Tariffs, Elevated Rates, Send Greenback to 26-Month High: Jan. 2, 2025

Stock markets stateside and in Europe are kicking off the new year positively but equities in China are suffering from their worst annual start since 2016. Top of mind is Beijing’s struggling manufacturing sector, whose performance is likely to weaken further once the Trump administration sets up shop in Washington in less than three weeks. The new US government is looking to demand concessions and implement tariffs in short order, creating the potential for a sharp contraction in China’s export volumes and economic activity. The Chinese, meanwhile, are attempting to counter these looming dangers by launching monetary and fiscal stimulus, strengthening other existing relationships and by searching for new clientele. Against this backdrop of adversarial trade postures, the dollar is trading at a 26-month high, as currency traders factor in heavier costs and restrictions for international commerce. But the US economy is resilient, with unemployment claims continuing to reflect stable labor demand, the backbone of consumer spending and GDP.

US Labor Market Strength Persists

The US labor market remains on solid footing with four-week moving average trends moving south for both initial and continuing jobless claims amidst an unemployment rate that is hovering near historical lows. Initial claims dropped to 211,000 for the week ended December 28, beneath expectations of 222,000 and the prior period’s 220,000. Similarly, continuing claims slipped to 1.844 million for the seven-day interval ending December 21, below the 1.890 million median estimate as well as the 1.896 million recorded in the previous report. The four-week moving averages fell from 226,750 and 1.878 million to 223,250 and 1.871 million.

New Multifamily Investments Wane

Elevated financing costs and a meaningful reduction in new apartment building investments weighed on US construction spending. November’s figure was essentially unchanged from October, despite projections calling for a 0.3% month-over-month (m/m) growth rate, which would have been a modest deceleration from 0.5% in the former month. A 1.3% m/m contraction in new multifamily projects offset a 0.3% increase in new single-family investments as well as gains of 1%, 0.9%, and 0.8% in the religious, conservation/development and communication categories. Meanwhile, the public safety, water supply and amusement segments dropped 1.3%, 0.9% and 0.7%.

Another Benchmark Illustrates China’s Manufacturing Woes

The slowdown in China’s manufacturing sector was confirmed today by Caixin and S&P Global, which published a report shortly after the government report issued on New Year’s Eve. The private sector’s Purchasing Managers Index (PMI) covering November dipped from 51.5 to 50.5 and missed the median analyst forecast of 51.7. The November result, furthermore, was only slightly above the contraction/expansion threshold of 50. The report included the following insights:

• Goods producers lowered prices to support sales
• Overall activity was hurt by weakness in export orders
• Business optimism weakened

The Caixin index was similar to the government-provided manufacturing PMI for November that was released on Dec. 31. It came in at 50.1, a drop from 50.3 in October and lower than the analyst expectation for no month-to-month change.

Singapore’s Economic Growth Moderates

Singapore’s GDP continued to expand in the final three months of 2024 but moderated from the third quarter. The nation’s economy grew 0.1% quarter over quarter and 4.3% year over year (y/y), respectively, compared to the 3.2% and 5.4% in the fall quarter. Analyst expected advance estimates for quarter over quarter (q/q) and y/y growth of 2% and 3.8%. Singapore is facing a spillover from China’s weak economy and uncertainty regarding expected changes in trade policies of the US.

Declining Singapore Home Prices Reverse

Prices of privately owned homes in Singapore in the three-month period ended in December strengthened 2.3% q/q after falling 0.7% in the prior period, according to the Urban Redevelopment Authority. The price gain was driven by an increase in home sales and the wealth effect, or home shoppers feeling more affluent due to a recovering global stock market. In a related matter, CBRE reported that fourth-quarter new-home sales excluding condominiums totaled 3,398 units, compared to only 1,160 in the preceding period. The surge occurred against the backdrop of the country’s central bank cutting interest rates in September, November and December.

Hong Kong Consumer Weakness Persists

Hong Kong recorded a 7.3% y/y plunge in retail sales based on value in November, its ninth consecutive negative result and worse than the 2.8% contraction in October. From a year-to-date basis, sales dropped 7.1% relative to the first 11 months of 2023. November’s weak results occurred despite visitors to the country increasing 8.5% y/y, with the country’s strong currency making shopping more expense for tourists. Additionally, China’s weak economy may have weighed on expenditures by visitors from that country. Clothing, footwear and allied products sank 6.7% in November y/y, slightly better than the 10.2% decline in October. Meanwhile, jewelry, watches, clocks and valuable gifts descended 5.4% in November, an improvement from October’s 11.6% plunge.

UK Home Prices Continue to Rise

UK home prices gained 0.7% m/m in December, a moderation from 1.2% in the preceding month but higher than the 0.1% rate expected by a consensus of analysts, according to date from mortgage provider Nationwide. On a y/y basis, the Nationwide Home Prices index accelerated from 3.7% to 4.7% and surpassed the forecast of 3.8%. Analysts had expected smaller price gains in part because home affordability is at a low level in the UK.

Stocks Start The Year Positive

Today’s action, meanwhile, features loftier stocks, a stronger dollar and unchanged Treasurys. All major stateside equity benchmarks are trading higher with the Russell 2000, Nasdaq 100, S&P 500 and Dow Jones Industrial in the green by 0.9%, 0.4%, 0.3% and 0.1%. Sectoral breadth is positive with 10 out of 13 segments higher and led by energy, utilities and communication services, which are up 1.35, 0.8% and 0.6%. The laggards are represented by consumer discretionary, materials and real estate; they’re losing by 0.5%, 0.2% and 0.2%. Treasurys are cooperating and near the flatline, with the 2 and 10-year maturities changing hands at 4.26% and 4.58%. The Dollar Index is at 109.43, a gain of 87 basis points, while is appreciates against most of its major counterparts including the euro, pound sterling, franc, yen, yuan and the Canadian tender. The greenback is depreciating versus the Aussie currency though. Commodity action is tilted to the upside, with crude oil, silver and gold up 2.4%, 2.1% and 1.2%, copper is near the flatline while lumber is down 1%. WTI is trading at $73.60 per barrel in response to a continuation of declining stateside inventories.

US Economy is Resilient

Today’s mixed performance underscores the tradeoffs and vulnerabilities of mounting tensions between Washington and Beijing. The US is engaging in tit-for-tat trade jabs with its Far East counterpart even before the new administration takes hold, and China is highly attentive considering that it depends heavily on exports to fuel economic activity and domestic prosperity. Meanwhile, an important focus for investors is the degree to which trade disputes push up the costs of goods. Physical products have driven the Federal Reserve’s disinflation train since 2022 and a reemergence in price pressures will almost certainly propel US price pressures back into the 3s. But 3% inflation may be tolerated by central banks for the time being, which when combined with a growthy economy are great for nominally priced assets like stocks, at least up until a point. That critical level is 3.6%, because if price pressure readings begin to approach numbers near 4%, I would expect central banks led by the Fed to become apprehensive, add restriction and close the door to further valuation expansion.

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