Economic Update October 2025
In this month’s update, we provide a snapshot of economic occurrences both nationally and from around the globe.
Key points:
US Fed reactivates interest rate cutting cycle.
Big downward revision to US jobs data.
The legality of Trump’s tariffs has been challenged and to be adjudicated by the Supreme Court.
RBA did not cut interest rates due to slightly stronger inflation data.
The Big Picture
After immense pressure from President Trump, the chairman of the US Federal Reserve (“Fed”), Jerome Powell, announced a 0.25% cut in the Fed funds interest rate to a range of 4.00% to 4.25% at its September meeting.
Not only did the Fed cut interest rates, it signalled another two rate cuts this year and one in each of the next two years.
We have long argued that the Fed rate was far too high for current economic conditions. Powell may well have privately agreed but we suspect he didn’t want to be seen to be running a Fed that was not independent from government.
There seem to have been two trigger points. We reported last month that there was a big revision to the previous two months new jobs data and a lower-than-expected number for the latest month (at the time).
September’s release was a paltry 22,000 new jobs and the unemployment rate inched up to 4.3%! Less than a week later, the BLS (Bureau of Labour Statistics) that produces much of the government economic data, reported its annual revision to the recent twelve-month period (April 2024 to March 2025) was a downward move of 911,000 jobs. In the previous year the BLS reported a downward revision of 818,000 jobs. That revision prompted Trump to accuse the BLS of being politically motivated – hiding poor data before the run up to the November 2024 election. Trump’s claim was that the BLS wanted to support a Biden victory. That revision also heralded in a 0.5% Fed cut in September 2024 to start a new rate-cutting cycle.
We have seen no reasonable evidence that the BLS has done anything other than the best job it can in difficult circumstances. The nature of work and jobs are changing and the response rate to the BLS monthly telephone surveys has been declining rapidly since the pandemic – as has also been reported response rates in Australia and Britain.
The problem of monitoring the labour market going forward has been exacerbated by the government shutdown in the US that just started on October 1st for an indeterminate time. There have been 14 such shutdowns in four decades – it is the way the two major parties try to direct funding to their chosen projects. The shutdown allows the president to choose which departments he will shut down. It is widely believed Trump will shut down the BLS before the next jobs’ data, due on October 3rd, to prevent more poor data from being published. We do not think a lack of data will divert the Fed from its cutting cycle and market pricing supports this view.
US June quarter GDP growth was revised upwards to 3.8% making for an average 1.6% p.a. for the first half of the year. Volatile trade data, caused by changing news on tariffs, continues to hamper estimating current growth. We think the US is likely to be growing at below trend but that it is unlikely to go into recession anytime soon.
US inflation data remains a little elevated – currently running at 2.9% pa. Since tariffs have contributed to rates being above the target 2%, there is no reason to change monetary policy to accommodate these small changes. The tariff effect will only be transitory unless it inspires workers to escalate wage demands. With a weak jobs’ market, inflation is not a problem.
Some commentators are calling the current situation ‘stagflation’. We see this claim to be a headline-seeking activity. The term was introduced in the 1970s when unemployment and inflation were both high. Inflation was well into double digits and unemployment rates were about double what they are now.
Trump is still announcing lots of new tariffs but with so many conditions that it is not feasible to keep up with what is real and what is not. The US Appeal Court found Trump’s across-the-board tariffs to be illegal. Trump has petitioned the Supreme Court to overturn that ruling – and to do that quickly.
Apparently reasonable legal experts have stated that only Congress can impose across-the-board tariffs but there are so many variations on what Trump might do if the ruling goes against him, it is not wise to speculate what might happen next.
What is clear about the tariffs is that the US consumer and US businesses are bearing the brunt of tariffs – which are simply taxes by another name. There is no credible evidence that the exporters to the US are cutting prices to share the tax burden. However, that does not mean exporters are not shifting their exports to other markets to replace lost revenue from previous US imports.
China has turned out to be an awesome opponent in the tariff war. The deadline for a ‘deal’ keeps getting pushed back. China has a near monopoly on rare earth minerals which are crucial in manufacturing high-tech goods such as EVs, drones and military equipment. China has resumed exporting some rare earths to the US but it is keeping a tight rein on where the minerals go. China is still in a position to cause serious economic damage to the US by withholding supply.
China has also stopped importing soyabeans from the US – not because there is a tariff on them, but in an act of retaliation. Other examples exist.
Last year, the US exported half of its production of soyabeans to China. Brazil has now replaced that supply. When Trump imposed similar tariffs in his first term, the US lost about 20% market share to Brazil and never recovered.
US farmers are hurting and Trump is offering $23bn of tariff revenue to compensate farmers. The problem is that the tariff revenue is being sourced from US consumers and businesses.
Other Trump policy initiatives are under fire. Courts also ruled against many of the mass deportations, but Trump seems to be following this ruling as he has now realised deportations are affecting employment and economic growth.
At home, the RBA is seemingly having difficulty interpretating inflation data. The problem lies squarely with our data agency, the ABS, and how it adjusted electricity prices to allow for government subsidies.
Without going into the details, the latest inflation publication revealed that electricity prices had gone up by 24.6% over the previous 12 months (from 12-monthly growths of +13.6% and ‑6.3% in the previous two reports) but this inflation was reportedly down ‑6.3% during the latest month! It doesn’t make sense.
The ABS seemingly tried to take the heat out of the inflation reports by calculating an implicit price change from a flat subsidy. As the subsidies come off, electricity price inflation and, hence, CPI inflation will be inflated for the following 12 months or more.
The ABS did report what the 24.6% electricity price inflation would have been without the subsidy effect; 5.9% for the last 12 months. We could have lived with that!
