Key insights from the week that was.
Starting in Australia, April’s Westpac-MI Consumer Sentiment Survey – which was in the field last week – provided a first-look into households’ reaction to President Trump’s tariff turmoil. Sentiment was only slightly lower over the first half the week, before moving sharply lower after the ‘Liberation Day’ announcements, leaving the headline index down 6% at 90.1. There were significant declines across the sub-indexes tracking ‘family finances vs. a year ago’ (–8.5%), but also the year-ahead outlook for family finances (–6.2%) and the economy (–5.7%). Attitudes toward consumption, which were already precariously placed owing to the elevated cost-of-living, fell victim to this emerging uncertainty, with the ‘time to buy a major household item’ sub-index falling –7.3% to be 34% below its long-run average. Although households were more uncertain about the prospect of interest rate relief, markets have since come to our view and have fully priced in a 25bp rate cut from the RBA in May.
The subsequent rapid deterioration in trade relations between the US and China and 90-day reprieve for other nations makes for a completely different picture, however (see below for further detail). The current tariff structure, should it persist, is not expected to have a significant impact on the Australian economy, principally thanks to China’s ability to stimulate to offset the shock. Though, there is a risk that the extreme volatility of recent weeks may see consumer and business confidence remain on the backfoot for an extended period. Still, if the market volatility recedes, domestic factors are likely to once again become the focus, specifically the health of the labour market, ongoing moderation in inflation, and the prospective recovery in consumer spending.
In the US and globally, the Trump administration’s trade agenda whiplashed markets this week. Following last week’s reciprocal tariff announcement, global bourses opened sharply lower for fear of where US and global growth could end up. Then, after holding to the announced tariffs resolutely, and doubling down on China, President Trump suddenly announced a 90-day reprieve for all non-retaliating countries. Imports from these economies will now only receive a 10% tariff on entry to the US, at least for the time being. The tariffs on Mexico and Canada will remain in place, however; while, at the same time, President Trump doubled down again on China, increasing their reciprocal tariff rate from 104% to 125%. Note this rate is reportedly in addition to the initial 20% tariff, so Chinese imports now face a combined tariff rate of 145% on entry to the US. Negotiations are set to get underway between the US and numerous nations next week. It is not clear what cost President Trump will demand for US tariff relief, but Treasury Secretary Bessent has alluded to a request for other nations to also tariff China. If they do so, then the current bilateral conflict risks becoming a much broader threat to global growth, to the detriment of China but also every other country involved.
The minutes of the FOMC’s March meeting highlight why President Trump may have had this change of heart. Evident in the discussions amongst members is that inflation remains the key consideration for monetary policy decisions. “Several participants noted that their contacts were already reporting increases in costs, possibly in anticipation of rising tariffs, or that their contacts had indicated willingness to pass on to consumers higher input costs that would arise from potential tariff increases.” A couple of members also raised concerns over the ability of the FOMC to assess the persistence of inflation in real time. There was also a specific reference to “many firms… paus[ing] their capital spending plans”, an adverse development for both growth and inflation. These views do not mean the FOMC are myopic in their focus. But simply that, as highlighted by Chair Powell last Friday, inflation is expected to remain further from target than employment, and policy needs to be set accordingly. The “Committee may face difficult tradeoffs if inflation prove[s] to be more persistent while the outlook for growth and employment weaken[s]”.
Coming back to our region, the Reserve Bank of New Zealand cut rates by 25bps to 3.5% at its April meeting, in line with market expectations. The statement noted that the “adaption of global supply chains to increased trade barriers will take longer to work through. It was noted [also] that monetary policy cannot offset the long-term negative effects of higher barriers to international trade”. Looking ahead, we anticipate a further 25bp cut in May and risks are likely to remain skewed to the downside for some time thereafter, requiring careful assessment of the incoming data.
