Fed, BOJ and China navigate uncertain growth and inflation paths Nikko Asset Management August 2025 Firm US GDP supports Fed's decision to keep rates on hold for now The Federal Reserve (Fed) kept rates on hold on 30 July, maintaining the policy rate in a range between 4.25% and 4.5%, following stronger-than-expected US Q2 GDP data. Although the Fed's rate decision was widely anticipated, the first double dissent in 30 years--from Fed governors Christopher Waller and Michelle Bowman--highlighted a divergence in outlooks among Federal Open Market Committee voters. Waller and Bowman pointed to early signals of softness in the labour market, although data suggest that economic activity continues to be supported by offsetting factors, even in the post-2 April world. In Q2, US consumption made a positive contribution to growth, albeit less strongly than in late 2024 (Chart 1). However, a significant expansion in net exports--compensating for front-loaded imports in Q1--more than offset a decline in private domestic investment and subdued government consumption. Still, US growth remains influenced by temporary factors, and households may not yet have felt the full brunt of US tariffs. Fed Chair Jerome Powell acknowledged emerging risks in the labour market but emphasised that employment is closer to one of the Fed's goals of full employment than inflation is to its mandate of price stability. Supporting Powell's point, the US core PCE index posted a smaller-than-expected decline, falling from 3.5% in Q1 to 2.5% in Q2, meaning that it is still half a percentage point above the Fed's target. Chart 1: US GDP contributions (seasonally adjusted, annualised rate) Source: Nikko Asset Management, Hutchins Center on Fiscal & Monetary Policy, BEA Tariff deadline rush underscores reasons to wait and see A deluge of new information on US tariffs continues to pour in, with the market and the US economy still trying to digest its implications. Tariff rates range widely, from 15% on exports from heavyweight South Korea to a higher-than-expected 25% on Indian goods. The only constant appears to be that tariffs remain subject to upward pressure, although the situation is perhaps not as severe as some worst-case scenarios had projected. The full economic impact of the newly agreed tariffs remains unclear, but it is likely that the most significant effects of the US tariff war still lie ahead. As we pointed out in Global Investment Committee's outlook: narrowing growth differentials , a New York Fed corporate survey shows that most companies plan to pass on tariff costs, at least partially, and that they typically do so with a lag of one to three months. Since we are not even a month past the initial 4 July "reciprocal" tariff deadline announced in April, further pass-through may still be pending in inflation data. Of course, the timing of such price rises may not be ideal as the job market has shown early signs of softening. However, repeated micro-adjustments to global supply chains and prices that result in consistent shocks may work against arguments for rate cuts based on labour market weakness. This could be particularly true if consumers internalise such repeated shocks and adjust their long-term inflation expectations upward. It is worth noting that once internalised and passed through into long-term expectations, inflation tends to be sticky. As such, it is not certain if the prevailing effect will ultimately be a decline in demand driven by rising unemployment. BOJ stands pat but slightly more hawkish on growth and inflation outlook The Bank of Japan (BOJ), like the Fed, opted on 31 July to remain in wait-and-see mode, keeping its policy rate on hold at 0.5%. However, in its updated outlook the BOJ modestly revised its near-term growth view from 0.5% to 0.6%. In addition, it significantly revised its near-term core CPI outlook from 2.2% to 2.7%. The central bank also modestly upgraded its longer-term core CPI projection; its two-year forward CPI forecast was revised back to 2% from 1.9%. These revisions, all else equal, provide a greater argument for a more hawkish BOJ compared to May. Meanwhile, the assumption that core CPI will slow from 2.7% in the current fiscal year to 1.8% in the next is highly dependent on the pricing-out of fresh food prices and absence of other inflationary factors going into fiscal 2026. Should prices remain more robust over late 2025 and household purchasing power stay intact, the BOJ may be prompted to bring forward its rate hike timeline. Our central scenario remains that the BOJ is likely to hike rates before the end of 2025. China's Politburo also in wait-and-see mode, keeps policy powder dry Amid the global wave of data, China's Politburo expressed confidence in the resilience of the Chinese economy but has so far refrained from offering new policy measures. As trade negotiations with the US have now been extended, China could be trying to maintain some dry powder to react to the eventual outcome of the talks--particularly if it poses any additional challenges to external demand. A key development is the 4th Plenum in October, which will focus on the 15th Five-year plan (2026 to 2030). This event may provide an opportunity for new