Global equities last week built on the previous week’s gains, rising 1.7% in local currency terms. However, UK investors didn’t enjoy the fruits of these increases with markets down 0.3% in sterling terms. This was because the pound rose 2.3% against a weaker dollar to $1.25, regaining some of its decline over recent months and leaving it little changed year-to-date.
President Trump as expected dominated the headlines and was the major focus for the markets with the President kicking off his term in office with a blizzard of policy announcements and executive orders.
His pronouncements ranged far and wide. But the main take-away for equities at least was that his talk on tariffs was more benign than expected. He did threaten to impose a 25% tariff on imports from Mexico and Canada as soon as 1 February. But importantly, his tone on China was not that hawkish with Trump saying he would rather not impose tariffs.
He also stated that there was no immediate plan to impose the universal tariff he had previously mentioned. None of this means significant tariff hikes are not still quite probable – just that their implementation looks likely to be delayed, potentially giving more time for negotiations.
Various members of his cabinet have been tasked to report back with recommendations on trade policy, including on the US-Mexico-Canada trade agreement, by 1 April. Trump’s plans to put America first extend not only to tariffs but taxes with talk of cutting the tax rate for domestic producers to 15% from 21% but also raising taxes on foreign companies.
Rather than China, Panama and Denmark bore the brunt of Trump’s wrath with the Panama Canal and Greenland apparently now high up his agenda. Of more consequence for the markets, the Federal Reserve was also put firmly in its place with Trump saying he knew interest rates better than the Fed and a call for rates to come down a lot.
The dollar duly took heed of the less aggressive talk on tariffs and calls for lower rates and fell 1.8% over the week. But bonds took rather less notice, with Treasury yields little changed and the market not changing its view that Fed rate cuts over the coming year are likely to be limited to 0.25-0.5%.
Trump also waded in on energy policy, demanding lower oil prices although the latter would make it rather harder to bring about his goal of boosting domestic production. The Brent oil price fell back below $80, reversing a good part of the rise seen in recent weeks.
Finally, Trump took steps to implement his pledge to reverse the green agenda of the Biden Administration. He ordered the US to withdraw from the Paris Climate Agreement and suspended funding for $300bn of infrastructure spending.
The latest macro data were far from the centre of attention but are still worth a mention. Business confidence unexpectedly rose a bit in both the UK and Eurozone in January. US confidence, by contrast, posted an unexpected decline although remain considerably more buoyant than across the pond.
This bit of good news in the UK, however, was tempered by the report of job cuts in November and December, alongside a pick-up in wage growth to 5.6% from 5.2%. While this reacceleration may reinforce the BOE’s caution in how fast it eases policy, it should not prevent it from lowering rates another 0.25% to 4.5% at its next meeting on 6 February.
Meanwhile on Friday, the Bank of Japan raised rates by 0.25% to 0.5%. This continued the gradual move started early last year to restore rates to more normal levels on the back of increased confidence in a sustained pick-up in inflation. Rates look set to be raised further to 1% later this year.
This coming week, the Fed meeting on Wednesday will be centre stage. That said, no change in rates is expected and the Fed messaging over future cuts will also probably be little changed with Trump’s tariff plans still far from clear. Thursday sees the release of fourth quarter growth data for the US and Eurozone and Friday the December numbers for the Fed’s favourite inflation measure. Last but far from least, the US earnings season will continue with highlights being the reports from Apple, Meta and Microsoft.
Rupert Thompson – Chief Economist