March 2025 quarter economic and market commentary
Financial markets through the March quarter were dominated by assessments of the likely consequences of the economic policy agenda of the Trump Administration.
As the quarter progressed, financial markets seemed to take a more pessimistic view of the likely return implications of that agenda. That pessimism became particularly pronounced in the lead up to President Trump’s “Liberation Day” announcement on April 2nd.
Of particular concern was an emergent fear that the weaponisation of international trade through swingeing tariffs and subsequent retaliation by trading partners would lead to a global trade war and an attendant global recession.
Recession fears emerged against a background of still “sticky” inflation, fears about which were only elevated by the effect of tariffs on inflation and inflation expectations. This led markets to contemplate a “stagflation-lite” scenario where economic activity declined but inflation proved stubborn. Such an environment was thought to limit the ability of the Fed to lower the policy rate which, together with a gargantuan budget deficit, would see at best only limited declines in bond yields. All in all, markets came to a judgement that the headwinds to equity market performance were set to intensify.
In commentary throughout the quarter and into April, the Fed appeared to confirm a reticence to contemplate policy rate reductions given already “sticky” inflation and the potential impact of the Administration’s tariff agenda on inflation and expectations thereof.
The result was a sell-off in US equity markets. Bond yields declined modestly throughout the quarter but reversed a large part of that decline in April.
Those developments took place against growing scepticism regarding the durability of “US exceptionalism” which had seen US equity markets (led by the technology sector) substantially outperform other advanced economies. That reversed in the quarter and into April. That was manifest in a significant depreciation of the USD versus the EUR in the quarter which also gathered strength in April.
Gold exhibited strong price appreciation during the quarter. This reflected a weaker USD but also growing scepticism of the “safe-haven” attributes of US Treasury bonds. The US Administration’s questioning of its traditional defence alliances along with a seeming lessening of diplomatic pressure on Russia elevated geo-political uncertainties which also enhanced the safe-haven assessments of gold. Potential growth in demand for gold at the expense of the USD as part of central bank (particularly Chinese) foreign exchange reserves also may have been a factor.
Locally, inflation data showed that inflation was declining at a rate faster than anticipated by the Reserve Bank of Australia (RBA). That saw the RBA on April 1st announce a decline in the policy rate from 4.35 per cent to 4.10 per cent. Markets are anticipating further cuts from the RBA in 2025.
Despite the prospect of lower policy rates in 2025 the Australian equity market was dragged down by US developments.
Going forward, the key issues for 2025 revolve around how the Trump agenda might evolve. Certainly, should fears of “stagflation-lite” persist that will maintain the current headwinds to US (and global) equity performance in an environment where expectations of “US exceptionalism” are extinguished.
Of course, President Trump is a mercurial personality, and it is difficult to assess how much of the articulated agenda will be enacted.
That all suggests that there will be frequent episodic bouts of volatility where the potential for seismic shifts in sentiment and the prices of financial assets exist.