CPI inflation stands at 3.0% for the headline rate but that would be in the middle of the 2% to 3% range without the statistical massaging!
If it were not for massive government support in the job market and economic growth, the Australia economy would be seen to be in a bit of trouble. The latest growth data support that view. The RBA should have cut on September 30th but it was probably led astray by the ABS inflation data.
In spite of the economic machinations at home and abroad, equity markets continue to make new highs or close to them. We see the momentum trend continuing.
US bond yields have settled down after the tariff debacle. However, the ‘standard’ 30-year US mortgage rate went up after the Fed’s recent rate cut – as did the 10-year Treasurys’ yield. Long interest rates are determined by the market based on confidence in future growth and inflation. There is no ‘interest rate cut to pass on’ in the US or here.
Australian Equities
The ASX 200 reached an all-time high above 9,000 in August and it stayed close to that level throughout September. This broad index was down ‑1.4% in September; it was up +8.5% year to date (y-t-d).
The Energy (‑10.5%), Consumer Staples (‑5.6%) and Healthcare (‑4.9%) sectors were the biggest losers in September. Materials posted the only sectoral gain at +4.6%.
International Equities
The S&P 500 posted its fifth consecutive month of gains in September. At +3.5% for the month and +13.7% for the year, the gains far exceed what many expected in the throes of the tariff war in April and May.
The S&P 500 reached an all-time high of 6,694 in September.
The Nikkei (+5.2%) and Emerging Markets (+6.9%) posted very large gains in September. For the year-to-date, Emerging markets are up +22.0%. The S&P 500, the UK FTSE, the German DAX and China’s Shanghai Composite all posted gains of over +12% year to date.
Bonds and Interest Rates
The Fed funds interest rate now stands at the range 4.0% to 4.25% with reasonable prospects of dropping to near 3% by the end of 2026. Since we think 2.75% to 3% is the range that neither restricts nor encourages growth – the so-called neutral rate – the US will soon be in the position to act in either direction to respond to what future economic circumstances may require.
The CME Fedwatch tool has the probability of two more 0.25% pts cuts this year at 76%.
The RBA did not cut its interest rate at the end of September, but it is tipped to cut at the ‘Melbourne Cup’ board meeting at 42%. The current rate is 3.6% so it soon may be near the neutral setting.
We reiterate that we think a failure to cut interest rates at the September meeting was a missed opportunity. It was widely argued that CPI inflation had picked up so that a rate cut would be inadvisable. We have argued that the ‘pick up’ was a statistical anomaly caused by the ABS’ calculation of an implied electricity price inflation rate from the government subsidy.
The Bank of Canada cut its interest rate by 0.25% to 2.5%. The Bank of Sweden also cut its interest rate by 0.25% to 1.75%. The Bank of England and the European Central Bank (ECB) were ‘on hold’ at 4.0% and 2.0%, respectively.
Other Assets
Oil prices, Brent Crude Oil (‑1.6%%) and West Texas Intermediate WTI Crude Oil (‑2.6%), were down moderately in September after a big drop in August.
The price of gold was up very strongly (+11.4%) in September while the price of copper (+5.7%) grew more modestly. The price of iron ore was flat in September.
The VIX US share market ‘fear’ index finished September near normal levels at 16.3.
The Australian dollar was up +1.0% against the US greenback.
Regional Review
Australia
After two months of poor jobs data, the new numbers reported in August were reasonable, but September’s release showed a loss of ‑5,400 jobs in total, with full-time employment jobs falling by ‑40,900. Part-time job gains offset some of the full-time losses. The unemployment rate was steady at 4.2%.
GDP growth came in at 0.6% for the second quarter but that amounted to only 1.3% when annualised for the year to 30 June 2025. From June quartet 2024 to June quarter 2025, the growth was 1.8%. On a per capita basis, growth was 0.2% for the quarter and the year.
The household savings ratio fell from 5.2% in the March quarter to 4.2% in the June quarter which is a little below the long-term average. Government expenditure rose by 1.0% for the quarter. Reduced savings and government expenditure helped make the June quarter growth rate of 0.6% seem a little more positive than, perhaps, it should have been.
China
China’s retail sales of 4.2% exceeded the 3.9% expectation but industrial output of 5.2% was the worst since August 2024. China is having to deal with volatile trade and production in the wake of the tariff negotiations.
The China Purchasing Managers’ Index (PMI) came in at 49.8 which is the highest level since March. The PMI beat the expected 49.6 and was just short of the 50.0 level that separates expected growth from contraction.
United States
US nonfarm payrolls data revealed only 22,000 new jobs were created and the June figure was revised downwards from 14,000 to ‑13,000. Manufacturing has lost jobs in each of the last four months.
The 911,000 downward revision to jobs from April 2024 to 2025 amounted to a correction of about 50% from the provisional data.
US retail sales held up with an increase in volume of 1.7% over the 12-month period.
The US government shut down certain operations on October 1st since funding could not be agreed by Congress. Republicans are reportedly open to a short-term funding proposal, but Democrats are insisting on funding certain health benefits that were recently withdrawn. Such impasse is common in US politics no matter which party is in power.
Europe
British inflation was steady at 2.8% and European Union (EU) inflation was steady at 2.0%.
Trump made a second state visit to England. His tour was confined to the grounds of Windsor because of possible protests in the streets of London.
Rest of the World
The Bank of Russia cut its prime rate by 1.0% to 17% totalling 4.0% of cuts in this cycle. Russian inflation stands at 8.1%; target inflation is 4.0%.
The Bank of Turkey cut its rate by 2.5% to 40.5%.
Have more questions? Reach out to our knowledgeable team today.
We acknowledge the significant contribution of Dr Ron Bewley and Woodhall Investment Research Pty Ltd in the preparation of this report.
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