policy announcements in response to what is revealed after extended China-US trade talks. By October, the need for consumption-focused stimulus may become apparent, particularly if China's current "anti-involution" campaign--aimed at curbing excessive capacity--proves ineffective in offsetting price declines stemming from households' soft demand and precautionary savings. Funds operated by this manager: Nikko AM Global Share Fund , Nikko AM ARK Global Disruptive Innovation Fund , Nikko AM NZ Cash Fund , Nikko AM NZ Corporate Bond Fund , Nikko AM Core Equity Fund (NZ) , Nikko AM Global Shares Hedged Fund (NZ) , Nikko AM KiwiSaver Scheme Balanced Fund (NZ) , Nikko AM ARK Disruptive Innovation Fund (NZ) Important disclaimer information Please note that much of the content which appears on this page is intended for the use of professional investors only.

FOMC: projections highlight heightened uncertainty in rate outlook Nikko Asset Management June 2025 Fed keeps rates on hold, projects a mildly more optimistic outlook The Federal Open Market Committee (FOMC) kept interest rates on hold as expected at its June meeting. The June monetary policy statement had a mildly more optimistic outlook compared to May. The latest statement noted that "heightened risks of both higher unemployment and inflation" cited in May "diminished but remain elevated". However, the June Summary of Economic Projections (SEP), compared to the March release, indicates that the direction of the economy has shifted to a lower-growth, higher inflation environment in the short term. Growth and employment At the post-FOMC press conference Federal Reserve (Fed) Chair Jerome Powell described current conditions as "solid", saying that the 4.2% unemployment rate "remains low". Powell pointed out that real wages are still in positive territory. However, he also cited the SEP's projection for the unemployment rate to reach 4.5% by the end of the year; conditions are expected to worsen. Meanwhile, recent GDP data have not been useful reference to gauge trend developments, with investment surging and net exports skewed by front-loaded imports ahead of anticipated tariffs. On the other hand, the consumption component was softer, and PDFP (private domestic financial purchases) growth was reliant on domestic investment to expand at a healthy rate of 2.5% in Q1. Because investment was driven by anticipation of tariffs, a temporary factor, its contribution is likely to decrease. Notably, growth expectations were shifted lower in June (1.4-1.5%) vs. March (1.6-1.7%). Projections for unemployment in 2025 remains at 4.4-4.5%, reflecting a more defined central tendency. Inflation: the big unknown Powell said inflation "eased significantly" from highs in 2022, but "remains somewhat elevated" compared to the Fed's 2% target. However, he also noted that near-term inflation expectations have "moved up" in recent months, with tariffs a big "driving factor". Although the SEP's total PCE inflation projection of 3% was higher than March, the Fed Chair expected the inflation rate to subside in the longer-term. The uncertainty associated with such an outlook, however, may make the FOMC's rate trajectory highly unpredictable. The mode in inflation expectations moved higher from 2.7-2.8% to 2.9-3%, with both upside and downside risks becoming more prominent. The full range of expectations remains clearly above 2% in 2025 and 2026, subsiding to around target level in 2027, albeit with some upside tail risks. We also note that while FOMC members' diffusion indices assessing uncertainties regarding unemployment and GDP decreased somewhat after March's substantial increase, uncertainty over inflation remained elevated at levels similar to those in March. Majority of members see two rate cuts in 2025 but outlook more disperse The FOMC's median projection for the Fed Funds rate by the year-end remains 3.9%, unchanged from the March projection. The longer-term projection for 2027 was raised modestly to 3.4%. Ten of the 19 FOMC members see at least two rate cuts in 2025, while the number of those who do not expect the Fed to cut at all this year rose to seven from four in March. The varied projections highlight the elevated uncertainty in the outlook for the Fed Funds rate. For now, it appears that the FOMC remains data-dependent, with the main focus on the uncertainty over near-term inflation expectations. The FOMC's statement and SEP align with the central scenario of slower growth with trade détente outlined in our Global Investment Committee review: scenarios for a less certain global outlook. However, persistent uncertainty means that the probability of scenarios involving stagflation or recession with disinflation remains well above zero. Funds operated by this manager: Nikko AM Global Share Fund , Nikko AM ARK Global Disruptive Innovation Fund , Nikko AM NZ Cash Fund , Nikko AM NZ Corporate Bond Fund , Nikko AM Core Equity Fund (NZ) , Nikko AM Global Shares Hedged Fund (NZ) , Nikko AM KiwiSaver Scheme Balanced Fund (NZ) , Nikko AM ARK Disruptive Innovation Fund (NZ)   Important disclaimer information Please note that much of the content which appears on this page is intended for the use of professional investors only.

