Devon Funds Morning Note - 14 April 2025

Monday 14th April 2025

Blinking first

Global

The US indices were back on the up again on Friday in what was a volatile but positive week for the benchmarks. The S&P500 rallied 1.8% on Friday and was up 5.7% for the week, its best since November 2023. The Nasdaq jumped 2.1% on Friday and the 7.3% weekly gain was the biggest advance since November 2022. The Dow gained 1.6% on Friday and rose nearly 5% over the week. While China raised its tariffs on US imports into the country to 125%, optimism is growing that a deal between the two super powers is at hand. Late on Friday the US extended another “olive branch,” exempting smartphones, computers, computer processors, memory chips, and other electronics from reciprocal tariffs. The US appears to have blinked first in the game of “tariff chicken run.”

We had the 90-day pause on reciprocal tariffs last week, which saw markets surge, and there has been more backtracking by the Trump administration on the tariff front. The exemption on tech goods excludes them from the 125% China tariff and 10% tariff on other countries. It does not however exempt them from the 20% “fentanyl tariff” on China.

China’s Commerce Ministry has called the exemptions a “small step” and urged Trump to “completely abolish” reciprocal tariffs. Officials had also signalled they would not react to any further tariff hikes from Washington, calling them “economically irrelevant.” The Ministry said there was no longer any viable market for US goods in China under current tariffs, while the Ministry of Commerce dismissed the US levies as “a joke.”

US Commerce Secretary Howard Lutnick meanwhile said that the exemption was temporary, and said that there would be a different, specific levy applied to the semi-conductor sector, coming in “a month or two.” Trump on Saturday hinted at further developments on Monday. The soap opera continues, although the White House suggested on Friday that Trump is "optimistic" China will seek a deal with the U.S.

Dealing with what we know, the exemption is a major reprieve for companies such as Apple and Nvida, which were up 4% and 3% respectively prior to the announcement on Friday.

It is perhaps also an acknowledgment that many of these items can’t be easily made in the US, or certainly not overnight. This includes Apple’s wares, with China accounting for nearly 90% of iPhone production. iPads and Apple watches are also exempt.

It also mirrors what happened in Trump's first term with Apple receiving an exemption back then. It also comes in the same week the White House Press Secretary claimed that iPhones can “easily” be made in the US. Some with slightly more expertise in the field have estimated that even moving 10% of Apple’s supply chain to the US would take at least three years and cost US$30 billion.

The political and economic impact for what is seen as a staple product for many is also relevant. Americans would also not he happy paying 30%-50% more for their iPhones (it also won’t be that well received by those that rushed out to buy iPhones ahead of the tariffs coming in).

Despite Lutnick’s comments, the move is the first significant softening of any kind in Trump’s conflict with China. The exemptions cover almost US$390 billion in US imports and more than US$100 billion from China, or around 22% of its exports to the US. Trump has claimed he’s “ready for a call” from Beijing. Will this latest olive breach mean more talks with China are on the horizon?

There are also new exemptions on semiconductor manufacturing equipment. This is perhaps also not surprising. Trump wants the US to be a leader in AI, and these tools are essential for building chip factories. Other Asian countries are also benefitting – also exempted are ~64% of Taiwan's exports to the US, 44% for Malaysia's, 33% for the Philippines, 30% for Thailand, and 29% for Vietnam. While very dynamic still, trade war hostilities appear be thawing and certainly moving away from the worst-feared scenario.

Consumers though, as well as investors, have clearly been rattled by the developments in recent weeks. The latest consumer sentiment numbers for April came in worse than expected. The University of Michigan consumer survey was 50.8, down from 57.0 in March and well below the estimate for 54. Sentiment is 34% lower than a year ago and was the lowest reading since June 2022, and the second lowest in the survey’s history going back to 1952. Concern over the trade situation is weighting on confidence and also has pushed up expectations around inflation.

Respondents’ expectations for inflation a year from now leaped to 6.7% - the highest level since November 1981 and up from 5% in March. At the five-year horizon, the expectation climbed to 4.4%, a 0.3 percentage point increase from March and the highest since June 1991.

The Current Economic Conditions index fell to 56.5, an 11.4% drop from March, while the expectations measure slipped to 47.2, a 10.3% fall and its lowest since May 1980. On an annual basis, the two measures dropped 28.5% and 37.9%, respectively. Consumers are literally “TARRIFED” it seems and worried about a recession. Unemployment fears have risen to their highest since 2009.

Ironically, other data out of the US painted a cooler inflation picture, with wholesale prices unexpectedly falling in March, driven by a steep drop in energy costs. The Labor Department reported a 0.4% decline in final demand prices month-on-month, compared to expectations of a 0.2% decrease. Annual wholesale inflation eased to 2.7% from 3.2% in February. Food and energy prices fell sharply, by 2.1% and 4.0% respectively, while core goods prices excluding those categories rose 0.3%. Prices for services slipped 0.2%, led by a notable drop in trade-related services.

It was a volatile week for bonds and the US dollar. The US 10-year rose from under 4% to 4.5% in the biggest weekly rise since 2001. The US dollar index hit its lowest since 2001. Fed officials were also playing it cool. Minneapolis Fed president Neel Kashkari said we are “quite a ways away” from the level of stress on the financial system that was seen during the Covid crisis in March 2020. The central banker added that, if things worsen, the Fed could help smooth out the financial markets. Boston Federal Reserve President Susan Collins made similar comments, saying that markets are operating properly and the central bank stands ready to step in should that change.

