Josh Gilbert, Market Analyst at eToro, shares his three things to watch in Australia in the coming days.
Tariff tantrum
Last week saw Trump roll out his most aggressive tariffs to date, including a 10% tariff on all nations, and increasing tariffs on all imports from China to 54% from April 9. This rollout was worse than expected, adding further uncertainty to global markets.
Aside from the 10% tariff, Australia avoided severe direct impacts. Australia’s direct trade exposure to the US is minimal, but this week may signal the beginning of the knock-on effects via Asian nations that have seen hefty tariffs, particularly China. These ripple effects could burden our export-driven economy, particularly if global demand decreases and commodity prices fall. For a small, open economy like Australia, any slowdown in global growth could significantly affect local conditions.
Apparel brands such as Nike and Lululemon are right in the firing line of Trump’s hefty tariffs on Asian nations, with Vietnamese goods being subjected to a tariff of 46%, and other nations such as Indonesia and Cambodia facing levies between 30% and 50%. Around 50% of Nike’s footwear is produced in Vietnam, while Cambodia and Vietnam are both key manufacturing locations for Lululemon, alongside other major brands like Under Armour and Patagonia. Although Trump intends for these tariffs to push apparel manufacturing back onto US shores, these tariffs will undoubtedly cause price hikes that are passed on to consumers over the coming months.
Following Trump’s ‘Liberation Day’ announcement, markets have fallen significantly. The worry now is the slowdown in global growth, lingering inflation risks, and escalating trade tensions. As markets continue to look uncertain, with US futures in reverse, the best investors can hope for is that countries play ball and this doesn’t spiral into a full-blown trade war. Any easing of tensions, rollbacks, or trade deals may lift the cloud of uncertainty and spark relief rallies.
Investors should prepare for ongoing volatility this week. This may feel like the end of the world, but it’s not. Markets have been here before. Throughout Trump’s first term, trade policy became a key driver of market volatility, causing several significant pullbacks. These were all short-lived, and markets ultimately bounced back. Although past performance is not a guarantee of future results, it’s a great reminder not to be short-sighted when investing. If you’re a long-term investor, you may find opportunities to own quality companies at far more attractive prices, but it’s about being astute.
US inflation
Although this week’s CPI reading likely isn’t going to give us the full picture of Trump’s tariffs, we might get some early signs as to what to expect. Last month, the annual inflation rate in the US eased to 2.8% from 3% in January, below forecasts of 2.9%. Fed Chair Jerome Powell noted February and January’s ‘very strong’ goods inflation readings were ‘very unexpected.’ Powell’s view on this was that it could be buying ahead of tariffs, or raising prices ahead of tariffs, something that may be even more apparent in this week’s data. Last week, he also went on to say that tariffs were larger than expected and that he expects higher inflation and slower growth moving forward.
Now, the challenge for Jerome Powell and the Fed is whether to bring interest rates down to support the economy or keep rates high to contain inflation. If we see this current situation move to a prolonged trade war, the risk of inflation, particularly through CPI, means the tariff effects may be less transitional than Powell initially alluded to, saying on Friday that effects could be more persistent. Since last week, rate cut expectations have changed dramatically, with the market now pricing in 5 cuts from here in 2025. That feels a little optimistic and may well change again depending on this week’s data. This week, expectations are for core inflation to come in at 3.1% year over year, and headline inflation to come in at 2.6% year over year.
Consumer confidence
The RBA’s rate cut in February has had a notable impact on consumer confidence. Sentiment is improving, lifting to a three-year high last month thanks to the slowdown in inflation. With better-than-expected data in March that saw a 4% rise in consumer confidence to 95.90 points, we’re likely to see another lift this month.
Consumer confidence is slowly making its way towards the neutral level of 100, which would indicate that there is a balanced outlook on the economy. Current sentiment is 4% off this milestone, and would show that an equal number of consumers are optimistic versus pessimistic for the first time since February 2022.
Although global tariff turmoil may dampen some sentiment, if inflation continues to ease locally and the board cuts rates again in May (as the market is now fully pricing in), then we will continue to see consumer confidence moving higher and potentially reaching the neutral level in the coming months.