Economic Update July 2025
In this month’s update, we provide a snapshot of economic occurrences both nationally and from around the globe.
Key points:
- Tensions ease in the Middle East post US bombing run, Israel and Iran truce.
- The US Federal Reserve held its interest rate ‘on hold’ citing tariff inflation risk, ECB cut 0.25%.
- Australian economy softening and expecting further RBA interest rate cuts.
- US equities close June at all-time highs, markets in general looking through the short-term noise
We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact the team.
The Big Picture
At the end of June 2024, the S&P 500 had completed a stellar year with a gain of over 20%, while the ASX 200 recorded a solid gain of around 10% over that same period.
In spite of the chaos caused by Trump’s policies, and the ongoing conflicts in the Middle East, these two equity indexes did surprising well – again – in the year to June 30 2025. The ASX 200 rose 10.0% in FY25 and the S&P 500 rose 13.6%.
The reciprocal tariff policy announcement by US President Trump on April 2nd 2025, for the so-called ‘Liberation Day’, caused a sharp fall in the S&P 500 of 18%. The recovery since that fall is the fastest on record for a decline of that order of magnitude.
A year ago, central banks were only just getting started on cutting interest rates as the inflation problem seemed to have been close to being beaten. Now, many central banks are close to having brought interest rates down to near neutral levels. Interestingly, the US and Australian central banks are not yet among that
group.
The reason stated by the US Federal Reserve for not having cut further is ‘the unknown extent of the possible increase in inflation caused by Trump’s tariff policies’. There is yet no material sign of tariff-induced inflation in the US but many expect a one-off lift in inflation, driven by tariffs of around 1%.
Given that US Consumer Price Index (CPI) inflation-less-shelter has been running at around 1.5%, and shelter inflation (a third of the index) has been falling steadily, there is some optimism that US inflation might struggle to get above 3% even with tariffs (unless Trump revisits his trade-war policies). And then inflation should
subside back to 2% as the imposition of tariffs should only cause a one-off increase in prices.
Trump has been berating Federal Reserve (Fed) chair, Jerome Powell, for being ‘too late’ to cut rates. Trump has threatened Powell’s position and has used insulting language against the man. Despite this, Powell has been calm and steadfast in his management of monetary policy.
The US economy, in terms of growth and jobs, is reasonably strong and so interest rate cuts are not necessarily urgent – but some slightly softer economic data, and the apparent containing of inflation, creates the opportunity for two or three more interest rate cuts this year.
Market probabilities for the next interest rate cut were firmly for the September meeting. However, three members of the Fed’s Open Markets Committee came out in favour of a July interest rate cut during the last weeks of June. The probability of a July interest rate cut remains low at circa 20%.
The RBA is expected to cut its interest rate in July and again (maybe more than once) over the rest of the year. Australia’s GDP growth rate at 0.2% for the March quarter was unexpectedly low despite apparent resilience in the labour market.
A significant portion of new jobs in the last financial year were in the National Disability Insurance Scheme (NDIS) programme. While the majority of these jobs are possibly very useful additions to our health care initiatives, they are funded by the taxpayer and so do not reflect the strength of the economy. Moreover, 10 of the last 12 reported monthly unemployment rates were 4.1% (the other two were 3.9% and 4.0%); an unusually stable set of data. The results are based on a small sample of around 26,000 households which is scaled up to represent a population of nearly 11 million households! We would have expected much more sample variation from month to month, as we usually observe.
We see no alarming signals in the broad macro data for Australia and the US. However, there are many possible sources of volatility in equity markets in the year ahead.
Trump’s retaliation tariffs were announced on April 2nd but were put on hold for 90 days – to July 9th – but only a few seem to think that the tariff increases won’t further be delayed – or even abandoned.
The average tariff before Trump’s ‘Liberation Day’ tariff policy announcement was about 3% and now it is closer to 15%. Somebody has to pay for it. Tariff is only another name for tax.
Exporters might try to absorb some of the costs before they export. That doesn’t seem to be prevalent. Correspondingly the importer in the US can try to absorb the cost but that too is difficult. Marelli, a large supplier of auto parts in the US that imports parts for Nissan and Jeep amongst others, filed for Chapter 11 bankruptcy protection as it found it couldn’t pass on the tariffs and it could not viably absorb their costs. Others will surely follow.
