Economic Update June 2025
In this month’s update, we provide a snapshot of economic occurrences both nationally and from around the globe.
Key points:
- US and China agree a 90-day truce in their tariff war and settle at lower rates
- US Court finds Trump tariffs illegal
- Equity markets look through tariff uncertainty and post strong returns for the month
- Court finds Trump’s use of emergency power to set tariffs is illegal
- Australian jobs and inflation data solid
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
On the 12th of May US and Chinese delegations met in Switzerland and agreed to a 90-day truce in their trade tariff war. The agreement does not apply to all tariffs but was certainly sufficient to buoy global markets post the announcement. Neither economy is sufficiently strong enough to weather the effects of a protracted trade war with each other without inflicting self harm. Finding a negotiated way forward is in the interest of both parties but that is not a guarantee. We await the elapse of the 90-day truce to see how further negotiations unfold.
After about four months of Trump seemingly randomly assigning – and charging – tariffs on a bilateral basis, a US Court deemed that the Administration had acted illegally on the reciprocal tariffs. However, they did not overturn the 25% tariffs on steel, aluminium and autos. The next day, that Court put a stay on the decision for seven days – to June 5th – after an appeal. Trump then retaliated by threatening 50% on steel and aluminium.
The issue that Congress sets tariffs and not the president has been known since the beginning. However, Trump invoked ‘emergency powers’. The Court disagreed that the emergency existed in law.
The market had already factored in that the big tariffs would not come back in – if not the reason why.
Markets launched a new acronym following the months of negotiations: TACO [Trump Always Chickens Out]. Trump looked very uncomfortable when answering a question about TACO but he fired back that what he did was how one negotiates.
There have been some statements made that say that Trump might find an alternative method for putting punitive tariffs on imports. We will have to wait and see but we think the worst of the tariff-induced volatility might be behind us.
The US consumer has been bruised by all the tariff chaos. The US has two highly reputable consumer sentiment indexes constructed one each by the University of Michigan and the US Conference Board. Both plummeted from November 2024 readings until a few weeks ago. The University of Michigan index reached an all time low (except for June 2022 during the lockdowns) but, at the end of May, the Conference Board index surged back up to the normal range after the reciprocal tariffs were pushed back 90 days.
Many commentators were confused by the relatively strong consumer data and the confidence data. That anomaly is now rationalised as confusion about an unknown longer-term future and short-term strong jobs and wages.
Trump imposed so-called reciprocal tariffs on April 2nd and pushed them back 90 days on April 9th. Arguably, the trigger for the turnaround was a surge in longer term US Treasury yields – to above 4.5% for the 10-year and above 5% for the 30-year. The issue at stake is the US Treasury needing to roll over about a third of its huge debt in June 2025.
Secretary for the Treasury, Scott Bessent, appears to have neutralised rogue trade advisor, Peter Navarro, in delaying the reciprocal tariffs. Bessent was key in negotiating tariffs between China and the US down from 145% and 125% to a more reasonable 30% and 10%. The 30% figure includes a penalty for distribution of Fentanyl.
Trump turned his attention to the Middle East following the big tariff backdown. He claims some massive deals of hundreds of billions of dollars with each of Saudi Arabia and Qatar. It appears Qatar also gifted a $400m jet which will be used as Air Force One and then on Trump’s personal account. There have been strong suggestions that Trump is intermingling his personal interests with those of the state.
There is little detail about the nature of these deals other than buying from Boeing is a big part of them. Presumably, there is a very long lead time on some of these planes and who knows if the plans will come to fruition.
Elon Musk appears to have failed to achieve his DOGE efficiency targets and left the project at the end of May.
As a result of the tariff chaos and government efficiency misses those elements will not contribute much to bringing down the $36.2 trn government debt. A lot, therefore, rides on getting gains in GDP growth through tax cuts and AI. An eminent commentator, Prof Jeremy Siegel, thinks AI could lift average growth from 2% to 3% pa which would be huge. However, if AI makes gains through redundancies, the gains won’t necessarily benefit the economy to the extent that it might otherwise.
At the end of May, Trump’s ‘Big Beautiful Bill’ passed through the House. Most people up with the details seem to think it will add to debt. The Senate also needs to pass the Bill and many have said senators will demand lots of changes.
The US Federal Reserve (the Fed) kept rates on hold in May possibly because of the uncertainty over tariffs. Since that meeting key inflation measures, the Consumer Price Index (CPI) and Private Consumption Expenditure (PCE) came in lower than expected.
There are problems with measuring shelter price inflation and that component is about one third of the CPI index. The official CPI-less-shelter inflation rate came in at 1.4% which is well below the 2% target. Indeed, in all but four months since mid-2023 that measure has been under target.
The Fed-preferred PCE inflation read was 2.1% and 2.5% after volatile items are removed. We see some reasons for the Fed to cut at its next meeting.
However, the market has priced the probability of an interest rate cut on June 18th at only 2% and 23% by July 29th. The odds for no US interest rate cut by September are currently 28%. We think the odds for an interest rate cut anticipated by the market will be priced in as news about the court’s views on reciprocal tariffs become clearer.
US jobs data have continued to be strong but there are some nascent signs that layoffs are starting to increase – particularly in Michigan the historical home of the US auto industry.
At home in Australia, the general election brought about sweeping support for the Labor party. Both the Coalition and Greens leaders lost their seats. As a result, the Coalition split into two parties but some resolution now seems possible.