Trump's first 100 days: a new economic regime takes shape Nikko Asset Management May 2025 Tariffs bring global uncertainty Donald Trump's second term in office has now passed the symbolic 100-day mark, and his most significant action this far was his announcement of global tariffs on 2 April. Trump's "Liberation Day" triggered a market sell-off in anticipation of a global supply shock, but after he subsequently announced a 90-day pause, global equity indices recovered, ending the month broadly where they began. The pause should give the US administration time to negotiate with its closest allies, but if no meaningful progress is made, particularly with countries like South Korea and Japan, by the end of May, it could signal a prolonged impasse. That would reinforce concerns that this is not simply a short-term negotiating tactic, but the beginning of a more entrenched trade rift. Therefore, while investors who avoided panic selling in April may have found themselves emerging relatively unscathed, the tariff shock continues to justify a higher risk premium across global equities. US economic concerns at the fore This not the first time the world has faced a severe supply chain disruption. But unlike the pandemic, for example, the current shock is self-inflicted, driven by Trump's idiosyncratic approach to trade policy rather than external forces. We're already starting to see the effects ripple through the US economy. Logistics data shows a sharp drop in goods moving from China to the US. Container bookings are significantly lower than a year ago. The Port of Los Angeles, the main entry point for Chinese goods, expects arrivals in early May to be down by a third. Airfreight bookings are also falling. According to Vizion, container bookings for standard 20-foot boxes from China to the US were 45% lower year-on-year by mid-April. As John Denton of the International Chamber of Commerce noted, many businesses are delaying decisions while they wait to see whether the US and China can reach a deal. China-US relations remain key As discussed last year, Trump's approach to tariffs has been to target China most aggressively. But political headwinds may force him to take a more conciliatory approach than he would like. With mid-term elections in November 2026, the Republican Party needs a quick win with allies, ideally leading markets towards new highs before then. China's President Xi Jinping, of course, faces no such political pressure. The tariff strategy appears designed to create what economists might call a "separating equilibrium", pushing allies to side with the US in isolating China, while also testing China's response. Trump's approach leaves little room for Xi to save face, effectively forcing Beijing into tit-for-tat measures. That lack of an off-ramp increases the risk of a drawn-out standoff, with economic data releases ratcheting up the pressure. Looking ahead, we expect more anecdotal evidence of supply disruption to emerge by the end of May, followed by harder economic data shortly after. The potential inflationary effect is notable. Based on trade volumes of around USD 425 billion and tariff rates that could eventually settle around 50%, we estimate the direct impact on US inflation could be around 1 percentage point, assuming no offsetting effects. Depending on how much of the cost is absorbed by importers and exporters, the range could be anywhere from 30 to 70 basis points. In short, the trade war's economic effects are already becoming visible. The longer it persists, the greater the risk that it drags on US growth and complicates the Federal Reserve (Fed)'s task of managing inflation expectations. Threats to Federal Reserve impartiality: are Powell's days numbered? Early in his second term, Trump appeared to be testing the legal ground for removing the Fed Chair Jerome Powell before the end of his term, with suggestions he could do so without needing to show cause. Trump has recently softened his public stance on Powell, but questions remain over future Fed independence. At the heart of this issue is Wilkins v. United States, a Supreme Court case expected to be decided in June. The case could effectively challenge the precedent set by Humphrey's Executor in 1935, which limits a president's ability to remove the heads of independent agencies without cause. Should the Supreme Court side with the Trump administration, it could strip away key legal protections that shield the Fed Chair from political interference. Even if the court offers a more limited ruling, the legal precedent could still be weakened, clearing the way for greater executive control over independent agencies. In the most extreme outcome, Trump would have the authority to dismiss Powell, or any other agency head, at will. Such a move would undermine the institutional integrity of the Fed and