Last week was defined in terms of economic news and helped solidify our position going into 2025. Of note was Germain’s preliminary inflation data. YoY data showed a third consecutive rise of 2.6%. The Euro Area also experienced an increase, coming in at 2.4%, and again, it was the third straight rise in prices as the economic sentiment remained bearish and still does at -0.9%.  It’s alarming as the EU Bank aggressively lowered interest rates to combat this negative sentiment. Price pressure, with a negative outlook, is hard to manage and could be a forerunner for stagflation, where there are no definitive cures. The annual inflation rate in China was announced and edged lower to 0.1%. The MoM was a little improved at 0%, bouncing back from -0.6%  the previous month, indicating some life in the economy. Disinflation persists in the second-largest global economy; however, it can be managed more efficiently than in a stagflationary environment. The PBoC continues to provide stimulus, but gaining traction is not happening. In Australia, last week’s Retail Sales numbers were surprisingly healthy, showing a rise of 0.8%. The rate rise could be seasonal, as in January 2024, we had a similar print. Expect the RBA to remain with the current monetary policy – no change in interest rates. Note that this was the most significant rise since in 12 months. In the US, Factory Orders MoM continued to show weakness, falling by 0.4% which is above forecasts. This is a focus for the Trump administration, with more emphasis below. Non-Farm payrolls are +256,000, well up on the forecast of + 215,000, with the unemployment rate edging down to 4.1%. Data shows that the Fed is unlikely to lower rates for the foreseeable future. 

But first, let’s look at Trump’s tariff policy. Controversy exists over the policy; however, as we hear from Trump first-hand, he wants to make the United States “great” again. His focus is on rejuvenating the manufacturing sector, which has been languishing for years, he believes it is a result of cheaper imports (See below comparison with China). China is way ahead even though her economy is faltering. Hence the focus on tariffs. From what is understood, Trump plans to implement a 25% tariff on all imports from Canada and Mexico, effective January 20, 2025. An additional 10% tariff on Chinese imports is also slated to take effect on the same date, reflecting ongoing trade tensions and national security considerations. The US already has significant tariffs on Chinese consumer goods, starting in 2018, to help level the playing field. These tariffs have been amended occasionally, with the last being a 100% tariff on EVs last September. Further, a proposal to impose a universal baseline tariff on all imports, with rates up to 20%, as part of a broader strategy to protect American industries and reduce trade deficits. Trump has also, threatened 100% tariffs on BRICS countries (Brazil, Russia, India, China, and South Africa) if they pursue initiatives undermining the U.S. dollar's status as the global reserve currency. Interestingly, to put in place these policies, he intends to declare a national economic emergency under the International Economic Emergency Powers Act, which grants him the authority to control imports during such an emergency.

Manufacturing (US (Blue), China (Grey))

(Trading Economics)

In summary, President-elect Trump's tariff policy represents a significant shift towards protectionist trade measures, aiming to bolster U.S. industries but it is raising concerns about broader economic repercussions and international trade relations which is currently be reflected in weak equity markets. 

In Europe, the last round of inflation data suggests inflation pressures and stagflation risks. One of the most significant developments last week came from Germany's preliminary inflation data, which indicated a third consecutive rise in the annual inflation rate, now standing at 2.6% YoY. This upward trend was mirrored across the broader Euro Area, where inflation increased to 2.4% YoY, marking the third straight monthly rise in prices. Despite these rising inflation figures, economic sentiment in the Eurozone remains deeply negative, with the sentiment index sitting at -0.9%. The persistent price pressures, combined with weak sentiment, highlight a challenging situation for policymakers at the European Central Bank (ECB).

The ECB has been aggressively cutting interest rates in an effort to stimulate growth and combat the gloomy economic outlook, but the latest inflation data suggests these measures have not been effective in turning around sentiment or reducing price pressures. The concern now is that the Eurozone may be on the brink of stagflation — a scenario characterized by slow economic growth, high inflation, and rising unemployment. Stagflation presents a complex challenge for central banks, as there are no clear-cut solutions. Traditional monetary policies, such as cutting rates or providing stimulus, often prove ineffective in stagflationary environments. This situation could force the ECB to reconsider its approach in the coming months.

Turning to China, the world’s second-largest economy, the latest inflation report showed a continued disinflationary trend. The annual inflation rate edged lower to 0.1%, signaling minimal price growth. However, MoM inflation improved slightly on a more positive note, bouncing back to 0% from the previous month’s -0.6% decline. While disinflation remains a concern in China, it is a more manageable challenge compared to stagflation. The People’s Bank of China (PBoC) has been actively providing stimulus to boost the economy, but the results have been limited. Economic traction is proving difficult to achieve, particularly as the country grapples with sluggish consumer spending, a cooling property market, and weaker exports.

Despite these challenges, China’s policymakers have more room to maneuver compared to their European counterparts. The government can continue to inject liquidity, adjust fiscal policies, and implement structural reforms to support growth, making the disinflationary environment less concerning than the stagflation risk in Europe. The markets especially some commodity prices are holding up in anticipation of more stimulus. 

In Australia, last week’s Retail Sales data came in stronger than expected, showing a 0.8% rise. This was the most significant monthly increase in the past 12 months and caught many by surprise. It’s worth noting that a similar pattern was observed in January 2024, suggesting the increase could be seasonal rather than indicative of a broader trend. However, the uptick does provide some optimism regarding consumer spending, particularly as the Reserve Bank of Australia (RBA) has maintained a stable interest rate policy to support economic recovery. Given this positive data, it is likely that the RBA will hold rates steady in the near term, taking a wait-and-see approach as it monitors both domestic and global economic developments. The rise in retail sales provides a cushion for the Australian economy, offering some reassurance that consumers remain resilient despite the challenges posed by inflation and rising living costs. It sends a message t the RFBA that rates can remain at current levels. 

Next week, the US earnings season kicks into gear, with major banks including JPMorgan Chase, Wells Fargo, Goldman Sachs, Citigroup set to report their quarterly results. Traders will also closely monitor key inflation data, including the CPI and PPI reports, for insights into price trends and the Federal Reserve's policy direction. Globally, China is set to release a suite of economic indicators, including Q4 GDP growth figures, as well as data on exports, imports, industrial production, and retail sales. In the UK, key reports on inflation, monthly GDP, and retail sales will shed light on the country's economic performance. Meanwhile, in the Euro Area, the European Central Bank will publish the minutes from its most recent monetary policy meeting, while final inflation figures for the bloc are also due.

On the position …, the AUD/USD is looking a little sad. We are still … out with some “ice in the belly.” We remain in short equity positions (ASX … and SP…) which gained some losses last week, with a general weakness on equity markets. Expecting this to may follow on this week.  Wheat, we stay long but are still happy to hold off doing anything for a longer period. Gold and silver traders, we also stay long and are happy to hold.  Crude is responding well to last week’s call, and we expect significant price rises to occur (…). 

Trade Focus:

SP500

Fundamentals:

A bearish outlook for the S&P 500 heading into 2025 stems from several concerning factors. Valuations remain stretched, particularly in the technology sector, with the index trading at a historically high price-to-earnings (P/E) ratio. This overvaluation, driven primarily by a few mega-cap tech stocks, makes the market vulnerable to a correction if these companies miss growth expectations…

Technical Analysis:

A bearish technical analysis view of the S&P 500 highlights several warning signs that could indicate a potential market correction or downtrend in the near term …

Support              …

Resistance         …

Momentum        …