Markets took the confidence print in their stride, on the idea that inflation will be transitory, and were also buoyed by last week’s tariff pause.

There was also some good news from a couple of banks as the earnings season got underway. JP Morgan shares jumped 4% as the bank’s quarterly revenue for the quarter was around US$2b more than expected and up 9% at US$46 billion. CEO Jamie Dimon though did caution that the U.S. economy is facing “considerable economic turbulence.” Morgan Stanley shares also rose on better-than-expected earnings which soared 26% to US$4.2 billion and revenues rose 17% to a record US$17.7 billion.

So a good start to the earnings season, but against the backdrop of a big disclaimer in the form of the trade ruckus. This week will see results from other banks, with Goldman’s, Bank of America, and Citigroup reporting. Other blue-chip names out with numbers (and no doubt comments on the trade situation) are Johnson & Johnson, Netflix, and American Express.

Across the Atlantic, the STOXX50 fell 0.2% and was lower for the week. The European Union said its trade representative was flying to Washington on Sunday to “try and sign deals.” The ECB meets this week, and is expected to cut rates again amid trade skirmishes. Carmaker Stellantis fell 4% after the company said shipments dopped 9% to 1.2 million vehicles during the quarter. The ever-evolving trade situation must be proving a huge challenge for those exporters caught up in it, and needing to decide whether to “ship or not to ship.” To add to matters, it has been reported that an entry code used by US Customs to exempt freight from tariffs has not been working.

Meanwhile the hopes for peace in Europe are also uncertain. Russia and Ukraine’s top diplomats traded accusations over the weekend of violating a tentative U.S.-brokered deal to pause strikes on energy infrastructure.

The FTSE in the UK rose 0.6% on Friday and was slightly lower on the week. Revised data showed flat growth in January for the UK rather than the small contraction initially reported. The services sector, which grew 0.3%, was the main driver of February’s gains, while industrial production rebounded 1.5% and construction rose 0.4%, both recovering from earlier declines.

Despite the stronger economic output, UK retail activity remained subdued. Stock wise, BP shares fell 3% after the oil major warned of lower upstream production in the first quarter. While oil output saw a modest rise, gas and low-carbon energy production was expected to decline. The energy giant also flagged weakness in gas marketing and trading.

In Asia, the indices were volatile. The Nikkei fell 3% on Friday (and was down 1% for the week). The Hang Seng and CSI300 in China were up 1.1% and 0.4% (3% and 8% lower for the week) respectively. There is data this week out on China GDP, inflation, industrial production and retail sales. The big focus will be whether there is any more blinking or reaching out on either side for a meeting between US and Chinese officials.

New Zealand

The Kiwi market was 1.5% lower on Friday, and was 2% lower for the week. On Friday Fisher & Paykel Healthcare fell 3.1% Mainfreight dropped 2.2% and Infratil was 2.3% lower. Freightways fell 1.7%. EBOS fell 6.4% after completing a $217m institutional placement at $36.65 a share, and ahead of the $54m retail offer to fund the purchase of SVS Veterinary Supplies, and the remaining 10% shareholding in Transmedic it didn’t already own.

There was some good news on the kiwi manufacturing index which is “holding in” there. The BNZ PMI has the manufacturing sector still in expansion mode, at 53.2 in March. It has now been above the breakeven 50 mark for three consecutive months. Although the PMI eased slightly from 54.1 in February, its three-month moving average (53.0) has reached its highest level since January 2022.

Subdued demand and cost pressures remain, but things are at least looking better after a dire time of it in the previous two years. The bigger question is what lies ahead given the rapidly evolving tariff policies of the US and major trading partners.

Of some concern for manufacturing is that the new orders index fell from 51.5 to 49.6 in March. This remains well below its long-run average of 54.0. There is also some concern that inventories are lifting, now at their highest levels since December 2021.

Some much better news is that the PMI employment index edged up to 54.7, its highest level since July 2021. This level, well above 50, is consistent with a rapidly expanding workforce according to BNZ. The PMI employment index also contrasts with the recent Quarterly Survey of Business Opinion where a net 6% of manufacturers reported fewer numbers employed in the past three months.

So there is a bit of uncertainty about how all this plays out and whether firms pull back on hiring plans until some of the dust settles on the trade front. But we may just be seeing some light here.

This week we have the Services PMI out, card spending, another dairy auction, and the quarterly CPI print. Annual inflation is expected to have edged up to 2.4%.

Australia

The Australian sharemarket was lower on Friday, with the ASX200 falling 0.8% to 7,646. Trading was volatile with the benchmark down more than 2% at one point during the session, but then tracking the US futures higher. The index was down just 0.3% for the week.

In terms of sector performances, gold stood out with a 5% rise. The price of the precious metal has soared US$60 to a record US$3,237 an ounce. Newmont jumped 5.4%. Other metals names were more subdued. BHP fell 1.6% and Mineral Resources was 2% lower. The energy sector was down 2% despite oil prices lifting.

The banks were mostly lower and healthcare was weak. Consumer staples were once again a bright spot. Woolworths rose 0.3%, and Coles gained 0.5%.

This week we have labour market data across the Tasman, as well as the minutes from the last RBA meeting and any further clues around the timing of another rate cut.

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