The third agent to wear the costs is the US consumer. We haven’t seen any material impact on consumer price indexes as many companies built up substantial inventories before the tariffs came in and are only now starting to pass on the additional cost. Some say the US might still have one to two months inventory at hand. Nike just reported earnings and announced that prices will have to go up shortly; footwear is expected to rise in price by 8% to 15%.
Since lots of goods are not imported, or are imported from low-tariff countries, experts reportedly are estimating the increase in the CPI to be of the order of 1% p.a. If, however, Trump starts bringing back higher tariffs, the US economy is likely to be a casualty.
Tariffs, to date at least, are not bringing in anything like the tax revenue Trump had foreshadowed. Moreover, most if not all that revenue is coming from US consumers and businesses. It is largely a redistribution of tax revenue for the government and tariffs will almost certainly reduce consumption due to the price increases.
China redirected much of its exports to countries other than the US during Trump’s first term as President and is seemingly starting to do it again. And China is now switching to importing beef, soya beans and oil (amongst many other goods) from other countries. The US could become increasingly isolated, if it is not careful.
There is much more to these trade deals than tariffs. There is no mainstream economic support for tariffs to redress trade balances. Indeed, trade imbalances are to be expected and welcomed in many cases.
One contentious point for the US-China relationship involves the export of certain rare earth minerals to the US. China has a near monopoly on the production of special magnets (and other goods) from rare earths that are essential in the manufacture of Electric Vehicles, rockets (commercial and military), drones and other high-tech products.
The US reportedly thought that it had gained access to China’s rare earths through the Geneva talks held between the two parties in May, but the extensive text of the agreement only devoted one sentence to non-tariff trade barriers – and there was no mention of rare earths.
The London talks between China and the US, held in June, were then set up to resolve this issue but failed again. Rare earths were mentioned but sources reported that the agreement is only for six months and only covers commercial – and not military – uses. The can has again been kicked down the road, this time until the end of the year.
Ford reported several of its auto plants in the US were on idle as they awaited a supply of rare earth products. China is in the box seat with this and it is big enough to see this confrontation through.
Almost out of left field, Israel attacked Iran over its nuclear build-up. It does not have the fire power to resolve the issue on its own but that didn’t stop Israel starting a renewed, heightened conflict.
Trump went to the election last year on a non-aggression platform – as he did in in his first term. The US was in negotiations with Iran over uranium enrichment. After the Israeli rocket attack, Trump said he might do something over the next two weeks. It only took him a day or two.
The US sent B-2 stealth bombers and submarines to fire on Iran’s three main nuclear facilities that happen to lie in a straight line south between Tehran and Qatar on the Persian Gulf.
The US reported that all three facilities were destroyed without casualties and without serious damage to property other than that associated with the facilities. Perfect! And a cease-fire between Israel and Iran was ‘on the cards’ in the next 24 hours, so Trump said. That’s why Wall Street rallied hard that night.
CNBC reported that there was a long line of trucks outside the facility containing the enriched uranium over the weekend before the bombing. It was being speculated that the trucks were there to move the uranium to another location!
Trump called the raid something like the ‘most decisive raid in history’. An expert came on TV and said all the enriched uranium could have been placed in the boots of 12 standard cars.
Just to save face, Iran attacked the major Middle East, US base in Qatar. To make sure everything was fine, Iran gave prior warnings to Qatar and the US. Iran fired 14 missiles; 13 were intercepted and the other missed the target completely. Everyone was a winner!
Recall, Trump did ‘big trade deals’ with Qatar and Saudi Arabia only weeks ago. It is hard not to think there was collusion over orchestrating a face-saving resolution to the conflict and to take attention away from the failed tariff deals.
Other reports questioned whether the US bombs could have struck 300 feet [say 100m] below the surface [under a mountain?] to reach the facilities. We don’t know what the truth is but we are thinking the strike wasn’t as successful as Trump announced – but it might have been enough to make the Iranians seriously consider their options for continuing to engage in this current conflict.
The collective wisdom of experts we have seen is that Iran’s nuclear program has been set back months rather than years. But importantly, Iran now knows that stealth bombers can turn up when they are least expected and that and they can carry lots of very big bombs [up to 30,000 pounds each!]. And there is now proof that Trump is prepared to push the button.
As the dust settles on the upheaval Trump has caused to trade, immigration, and efficiency (through the failed DOGE project run by Elon Musk) we are more optimistic about a less volatile future for Wall Street in there nearer term at least. The S&P 500 finished June with a new all-time high. Recent earnings reports have been stronger than expected and the future of Artificial Intelligence (AI) seems far more secure than some considered earlier in the year.