draw comparisons to the erosion of central bank independence seen in countries like Turkey, where politically driven monetary policy has contributed to economic instability. Powell's current term ends in May 2026, and it is unlikely he will be reappointed, and his successor could be announced well before then. Trump will likely nominate a more dovish candidate willing to cut rates aggressively in support of his policy agenda. This puts the Fed in a difficult position. Even if political pressure builds to ease policy, the Fed must remain vigilant about the risk of re-accelerating inflation. A premature or politically motivated pivot could risk repeating the mistakes of the 1970s, when monetary policy missteps allowed inflation to spiral. For now, this uncertainty may push the Fed to maintain its current pause for longer, as it waits for greater clarity on both inflation and the political landscape. Has the tariff risk premium already been priced in? In fixed income markets, some degree of tariff-related risk premium has already been priced into the long end of the US rates curve. However, when comparing US long-term yields with those of other developed markets, the relative value is starting to look more compelling. Global bond market scepticism, often described as bond vigilantism, can only stretch so far. At a certain point, investors recognise they are being adequately compensated for bearing tariff-related inflation risks. When that happens, US long bonds may start to attract stronger demand, offering not just a yield premium but also a degree of protection in a potentially slower growth environment. With the European Central Bank moving onto an easing path, the spread between US and European long-end rates is likely to widen further in the near term. That divergence supports the case for US duration, especially as the risk premium embedded in Treasury yields becomes more attractive. Downward pressure on the dollar While credit markets also weakened during April, the more pressing concern is the US dollar. The dollar index fell to a three-year low in the month, and the currency is currently looking technically oversold, even when assessed relative to interest rate differentials. Fundamentally, there appears to be an incentive for the US to maintain a weaker dollar in order to reduce its export deficit. What we are seeing is the emergence of a new economic regime. Previously, foreign exchange moves were largely driven by interest rate differentials. But under Trump's policies, those drivers appear to be shifting. Trade dynamics and political strategy are taking a more central role in currency movements. In this new environment, we expect continued downward pressure on the dollar. Slowing economic data, which we anticipate will materialise soon, could reinforce this trend. We also believe that at its upcoming June meeting the Fed is more likely to ease policy, which the markets have currently priced in at only around 50%. Thoughts on volatility The start of April brought a spike in market volatility that unsettled many investors. In today's markets, risk premiums are priced in far more quickly than they were two decades ago, and we saw this in action with the volatility index (VIX) briefly surging above 50 following Liberation Day. Such levels are rare and typically short-lived. While similar spikes occurred during the Global Financial Crisis and the early days of pandemic, volatility above 50 historically tends not to persist. It creates an environment where selling volatility becomes attractive, quickly pulling the index back down. This pattern appears to be playing out again. The initial equity sell-off seemed to bottom shortly after the Liberation Day announcement, in a manner not dissimilar to the bottom reached in March 2020 at the onset of the pandemic. Back then, valuations fell to around 16 times forward earnings. This time, we've only seen multiples contract to roughly 19 times, and credit markets have experienced far less severe dislocation. While macro risks remain, current conditions do not yet point to a systemic crisis. From a market positioning perspective, the worst may now be behind us. What happens next largely depends on the pace and direction of trade negotiations, both with Washington's allies and, further down the line, China. Ultimately, we expect US-China tariffs to settle in the mid-double-digit range, depending on how far both sides are willing to compromise. Crucially, Trump will need to make at least a symbolic concession to allow Xi Jinping to save face. Without that, a sustainable off-ramp becomes much harder to achieve. For now, based on historical patterns and current valuations, we think it's likely the market has found a near-term bottom, unless trade tensions escalate significantly from here. In our view, now is an opportune time to