 49.1 when 49.9 had been expected. Its retail sales beat expectations with a growth of 4.0% but industrial production was just under expectations at 5.9%. China’s trade data disappointed, possibly due to the tariff war. We expect China to add further stimulus as needed.

It is a difficult time to give strong guidance for investors. We do think Trump’s blustering style has led many to fear conditions far worse than may eventually transpire. Those who look at recent stock market falls as indicative of bad times might be over-reacting. So far, the US and Australia’s main markets have suffered no more than a 10% correction and that follows two successive years of gains above 20% for the S&P 500. Corrections are the norm and not the exception in stock market behaviour. It is too soon to run for cover.

By next month we should have a much better view of what is happening with Trump’s policy agenda. We should also know by then what the respective main election promises are for Australia.

Asset Classes

Australian Equities

The ASX 200 fell sharply (-4.0%) again over March with only one sector, Materials, registering a gain (+1.5%) while nine sectors recorded losses and Utilities was flat.

The index finished March down -8.3% since the recent all-time high of 8,556. During this sell-off – which is about the same as that on the S&P 500 – the broker-based forecasts of the ASX 200 component-companies’ earnings forecasts remained strong and forecast capital gains above the historical average over the next 12 months.

International Equities

Except for the Shanghai Composite and the Emerging Markets indexes, all the six major international indexes we follow were well down.

Unsurprisingly, the S&P 500 was the worst, affected by news of tariffs with a loss of -5.8%; Emerging Markets gained +1.7%. The Shanghai Composite also posted a gain but only +0.4%. The Nikkei and DAX were down with losses of -4.1% and -1.7%. The London FTSE index was down -2.6%.

Bonds and Interest Rates

The ECB and the Bank of Canada have been the most active of the central banks we follow in cutting interest rates in this cycle. The RBA has been the least active in cutting rates.

Market pricing suggests that there will be two or three more interest rate cuts this year by the Fed in bringing the Fed interest rate down to a range of 3.5% to 3.75% or 3.75% to 4.0%. Market pricing also suggests two or three cuts in the RBA official cash rate to 3.6% or 3.85%.

It is important to note that most mortgagees in the US hold 30-year fixed rate mortgages and so many locked in very low rates during the pandemic. In Australia, most mortgagees have variable rate loans or a mix of variable and fixed-rate loans for a period of only 1 – 3 years. Therefore, Australian homeowners were hit much harder than their US counterparts when rates were on the hiking cycle. It is fallacious to state that the RBA should be in less of a rush to cut rates because they did not take rates to the same level as the US Fed.

The Fed left interest rates on hold in March but there is an 14% chance of a cut priced in at the next meeting on May 7th but a 76% chance of one or two cuts by June 18th. The RBA has a 75% chance of an RBA interest rate cut by May. There is a 91% chance of three interest rate cuts by the RBA during the rest of the year.

Other Assets

Brent Crude oil (+2.1%) and West Texas Intermediate Crude oil (WTI) (+2.3%) prices were up in March.

The price of gold was up +9.6% in March finishing the month at $US3,125

The price of copper (+4.9%) was up sharply again but iron ore prices (-1.6%) were down. However, the price of iron ore held above $US100 / tonne

The VIX ‘fear’ index is still elevated at 22.3 but down from its intra-month high of 27.9.

The Australian dollar (AUD) traded in a wide range ($US0.6191 to $US0.6375) over March but finished up (+0.5%).

Regional Review

Australia

Australia will hold its general election on May 3rd. Polls suggest the election may be close between the two major parties but the prospects for the Greens, Teals and Independents is much harder to judge. Rather than comment on recent press releases and speeches, we will reserve our opinion until we have seen the full set of election promises.

The jobs data posted in March disappointed many commentators because 52,800 jobs were lost. However, we note that there were unusually large increases in the two previous months of 59,800 and 30,500. After allowing for the usual noise in these data and possible inaccuracies in seasonal adjustment procedures we think it is far too early to suggest an imminent problem in the labour market.

When we look over the last 12 months, we see that total employment grew by 1.9%, full-time jobs by 2.0% and part-time jobs by 1.6%. This is the first time in a year or two that the three measures were in alignment. Recently, part-time employment was growing by over an unsustainably large 6%.

The unemployment rate was steady at 4.1% but we have noted that a big increase in taxpayer funded NDIS jobs makes it harder to understand the new dynamics of the labour market.

GDP growth for 2024, was released in March. Growth was 0.6% for the quarter and 1.3% for the year. Per capita growth for the December quarter 2024 came in at 0.1% after seven consecutive negative readings. The household savings ratio improved to 3.8% from 3.6% in the previous quarter. We regard 5% to 6% as a healthy savings ratio based on historical data. This ratio sank to 1.5% in 2023. Households need to put aside savings for emergencies, durable goods, holidays and retirement. The Superannuation Guarantee Levy is a part of this definition of household savings.

China

Late last year China seemed to need a stimulus package, and it provided one. Most economic data – except trade – are getting back to normal. China has set 5% as its goal for growth this year.

Trump imposed a further 10% tariff on imports from China making 20% in total. In addition, the 25% tariff on finished cars and the steel and aluminium tariffs are headwinds facing China. It has been reported that China’s electric vehicles (EV) are providing stiff competition for US EV autos, particularly Musk’s Tesla offerings.

US

The nonfarm payrolls (jobs) data came under expectations at 151,000 new jobs as 170,000 had been expected. The unemployment rate climbed one notch to 4.1% from 4.0% and wage growth at 4.0%, undershot the expected 4.2%. With CPI inflation well below 4% – even with the shelter inflation problems – means that the US worker is experiencing improved compensation month by month.

Retail sales, adjusted for CPI inflation, came in at 0.0% for the month and 0.3% for the year. These are not strong numbers, but we have noted that consumers have adopted a more cautious approach to spending. They have the money to spend but they are (sensibly) applying caution in these troubling times. Sales could spring back quickly when consumers feel more confident.

Europe

Trump’s reaction to North Atlantic Treaty Organisation (NATO), and the Ukraine in particular, has acted to galvanise Europe in providing a more concerted and unified response to conflict and geopolitical tension in the region. Germany just passed a massive bill to issue over one trillion dollars’ worth of debt to build a military capability to make up for a possible US withdrawal or disengagement from NATO. Europe looks to be working hard to replace any gap left by Trump’s apparent receding commitment to NATO. Of course, in four years’ time, the old normal could be restored.

EU inflation fell to 2.4% and the European Central Bank (ECB) cut its rate from 2.75% to 2.5%.

Rest of the World

Such is the extent of Trump-created chaos that so much of the world is now caught up in the ensuing economic maelstrom.

Mexico sent a number of drug-cartel ‘suspects’ to the US for trial but that didn’t seem to overly appease Trump’s appetite for blaming Mexico for the US’s drug problems.

Mark Carney, a celebrated former governor of both the Bank of England and the Bank of Canada was sworn in as the Prime Minister of Canada. He has the credentials and the apparent resolve to take on Trump over the tariffs imposed on Canada.

The cease fire between Israel and Hamas in Gaza has again run into difficulties.

Japan recorded stronger than expected economic growth in 2024. A rate of 0.6% for the December 2024 quarter was much stronger than the 0.4% which had been expected. That’s good for the global economy.

The Ukraine-Russia ceasefire seems to exist in concept only without any real headway being made save for a supposed naval truce in the Black Sea.

New Zealand recorded growth of 0.7% in 2024 – a bounce back from recession.