Economic news is grabbing the headlines

Australia’s Derryn Hinch was once dubbed the human headline. It is fair to say that the US president has taken the mantle to a whole new level. While the huff and puff of trade wars are far from resolved, we focus on global financial activity. Staying informed and balancing risk vs. reward is the key over the coming months.

We’ll discuss the US decision-making process later in this post. For now, we’ll analyse the latest data and give you a breakdown of what has happened.

The big news on the home front was The Reserve Bank of Australia (RBA) decision to cut interest rates for the first time since November 2020, trimming the cash rate by 0.25% to 4.1%. While this won’t immediately translate into lower mortgage rates, it signals that the RBA sees enough economic softness to start easing policy. For investors, this could mean a more supportive environment for property and equities over time.

Over in the US, the economy is showing a mix of good and not-so-good news. The ISM Manufacturing PMI climbed above 50 for the first time in months (now at 50.9), which means the manufacturing sector is back in expansion mode. However, on the jobs front, things are cooling slightly. The latest JOLTs Job Openings report shows job vacancies have dropped below expectations. The ISM Services PMI (which measures the all-important services sector) has also slowed down. If the US economy continues to lose steam, we might see further rate cuts from the US Federal Reserve, which could weaken the US dollar—potentially strengthening the Aussie dollar in return.

Things are looking a bit brighter in Germany, where the ZEW Economic Sentiment Index climbed to 26, well above market expectations. This suggests that Europe’s largest economy could be on a more positive trajectory, which is good news for global trade and investment sentiment. Meanwhile, British retail sales surprised on the upside, jumping 1.7% in January—the biggest rise since August. This suggests UK consumers are still spending, which could stabilise European markets.

China’s Caixin Manufacturing PMI peaked at 50.8, indicating a modest expansion. While this is positive, some of the strength could be due to businesses rushing to fill orders ahead of potential tariff changes. Any signs of stability in China are crucial for Australia, as it remains our largest trading partner. A stronger Chinese manufacturing sector generally means higher demand for Aussie commodities like iron ore and coal.

The US tariffs: What it means for global markets & Australia

The US is back in the tariff game and making waves across global financial markets. With fresh tariffs targeting key industries—particularly in China, Europe, and Mexico—the world is watching closely to see how this plays out. While the US says these measures protect domestic industries, other countries aren’t taking it lightly. China and the EU have already signalled potential retaliation, setting the stage for another round of trade tensions.

When the US imposes tariffs, it raises costs for importers, which can lead to:

• Higher inflation in the US, as businesses pass on costs to consumers.
• Trade disruptions occur as countries look for alternative suppliers or slap retaliatory tariffs on US goods.
• Volatility in global markets, with investors reacting to the uncertainty.

Last time tariffs were a big headline (think back to the US-China trade war in 2018-2019), we saw stock market swings, supply chain shifts, and businesses scrambling to adjust. Expect more of the same if tensions escalate.

Staying informed is key to smart investing. The global economy is in a delicate balancing act, with shifting economic trends, geopolitical tensions, and central bank policies shaping the investment landscape. By focusing critically on global financial movements, we ensure our investors are well-positioned to navigate risks and seize emerging opportunities—both at home and abroad.

Base case: 78% Probability

Global growth remains cautious in the short term, with mixed economic data. While the US has led in recent years, signs of improvement outside the US are emerging. Markets outside the US have begun outperforming, which may persist if economic surprises favour non-US economies.

Inflation is expected to stay benign in early 2025, though above decade-long averages. This supports credit markets and equities. However, new US tariffs introduce risks, with potential headwinds for global growth and equity prices. While widespread, long-term tariffs aren’t our base case, their severity and duration depend on diplomatic negotiations, increasing short-term market volatility.

Central banks, particularly the US Federal Reserve, face tough choices: ease financial conditions and risk local currency weakness or continue tightening and risk economic slowdown. Their decisions will heavily influence markets. Global liquidity has improved, offering some reassurance, but US tariff-driven dollar strength could strain liquidity. Despite this, rising liquidity injections should support financial markets in the medium term, even as volatility increases.

We maintain a positive stance on growth assets, though near-term risk levels may need adjusting. If employment weakens further or central banks pull back liquidity, we may take a more defensive position.

Worst case: 11% Probability

Consumer demand declines more than expected, with US growth faltering and no global recovery. Inflation rebounds, putting rate cuts under pressure. Severe, prolonged US tariffs spark retaliation, further dampening global trade and discretionary spending.

Banking stress from credit market volatility could tighten lending, affecting strong employment conditions. Geopolitical tensions and supply chain disruptions could increase energy prices, exacerbating inflation and forcing central banks to tighten further. Rising wages and lodging costs would pressure company profits as input and debt servicing costs rise.

This scenario would mean tightened financial conditions amid persistent inflation, with central banks withdrawing support as economies weaken. A worsening China property crisis could create further downside risks, impacting Australian exports. Geopolitical escalations or major credit defaults could trigger rapid liquidation of risk assets.

In response, we would adopt a defensive stance, increasing cash holdings and reallocating them toward defensive sectors like healthcare, consumer staples, and utilities.

Best case – 11% Probability

Stronger-than-expected growth in developed markets and easing inflation and supply chain improvements create a pro-growth investment environment. Contained global conflicts and short-lived trade tariffs further support sentiment.

Lower input costs boost corporate earnings and margins. A Trump presidency could reinvigorate business and consumer confidence, spurring spending and credit demand. An Australian election may drive fiscal stimulus, further supporting economic activity.

Asset prices could surge with central banks providing liquidity and fiscal policies supporting growth. In this scenario, we would increase exposure to growth assets and shift toward cyclical sectors that benefit from economic expansion.

Our analysis points to a cautious short-term global outlook, with US economic dominance beginning to wane and stronger growth emerging in other regions. Inflation remains contained but above historical averages, supporting equities and credit markets. However, policy uncertainty, tariff risks, and volatile market conditions require a steady hand.

We take a disciplined, proactive approach to these developments. By carefully balancing risk and opportunity, we continue to focus on growth assets while managing potential volatility.

For those concerned about downside risks, we are prepared. Should global demand weaken, inflation surge, or geopolitical tensions escalate, we will shift tactically to defensive positions, prioritising capital preservation in sectors like healthcare, utilities, and consumer staples. On the flip side, if economic momentum accelerates, we are ready to tilt toward cyclical growth sectors, ensuring investors benefit from the upswing.