Devon Funds Morning Note - 11 April 2025

Friday 11th April 2025

Deal or no deal

Global

A day after the one of the biggest rallies in history, the US indices reverted to do the downside on Thursday, giving back some of the gains from the previous session. Trump did not rule out extending the 90-day pause as deals were being negotiated with trading partners, but the focus was more on China. The White House confirmed that the cumulative tariff rate on the country would total 145%, consisting of the new 125% duty on goods, on top of the 20% rate levied in response to the fentanyl crisis. After surging 9.5% and 12% respectively in the previous session, the S&P500 fell 3.5% while the Nasdaq was 4.3% lower. The Dow soared nearly 3,000 points on Wednesday, and gave back a third of this overnight. US inflation figures came in lower than expected on Thursday, but the focus was more on what tariffs will mean for prices going forward. The US dollar index fell to levels last seen in September, while bond yields rose and the gold price soared by US$100. Oil prices fell back 4% on concerns over the growth outlook. The futures though have the US markets pointing higher.

Technology stocks drove the declines. Nvidia fell 6%, and Apple fell 4% after surging 18% and 15% respectively in the previous sessions. The semiconductor index was down 8%, after surging 19% the day before. The banking index gave back half of its gains from the previous session, falling 4%. Airlines lost significant altitude, while old economy stocks drifted, including energy and consumer discretionary (Chevron and Nike were both down 8%).

Investor enthusiasm over the 90-day pause has proven short-lived it seems, even though it provides a decent window for the US to negotiate deals with trading partners. The director of the National Economic Council director said that there were already “offers on the table for more than 15 countries” and they were deciding if these were good enough to present to the President. He added that it would take an “extraordinary deal” for Trump to go below the 10% baseline tariff. He said that two deals however were almost “closed.” Interestingly he added that volatility in the bond market was not a direct reason for the tariff pause but added “a little more urgency” to the decision.

Deal or no deal. Trump said during his Cabinet meeting that tariffs would revert to the higher rate if a deal couldn’t be negotiated, but also didn’t rule out extending the 90-day window. He added that “there’ll be a transition cost and transition problems,” even while insisting, “we think we’re in very good shape.” Trump touted that the US was raking in billions of dollars each day as a result of his protectionist policies.

While Trump is completely incorrect in saying that trading partners will be paying more as a result of tariffs (they are a tax paid by the importer at the border), he is on the mark in that the duties flow back to the US government. Customs duties for the first half of the fiscal year totalled US$43.6 billion, up nearly US$6 billion from the prior year, and including tariff receipts of US$8.2 billion. This however did not stop the U.S. budget deficit swelling past US$1.3 trillion. The March shortfall was though 32% lower than a year ago.

Trump has claimed that part of the benefits of higher tariffs will be reducing the debt load. It is a big mountain being faced, and is coming with a significant servicing cost. Total interest payments for the year to date are US$582 billion, more than US$60 billion ahead of the 2024 year-to-date total. Little wonder that Trump also wants interest rates to come down.

The prospect for rates coming down from an inflationary perspective look solid if looking in the rear-view mirror. The consumer price index fell a seasonally adjusted 0.1% in March, putting the 12-month inflation rate at 2.4%, down from 2.8% in February, and below forecasts for 2.6%. Core inflation (excluding food and energy) came in a 2.8% annual rate, well below estimates of 3%, and having increased 0.1% for the month. That is the lowest rate of core inflation since March 2021.

Falling energy prices helped the headline rate fall, with a 6.3% drop in gasoline prices. Shelter prices, a persistent driver of inflation, increased just 0.2%, the smallest gain since November 2021. Food prices climbed 0.4% on the month - egg prices rose another 5.9% and were up 60.4% from a year ago (Trump won’t be happy with that).

The issue though is more around the path of future inflation, given tariff polices where there remain many uncertainties. While the worst feared outcomes may not eventuate, it seems likely that the prices for many goods will be going up. The price shock will likely first be seen in food, where many products are perishable, and grocers can’t hold on to supply for very long. By comparison, other retailers may be able to delay the price impact as they can sell old inventory that hadn’t been subject to tariffs.

Nonetheless, there appears to be an inflation bump coming in the US at some point – the question is how much, and also how “transitory” it might be. Current estimates are wide ranging, but some are suggesting the US CPI could peak at around 4% this year, up from 2.4% in March and roughly double what the Fed aims for over the long term. It remains possible that the tariff situation could play out much better than feared, but there remains a high degree of uncertainty. This however takes nothing away from the fact that investors may be better placed to adopt “cool heads”, to avoid missing out on substantial risk on rallies as was seen on Thursday.

Fed officials are already well aware of the uncertainties. Kansas City Federal Reserve President Jeffrey Schmid (a voting member) said overnight he believes policymakers will have to hone in on inflation threats rather than slower growth as they contemplate future moves in interest rates. Schmid also sounded a warning over the transitory argument, saying, “One enduring lesson of the high inflation period of the 1970s and early 1980s was that once inflation is embedded in expectations, it becomes much more difficult to contain.”

This is also while the Fed has to deal with on the other side the broader risks to the US economy. Former Treasury Secretary Janet Yellen was forthright in her assessment of Trump’s tariff efforts push, calling it “the worst self-inflicted wound that I have ever seen ... imposed on a well-functioning economy.” Yellen was relieved about the pause, but when asked for her assessment of the administration’s efforts since in office, Yellen (who is a Professor Emeritus at the University of California) said “I’m afraid I could not give it a passing grade.”

