Bassanese Bites: A 0.35% rate cut? – February 17 2025
Global markets
Global equities ended the week stronger despite a higher-than-expected US inflation report and also thanks to a delay in planned US tariffs and hopes around proposed Russia-Ukraine peace talks.
The underlying resilience of global equities was on display last week as markets shrugged off a higher-than-expected US inflation report.
The US core consumer price index (CPI) rose 0.4% in January – a touch more than the 0.3% expected. This pushed up annual core inflation to 3.3% from 3.1%.
That said, there’s a suspicion the result could have been affected by seasonal distortion. In recent years, more businesses seem to push through their annual price increases in January than the seasonal adjustment process allows for.
Moreover, some of the strength in hotel and car prices could be related to shortages caused by the LA fires. The LA fires are also thought responsible for the weakness in January retail sales reported on Friday.
As regards inflation, certain items in both the CPI and producer price (PPI) reports last week (such as health care, insurance and airline rates) also suggested a fairly benign result for the Fed’s preferred inflation measure, the private consumption expenditure deflator or PCED, when it is released later this month. If the core PCED rose by only 0.3% in January, it would pull down the annual rate from 2.8% to 2.6%, which would be the first decline in several months.
President Trump’s market impact last week was mixed. His announcement of 25% across the board tariff increases on steel and aluminium imports was met with market alarm, though we are still waiting to see the extent of any exemptions (including Australia!). But his announcement that reciprocal tariffs would be delayed until April – following a careful study of trade restrictions imposed by other countries – was met with some market relief. More positive were reports that the US and Russia were planning to discuss a peace deal – though hopefully with Ukraine also!
Last but not least, during Congressional testimony Fed chair Powell reiterated the Fed was in no hurry to cut interest rates again – although still saw the next likely move as down not up.
Global week ahead
There’s little of major note this week, with a smattering of US activity data, minutes for the recent FOMC meeting, and a bunch of Fed speakers. Given we know the US economy is firm and the Fed is biding its time, these events are unlikely to be significant market movers – what matters at present is the inflation outlook and Trump.
Outside of the US, the Reserve Bank of New Zealand is widely expected to cut rates a further 0.5% on Wednesday to 3.75%, due to falling inflation and its weak economy.
