Since my last post (10 Dec 2024, “A Straw on a Camel’s Back Away from a Bust”), events have unfolded rapidly. While Trump’s escalating tariff war could prove to be the tipping point, only time will reveal its full impact—both in the short and long term. So, what are the possible repercussions?

Trump’s latest tariff measures, including a 25% duty on steel and aluminium imports, could have significant consequences for Australia’s economy and trade relations with the U.S. Since Australia was not granted an exemption, key industries such as mining and metal production may face reduced demand from American buyers, impacting export revenues.  There are a number of articles regarding this, but articles by Victoria Ticha and  Dr Medo Pournader give a broad rundown.

Direct Economic Impacts:

• Export Challenges: The newly imposed 25% tariffs on steel and aluminium will likely reduce U.S. demand for Australian exports, cutting into national revenues. There is also a risk that tariffs could expand to include beef and lamb, further amplifying economic strain.

• Mining Sector Struggles: The U.S. is a key market for Australian raw materials, including iron ore, bauxite, and alumina. A decline in demand could weigh heavily on mining companies and their supply chains.

• Stock Market Volatility: The ASX200 has already taken a hit, and with domestic economic headwinds—such as sluggish wage growth and record small-business defaults—the broader economy faces mounting risks.

Broader Economic Concerns:

• Escalating Global Trade Tensions: The tariffs could intensify trade disputes, prompting retaliatory measures from other nations and threatening global economic stability.

• Rising Costs & Inflation: Higher import costs may lead to inflation, eroding consumer purchasing power and dampening economic activity.

• Slower Economic Growth: Disruptions to trade and supply chains could weigh on Australia's GDP, particularly impacting industries reliant on global markets.

While Trump’s actions are not solely to blame for Australia’s economic weakness, the global downturn exacerbated by the trade war suggests further downside risk in the near term.

Another factor, the Australian yield curve has been closely watched as it reflects economic conditions, monetary policy expectations, and investor sentiment. See chart

Currently, parts of the curve remain inverted, signalling concerns over slowing growth and potential rate cuts. The short end remains elevated due to the RBA’s tight policy stance, while the long end has shown signs of steepening, reflecting inflation persistence and fiscal pressures.

Key drivers include:

• RBA Policy & Inflation: Markets anticipate rate cuts in late 2024 or early 2025 as inflation moderates.

• Economic Growth Concerns: Weak consumer spending, slowing employment, and housing market pressures point to a softening economy.

• Global Bond Market Influence: U.S. Treasury movements impact Australian yields, with Fed policy shifts driving global sentiment.

• Government Debt & Fiscal Policy: Increased bond issuance may push long-term yields higher, influencing curve steepening.

For investors, an inverted curve suggests caution in equities, favouring defensive sectors. Fixed income opportunities may arise as rate cuts materialize. A flatter curve could also impact the AUD, especially if rate differentials widen globally.

Portfolio Positioning:

Our Macro Portfolio remains overweight in cash and will continue to do so while market conditions remain weak. We are evaluating opportunities in resources and technology, as these sectors are likely to outperform industrials and traditional banking in the next phase of the cycle. Within financials, we see investment banking as better positioned for recovery, while remaining cautious on traditional banks, which remain overvalued with limited medium-term growth prospects.

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