Trump meanwhile seems pleased with how things are going. After yesterday’s rally he posted, “What a day, but more great days coming!!!” He refrained from commenting on Thursday’s price action. There are calls meanwhile from some Democrats for an investigation into any stock trading by White House officials prior to the pause announcement, and “who knew in advance” that Trump “was going to once again flip-flop on tariffs.”

Across the Atlantic, the European indices had their best session in three years. The STOXX50 soared 4.3%. Autos, banks, miners, pharmaceuticals and luxury goods names all powered ahead. Shipping giant Maersk soared 8%. The European Union has said it will match the US and pause the adoption of its retaliatory tariffs on a swathe of U.S. goods for 90 days. European Commission President Ursula von der Leyen said “We want to give negotiations a chance,…but all options remain on the table.”

In the UK, the FTSE100 jumped by 3%. Barclays and Anglo American both soared over 7%. The UK supermarkets were weaker though. Tesco fell 4.4% after warning that profits in the current year could be pressured by intensifying competition. The UK’s largest grocer reported a 10.6% rise in annual operating profit to £3.13bn, and expects earnings to ease to between £2.7bn and £3bn for the upcoming financial year.

In Asia, the Nikkei had a huge session, soaring 9%. The Hang Seng was up 2.1% and the CSI300 in China rose 1.3%. China’s consumer deflation extended for a second month in March. The consumer price index declined 0.1% from a year earlier, compared with a 0.7% drop in the previous month. The median forecast was zero. China’s core CPI though rebounded to 0.5% from minus 0.1% in the previous month. Factory deflation persisted for a 30th month, with the producer price index recording a faster drop of 2.5% compared to 2.2% in February. An escalating trade war with the US threatens to put more downward pressure on prices.

The Chinese Foreign Ministry said China is not looking to fight a trade war, but will “not flinch” if tariff hostilities escalate to that point. Chicken run. Any sort of meeting between the US and China could be the next circuit breaker that markets are looking for.

New Zealand

The Kiwi market jumped on the relief around the tariff pause with the NZX50 climbing by 3.3% to 12,201. It was one of the biggest one-day gains ever recorded, eclipsing the 3.1% rise in June 2020. Fisher & Paykel Healthcare soared 4.4%, Infratil surged 5.3% and Auckland Airport jumped 4.3%. a2 Milk rallied 2.9%, and Contact Energy leapt 1.9%. Freightways surged 4.8%. Other strong gainers included Port of Tauranga (+2.6%), Summerset (+3.4%), Vista Group (+5.4%) and Vulcan Steel (+8.8%) and Fletcher Building (+2.7%).

A huge gainer was Mainfreight which rebounded 8.6%. While benefitting from the tariff news, there is also perhaps an appreciation that the company’s exposure to the US is relatively small – just 8% of earnings in the last year. Australia and New Zealand make up 75% while Europe is 15%.

On the data front, there was a reminder for those applauding the RBNZ on not putting through a 0.50% rate cut as to just how fragile the economic recovery is still. ANZ released their Truckometer which showed the Light Traffic Index remans flat, suggesting no real pick up in demand. The index was up 0.1% in March and down 0.4% y/y. As ANZ notes, light traffic (motorbikes, cars and vans) is generally a good indicator of the state of demand, as opposed to production. It typically provides a six-month lead on momentum in the economy, and variation reflects discretionary spending on outings, movement of couriers and tradespeople.

The Heavy Traffic Index fell 2.1%, to be up 2.3% y/y, and flat in per capita terms. Heavy traffic data (mostly trucks) tends to provide a good steer on production GDP in real time, as it captures both goods production and freight associated with both wholesale and retail trade. The per capita HTI has bounced back after a sharp fall in the middle of last year

Chris Luxon meanwhile has evidently been doing his bit to engage with other trading partners, including the EU, Ireland, Vietnam, and other parts of Asia. New Zealand is faced with the 10% baseline tariff and it remains unclear whether we are one of the countries that has reached out and are in deal discussions. In any event our exports to the US are relatively low at $9 billion – coincidently the amount the government has upped its defence spending budget by.

This morning EBOS has announced the completion of a capital raise of A$200 million to fund the acquisitions of SVS Veterinary Supplies and the remaining 10% stake in medtech company Transmedic for A$35m. SVS, a leading supplier of pet medicines and other products to veterinary clinics and specialty retailers in New Zealand, was acquired for upfront consideration of $115 million and an earn-out of up to $10 million. The upfront acquisition price represents approximately 7x earnings (EBITDA). The overall raise will also provide “further balance sheet capacity to fund additional future growth opportunities.”

The kiwi market has opened down around 1.1%.

Australia

The Aussie market staged a huge rise on Thursday as well, with the benchmark added almost A$100 billion in value. The ASX 200 gained 4.5% to 7709, the best one-day gain in five years. The A$ rebounded to US0.62.

All sectors were in the green and there were some big upwards moves. The mining sector soared over 6%, with BHP rallying 5.4%, South32 leaping 9.5%, and Mineral Resources surging 18%. Uranium stocks were on fire, with Paladin soaring 17%. The gold sector rallied over 6% as spot gold rose the most in five years. The technology sector jumped over 7% with Wisetech up 8%. Property stocks rallied with Goodman Group soared 6.6%. Macquarie, Westpac and NAB were all up around 5%.

With the US and China in standoff mode, Australia is faced with trying to have a foot in both camps, while also protecting its interests. The Albanese government is looking to reignite free trade talks with the EU and other nations. As Australia’s biggest customer, how it all plays out for China remains hugely relevant. Time will tell as to what extent there is a need to pick sides.

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