•    Trump’s policies show limited immediate market impact.

•    No major tariff updates yet, especially in China.

•    Consumers worry about tightening spending power.

•    The dollar reflects investor sentiment on policy change and government credibility.

•    Bank of Japan rate hike signals normalisation, boosting Japanese asset prices.

•    DeepSeek is possibly deep trouble for tech near term performance.

The first week of Donald Trump’s new presidential term has been dynamic on many fronts but has had few visible effects on the US economy or markets – at least that’s what the markets’ performance suggests. The US equity market closed the week with a gain of 1.5%, while the 10-year Treasury yield held steady at 4.62%.

One notable observation from the week, however, was the announcement of the much-anticipated Trump tariffs, which, interestingly, turned out to be less severe than feared. While there was talk of a 25% tariff on Canadian and Mexican imports initially—dubbed by President Trump as a policy that would “make us rich as hell”—the implications may be less promising for the average US consumer. While such an exorbitant tariff boost might generate more revenue for the US government, they are likely to raise prices on goods, further eroding consumers’ spending power. With little relief in sight for what has been the voters’ primary concern—loss of real income—it’s uncertain how this will play out in the coming months.

In the retail sector, Walmart’s continued outperformance vis-à-vis global luxury goods reflects a growing trend: consumers are “trading down” as rising prices squeeze real incomes (see Chart 1) and create inflationary pressures.

One area of consumer spending, however, remains resilient: streaming services. Netflix reported record-breaking new subscriptions during the last fiscal quarter of 2024, doubling market expectations. However, in a move that adds to inflationary pressures, Netflix responded by raising prices after this surge in subscribers.

Chart 1: Walmart’s Outperformance of Global Luxury Goods Sector Implies a Trading Down by Consumers.Source: Bloomberg 

Interestingly, Trump refraining from announcing tariffs on China could be the administration’s wilful strategy to horse-trade. The Chinese equity market was flat on the week, which is good news considering the prevailing angst about possible punitive tariffs at the 60% level. Little news can be expected in the coming days considering it is Chinese New Year.

Markets Seek Clues on Trump’s Economic Vision
As markets look to decode the direction – and impact – of Trump’s economic policies, the president has drawn a historical parallel by referencing former president William McKinley, a GOP leader from the era of the "Gilded Age." This post-Civil War period of rapid industrialisation, as noted by The Wall Street Journal, “created tremendous American wealth but was marked by rampant inequality.” The reference raises questions about whether Trump’s policies could echo similar dynamics, balancing economic growth with equitable outcomes.

The Dollar: A Key Barometer for US Policy Credibility
The US dollar, considering its recent performance, is shaping up to be a critical test of confidence in the new administration’s economic policies. Last week the dollar traded at a two-week low, though this slip comes in the context of a significant 10% rally since October. One factor contributing to the dollar's recent decline is the rise in Japanese interest rates, which has exerted downward pressure on the greenback.

The coming weeks will reveal whether the dollar's performance aligns with market expectations for the new administration’s economic strategy—or signals further uncertainty.

Chart 2: Trade Weighted has Peaked but the Future not Entirely Clear. Source: Bloomberg 

Bitcoin and gold have rallied as the dollar has weakened (Chart 3). However, the recent price performance of these two asset classes has had a more erratic correlation with the dollar. Both gold and Bitcoin are acting a little more consistently as “independent” currencies and not so beholden to the general direction of the dollar. 

Chart 3: Bitcoin and Gold Rally Further on Dollar Weakness Source: Bloomberg 

Japan’s Normalisation—The Japanese Economy Takes a Step Forward with the BOJ Rate Hike
The normalisation in Japan’s economy advanced further last week as the Bank of Japan (BOJ) raised its short-term policy interest rate to 0.5% from 0.25% – its highest level since the 2008 financial crisis. This move reflects the BOJ's confidence in sustained wage growth going forward and its determination to maintain inflation at around its 2% target. With the BOJ targeting short-term interest rates between 1.0% and 2.5%, there is room for further rate hikes in the coming quarters.

Japanese Equities Poised for Growth
The Japanese equity market appears well-positioned for further gains. Despite remaining range-bound over the past year—aside from a bond market shake-up in August—corporate earnings estimates have steadily climbed. Over the same period, the market has seen a 7% price-to-earnings (P/E) multiple depreciation as earnings upgrades outpaced index performance.

What’s particularly intriguing is the underappreciation of ongoing corporate transformations. Suntory President Takeshi Niinami’s remarks that describe Japan as being at a “great tipping point,” and that “the lost 30 years is over” could be an important indicator of what lies ahead for the Japanese economy. Niinami emphasised that activism in Japan’s corporate sector is driving unprecedented levels of profitability and shareholder value creation. In our view, this wave of restructuring and efficiency improvement could unlock significant upside for investors.

Chart 4: Nikkei Suffers P/E Depreciation as Index Performance Fails to Match Earnings
Rebased to Feb '24=100Source: Bloomberg 

Has Deepseek Put Silicon Valley and the US Tech Sector into Deep Thought!

We have previously expressed concerns that the tech sector's dominant performance could face challenges in 2025. This past week, the realisation that a small Chinese AI startup, DeepSeek, has developed a much cheaper alternative for the future of AI has sent shockwaves through Silicon Valley and the broader tech sector. Essentially, DeepSeek has demonstrated that significant advancements in AI can be achieved without exorbitant costs.

Reports from various articles suggest that DeepSeek has managed to reduce API costs by an astonishing 95%. One emerging conclusion is that the real innovation and excitement in the tech sector may come from smaller, more agile companies rather than the large tech giants investing billions into R&D programs.

We reiterate that the S&P 500, without NVIDIA's stellar performance, appears no stronger than the European equity market. This raises the possibility that the idea of U.S. exceptionalism could be nothing more than a mirage.

Gary Dugan - Investment Committee Member

Bill O'Neill - Non-Executive Director & Investor Committee Chairman

27th January 2025

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional at Falco Private Wealth before making an investment decision. Falco Private Wealth are Authorised and Regulated by the Financial Conduct Authority. Registered in England: 11073543 at Millhouse, 32-38 East Street, Rochford, Essex SS4 1DB