On the fiscal front, Trump has been facing a multitude of problems in trying to get his ‘Big Beautiful Bill’ through Congress. It is now passing through the Senate but it has to go back to the House of Representatives after substantial changes being made, and agreed to, by the Senate. Even Republicans were demanding changes! Two are voting against the Bill and six were reportedly undecided.
The Bill, if it goes through, is likely to add just over $3 trn to the current $36 trn government debt. The bill includes tax breaks and a substantial lifting of the debt ceiling. The logic behind the bill is that it will stimulate the economy and that growth will improve government revenue to offset the tax breaks. Musk launched a scathing attack on the Bill and has vowed to back candidates against those Republicans that vote for the Bill.
On other matters that many think are likely to guide the future of the global economy, the advent of DeepSeek – a China ‘alternative’ to ChatGPT and other AI projects – earlier in the year caused many to think it might be the end for Nvidia and other big US technology firms. It wasn’t, and it looks unlikely to be. Nvidia reported well in June and many of the mega tech companies are promising to invest hundreds of billions of dollars in the years to come.
It is important for investors to appreciate what AI can currently do and what more there is to do. Without that, the fear of losing jobs to AI is not rational.
At this point in time, AI is good at collecting information and summarising it. But it still makes lots of mistakes and needs human oversight to ‘train’ the models.
What AI cannot do at this point in time is reason or generalise. For example, it cannot answer the question, ‘What strategy should we follow for success in a given business’. Moving to the ‘super AI’ that will bridge this gap is what is consuming the top tech firms. Not only is the solution likely to be a long way off – it might never be achieved. Meta has reportedly offered sign-on bonuses of $100m each in poaching up to 10 AI experts.
To reason with facts and alternatives requires ‘weights’ to be applied to consolidate alternatives. That’s what human brains can do to differing extents. AI cannot yet do it at all.
Repetitive, low-level jobs are already at risk. True leaders in thought and business are very safe at the moment – and maybe for our lifetimes.
The outlook for equity markets for the coming period remains positive supported by continued growth and utility of AI and modest aggregate earnings growth generally however, at current elevated valuations they remain vulnerable to macroeconomic (e.g. detrimental tariff policy changes) and/or geopolitical shocks.
US bond yields have stabilised at levels comfortably below the ‘trigger points’ of 4.5% for the 10-year and 5.0% for the 30-year that caused equity market volatility in April and May.
Australian economic conditions are not great but will probably be boosted by multiple interest rate cuts by the RBA in the remainder of 2025. The ASX 200 finished the year to 30 June only a fraction (less than 0.5%) off its all-time high.
Asset Classes
Australian Equities
The ASX 200 made moderate gains in June (+1.3%) but gained +10.0% over the year to 30 June. If dividends were reinvested, the total return for the year (without franking credits) was 13.8%.
The Energy sector (+9.0%) and Financials (+4.3%) were the best performers for capital gains in June. Over the year to 30 June, Telcos (+36.7%), Financials (+29.4%), Industrials (26.2%), IT (+24.2%) and Consumer Discretionary (20.8%) were the stand-out sectors in terms of total returns. Health (-4.6%) and Materials (-2.3%) were the only sectors to go backwards over that period.
Our analysis of broker-based forecasts of company earnings for the coming year varies but in general are pointing to a positive outcome, providing we get no big surprises.
International Equities
The S&P 500 finished June very strongly – up +5.0% – and surpassed its all-time high on the last day of the month. For the year to 30 June, the S&P 500 gained 13.6%.
Of the major indexes we follow, the Nikkei gained the most over June at +6.6%. None of these indexes went backwards except for the DAX at -0.4% and the FTSE at -0.1%. Emerging Markets gain was +4.5%.
For the year to 30 June, the DAX gained +31.1%, the Shanghai Composite +16.1% and the FTSE 7.8%. Emerging Markets gained +10.6%. The Nikkei was the worst performer of the indexes we follow but it still grew by +2.3%. The World index grew by +14.7%.
With the US economy potentially going into expansionary territory due to the ‘Big Beautiful Bill’, another positive year might be expected. However, if the year to 30 June was any guide, good returns are usually not gained in a straight line. Volatility has not gone away but it has receded from its recent highs.
Bonds and Interest Rates
The Fed continues to resist Trump’s calls to cut interest rates but there is pressure coming from within for the Fed to cut in July. Two or three cuts are expected by the market in the rest of this calendar year.