consider an active global fixed income approach to navigate what is likely to be a prolonged period of uncertainty and for those seeking diversification. With bond yields and geopolitical risks remaining elevated, this environment presents unique opportunities in fixed income, particularly as markets adjust to lower inflation expectations. Funds operated by this manager: Nikko AM Global Share Fund , Nikko AM ARK Global Disruptive Innovation Fund , Nikko AM NZ Cash Fund , Nikko AM NZ Corporate Bond Fund , Nikko AM Core Equity Fund (NZ) , Nikko AM Global Shares Hedged Fund (NZ) , Nikko AM KiwiSaver Scheme Balanced Fund (NZ) , Nikko AM ARK Disruptive Innovation Fund (NZ)   Important disclaimer information Please note that much of the content which appears on this page is intended for the use of professional investors only.

Isolation day: the geopolitical impact of Trump's tariffs on the world Nikko Asset Management April 2025 "Shock and awe" intended When news broke of Donald Trump's resounding victory at the November 2024 US presidential elections, many countries and businesses girded themselves for another round of trade wars. But this time, the 47th US president upped the ante from his previous term by imposing across-the-board tariffs on friends and foes alike. The Republican party's majority in both the US House of Representatives and Senate helped to ensure that Trump would have near-unchecked power, leading to such policy extremes. In light of these developments, we see markets as the remaining check and balance to hold the current administration's actions to account in the immediate term. As would be expected, Trump's tariffs roiled global stock markets. We therefore expect risk premiums for US assets to remain elevated for some time. Prior to the outcome of the US elections, we had explored the likely implications of a second Trump presidency and potential implications for portfolio companies in "If Trump wins: uncertainties and opportunities from an Asian equity perspective". Similarly, from a global perspective, the pronounced market volatility suggests that it will be hazardous to sell following large declines and to buy after major upturns unless we have greater conviction that concrete steps are being taken towards de-escalation. Energy and commodities also took a hit as the ongoing trade disputes raised doubts over future demand. We expect crude oil prices to remain lower for longer though other commodities may be more economically sensitive and thus, volatile. In our view, Trump's re-escalation of the tariff wars will only exacerbate the slowdown in global growth and may potentially plunge the US into recession unless his administration significantly reverses course with key trading partners including China, the European Union (EU), Canada and Mexico. Another factor which could prevent an impending US downturn is intervention by the Federal Reserve (Fed). However, the Fed faces a very tough task, as rising inflation poses a risk that could make it challenging for it to further reduce interest rates. China in the crosshairs Although seemingly indiscriminate, the so-called "Liberation Day" tariffs primarily targeted China. We believe that Washington will maintain this approach even if it rolls back punitive measures, such as with the surprise 90-day reciprocal tariff reprieve announced by the White House, for all countries apart from China. The chaos caused by Trump's unpredictable actions may seem surreal, almost like events from a reality TV show. Nonetheless, we believe he is still a businessman at heart with deal-making as his main objective. The ability of all countries to weather the US tariffs hinges on sound policy decisions, supportive domestic demand, capacity to stimulate the economy via monetary and fiscal means and the ability to negotiate concessions with the Trump administration by increasing purchases of US goods or investment. We think this last point may help countries to secure a bigger share of the export manufacturing market to the US over time if balanced correctly. The country with the most potential in this regard is India, which also stands to benefit from a sustained drop in energy prices. Most countries in Asia will likely try and hold discussions with the Trump administration. To date, over 75 countries have sought to strike a deal with the White House. Given Trump's preference to conduct one-on-one talks, we feel it would be prudent for the Association of Southeast Asian Nations (ASEAN) to negotiate as a bloc for more favourable terms as opposed to a country-by-country basis. For potential guidance ASEAN can look at the EU, which has banded together even more closely amid current developments. In the context of Asia excluding Japan, although countries that are part of the "China plus one" risk diversification strategy were also hit with tariffs to varying degrees, most of them are in the process of negotiating trade agreements with the White House. We believe that they could potentially be well-positioned to benefit from subsequent lowered duties as well as the accelerating trend of diversifying supply chains away from China. Meanwhile, the Philippines' services and agriculture-focused economy means that the reciprocal tariffs, which mainly penalise manufacturing hubs in Trump's quest to bring such jobs back to the US, will have less of a negative impact on the Philippines. And finally, while India is yet to officially respond to the sweeping US tariffs, we believe that its economy, driven more domestic consumption, puts it in a stronger position to negotiate a more favourable trade agreement with Trump compared to countries more heavily reliant on exports. Sino resolution China, however, is not having any of it. Compared to Trump's first term in office, Beijing is hitting back more forcefully with tit-for-tat tariffs having learned the hard way that any signs of weakness will certainly be exploited. With neither Trump nor Chinese President Xi Jinping likely to back down, we believe China's actions must be accompanied by corresponding domestic support packages to prevent Chinese assets from suffering collateral damage. Further restrictions on investments in China or the US could be on the cards should tensions escalate. US Treasury Secretary Scott Bessent raised the possibility of delisting Chinese companies from local stock exchanges following the tariffs announcements. Beijing had also earlier ordered the National Development and Reform Commission to halt approvals for Chinese firms aiming to invest in the US. Government officials have said China is ready to lower interest rates and relax the reserve requirement ratio to stimulate the economy in the face of rising trade tensions with the US. In a planned emergency meeting of high-level economic officials, we expect the authorities to redouble efforts to bolster consumption, artificial intelligence (AI) and energy infrastructure and focus on localising industries such as medical devices. Initial measures to boost domestic consumption are expected to include the streamlining of duty-free purchases by inbound tourists, which could benefit duty free names. The measures could also include a plan to ramp up health-related consumption though fitness and sports initiatives and the promotion of high-quality agricultural products. These are likely to be just the beginning of a series of policies aimed at supporting domestic demand. Manufacturing mayhem At a sectoral level, pharmaceutical and semiconductor imports are currently not subject to US reciprocal tariffs. However, Trump is threatening to revoke these exemptions as part of a wider national security agenda. Chinese companies in these industries are the likely targets of future measures. In the broader manufacturing space, we view flexibility in production as necessary for supply chain resilience as per Apple's decision to produce more iPhones in India in a shift away from China. Nevertheless, committing to longer-term manufacturing capital expenditure decisions poses significant challenges under current conditions. A new world order born of fundamental change Trump's unprecedented actions have torn down the established global trade order as the US seeks to structurally cut its deficit and bring back manufacturing jobs, while China has been making attempts to shift away from an export-led economy towards consumption-driven growth. The 90-day tariff moratorium may provide nations some time to assess the optimal route to navigate these US tariffs. However, the risk of further escalation is very real, given that the world's two largest economies are adamant about not appearing weak in the eyes of the other. Regardless of who gains the upper hand in the end, all countries will need to chart a new course into the proverbial unknown. Volatility typically brings both risk and opportunities. Significant fundamental changes have been set in motion and will lead to long-term, sustainable investment opportunities in the days and months ahead. Cutting through the noise and bluster to identify longer term investment opportunities is what excites us. Over the last 15 years, US equities and assets have been the biggest beneficiary of global portfolio flows. However, if US risk premiums are expected to remain elevated for an extended period, investors are likely to ask, "Where else should I reallocate my capital to"? We would not rule out large parts of Asia. Funds operated by this manager: Nikko AM ARK Global Disruptive Innovation Fund, Nikko AM Global Share Fund Important disclaimer information Please note that much of the content which appears on this page is intended for the use of professional investors only.