The RBA is widely expected to cut its overnight cash rate (OCR) again in July. It appears to be on a rate cutting cycle taking this interest rate to around 3% by the end of the year – or lower!
The Bank of Japan was ‘on hold’ in June, as was the Bank of England. The Swiss National Bank cut its interest rate to 0.0%.
The big question facing policy and lawmakers in the US is what will happen to longer term rates. In the Senate hearing, a Republican senator berated Powell for costing the US economy $400bn this year by not cutting interest rates – due to the interest payments on debt.
The senator showed a complete lack of understanding of how monetary policy works. The Fed only has an impact on overnight rates and limited impact on yields one to two years out. It is possible, and has often happened, that an interest rate cut by the Fed might mean an increase the 10-year and 30-year Government Bond yields! Longer-term yields are greatly affected by inflation and growth expectations, amongst other factors.
Other Assets
Brent Crude oil (+5.8%) and West Texas Intermediate Crude oil (WTI) (+7.1%) prices were up in June. Over the year to 30 June, the losses were -21.8% and -20.1%.
The price of gold was flat (0.0%) in June while the price of copper (+6.0%) was up sharply again. Iron ore prices (-3.6%) were down.
The VIX ‘fear’ index is almost back to a near-normal level at 16.7 after peaking at 22.2 earlier in the month. The VIX peaked at 52.3 in the year to 30 June.
The Australian dollar (AUD) traded in a modest range over June but finished up by +1.8% on the month. Over the year to 30 June, our dollar was down by -1.1% against the US dollar.
Regional Review
Australia
Australia jobs data for the latest month provided mixed evidence of an economy that is ticking along. There were -2,500 jobs lost but +38,700 full-time positions were created; there was an offsetting -41,100 part-time jobs lost. The unemployment rate was steady at 4.1%.
The March quarter GDP data were released in June and largely disappointed. Quarterly growth was 0.2%, which was less than the 0.4% expected. The annual growth rate was 1.3%. Per capita growth returned to negative territory with readings of -0.2% for the quarter and -0.4% for the year. The brightest spot in the National Accounts was a rise in the household savings ratio to 5.2% from 3.9%. We consider a reading in the range of 5% to 7% to be ‘normal’. After some time of having a low savings ratio, households are now back to trying to build for a solid future.
The Westpac and NAB consumer and business sentiment indexes were largely unchanged and weak.
The monthly CPI inflation data were at the low end of the RBA target range at 2.1% (headline) and 2.6% (core).
China
Inflation was again negative for the year at -0.1% but China is actively trying to stimulate its economy. The wild swings in US import tariffs have disrupted shipments in the March and June quarters to try to minimise aggregate tariff revenue. For example, in May, China’s exports to the world were up +4.8% but down to the US at -4.5%. Imports from the US were -18.0% but only down -3.4% from the rest of the world.
Industrial profits slumped -9.1% in the latest month. It will be at least some months before we will get data that can readily be interpreted.
China must redirect lost US demand to domestic demand and to new markets.
United States
US jobs were up +139,000 when only +125,000 were expected. The unemployment rate was steady at 4.2%. Wage growth was 0.4% for the month and 3.9% for the year.
GDP growth for the March quarter was revised down to -0.5% from -0.2% as imports were rushed in to beat the imposition of new tariffs. The Atlanta Fed puts out ‘nowcasts’ ahead of the official GDP data. Its current estimate for June quarter growth is 2.9%. The OECD predicts growth for 2025 to be 1.6% and the same for 2026.
The respected University of Michigan consumer sentiment survey reported a bounce back to 60.5 from 52.2. The 1-year inflation expectations data came in at 5.1% which is well above the Fed’s estimate of 3.2% but down from its previous month’s reading at 6.6%. The US population at large is lowering its inflation expectations.
Retail sales were -0.9% for the month and +3.3% for the year. When adjusted for inflation the readings were -1.0% for the month and +0.9% for the year. There are nascent signs of a weakening consumer, but an interest rate cut is not urgent – just desirable.
Europe
UK growth slumped to -0.3% and the unemployment rate rose to 4.6% from 4.5%. The minimum wage was increased by 6.7% in an attempt to play catch up on the ground lost over the last couple of years due to the cost-of-living crisis.
The European Central Bank (ECB cut its interest rate for the 8th time by 25 bps to 2.0%. Inflation was under control at 1.9%.
The Swiss National Bank cut its rate by 25 bps to 0.0%.
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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