Labor’s policies are, in the main, not controversial and could ultimately be good for the nation. However, the proposed changes to taxation on super are contentious. The issue for most people is not that tax should be increased for big balances. It is that unrealised capital gains will be taxed at 30% above some threshold.
There are three major problems with that ruling. People with large assets such as property in their super funds may have to pay tax on any capital gains without the income to cover the CGT. Secondly, illiquid assets such as property are difficult to price and so there would likely be disputes over valuations. Thirdly, for realised capital gains outside of super, made over a period longer than 12 months, are taxed at half of the investors top marginal income tax rate – potentially a lower rate than income tax paid by people with lower incomes.
Interestingly, many or most politicians and public servants are on Defined Benefits’ pensions which, for technical reasons, are not included in the proposed new taxes. It seems possible that a senior public servant or government minister could have a substantial defined benefits pension and, say, just under $3 in a super fund and not have to pay the new taxes! We wait to see if this change will be introduced without amendment.
Our jobs data were also quite firm with 89,000 new jobs created in the latest month. The unemployment rate was steady at 4.1%. A ranking of all countries by the proportion of all people employed by the government put Australia at number one in the world. Hence, much of our jobs data looks good because the jobs are funded by the taxpayer and are not subject to market forces like private jobs!
With the policy chaos likely becoming more subdued in coming months and Australian data holding up, the ASX 200 and S&P 500 market indexes are getting back on track to have the strong year expected at the start of the year by many commentators – and the broker-based forecasts of company earnings we analyse on a daily basis. US Treasury yields have stabilised at near 4.5% p.a. for the 10-year Government Bonds and 5.0% for the 30-year Bonds.
Asset Classes
Australian Equities
The ASX 200 had a very strong month gaining 3.8% as part of the recovery from the impact of Trump’s reciprocal tariffs. The index ended May only 1.4% off its all-time high and up 3.4% since 1 January.
The IT sector (+19.8%) and Energy sector (+8.6%) were the standouts. No sector had negative returns for May.
International Equities
The S&P 500 finished May very strongly – up 6.2% but it is still nearly 4% off its all-time high and almost flat (+0.4%) since 1 January.
Of the major indexes we follow, the German DAX gained the most over May rising +6.7% and Japan’s Nikkei gained 5.3%. The Emerging Markets index gain was more modest but still quite strong at +2.9%.
Bonds and Interest Rates
The Fed continues to resist Trump’s calls to cut its interest rates. Indeed, Trump summoned Powell for a meeting at the end of May. Nevertheless, the Fed kept rates on hold at the May Federal Open Markets Committee (FOMC) meeting. Markets are expecting the next cut in September.
The RBA cut its Overnight Cash Rate (OCR) by 25 bps to 3.85% on May 20th and is expected to cut again in July with possibly two more cuts after that this year.
The Bank of Japan kept its interest rates on hold. It’s auction of 40-year Government Bonds (JGBs) did not go as expected, so long yields (interest rates) rose. The Bank cut its inflation forecasts for this year and next year. It also trimmed growth forecasts.
The Bank of England (BoE) cut its rate by 25 bps to 4.25% even though its quarterly economic growth rates came in at a solid 0.7% for the quarter.
There was some market instability in bond yields over the month – particularly in long-duration US Treasury yields. There is set to be a very large roll-over of Treasuries during June as the US treasury refinances a large amount of maturing bonds. Some more bond market volatility is, therefore, expected.
Other Assets
Brent Crude oil (+1.2%) and West Texas Intermediate Crude oil (WTI) (+4.2%) prices were up in May.
The price of gold was down -0.7% in May while the price of copper (+4.7%) was up sharply again. Iron ore prices (-0.3%) were flat.
The VIX ‘fear’ index is almost back to a normal level at 18.6 after peaking at 24.8 earlier in the month.
The Australian dollar (AUD) traded in a wide range ($US0.6394 to $US0.6527) over May but finished up by only +0.3% on the month against the US dollar.
Regional Review
Australia
Australia jobs data for the latest month provided more evidence of an economy that is ticking along okay. The 89,000 new jobs in the month with 59,500 of those being full-time positions.
The unemployment rate was steady at 4.1% maintaining a range of 3.9% to 4.3% for the last 12 months.
Retail sales for the month were -0.1% and 3.8% for the year. When adjusted for inflation, sales were -0.3% and 1.4%.
The Wage Price Index rose 0.9% over the March quarter and 3.4% over the previous 12 months. While this rise is above that of inflation (2.4%), inflation-adjusted wages are down 6% from the 2020 peak and down 3% since Labour was elected in 2022.
China
Inflation was 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 quarter and to date in the June quarter to try to minimise aggregate tariff revenue.
United States
US jobs (non-farm payrolls) were +177,000 in the latest month well ahead of the +133,000 expected with an unemployment rate steady at +4.2%. The wages growth rate was +3.8% for the year.
US CPI came in at 2.3% (headline) and 2.8% (core). CPI less shelter inflation was only 1.4%. PCE inflation was 2.1% (headline) and 2.5% (core).
The respected University of Michigan consumer sentiment survey reported another big drop – down to 50.8 from 52.2. The 1-year inflation expectations data came in at +7.3% which almost certainly cannot turn out to be accurate. Professor Siegel estimates that tariffs might add 1.5% (or at most 2%) to current inflation of 2.1%.
And that estimate was revealed before the court result on the legality of reciprocal tariffs.
The Conference Board index for consumer sentiment rose sharply from 85.7 to 98.0. The previous two months were 93.9 and 100.1. This release was the first to exclusively include survey data after the April 9th 90-day delay on US tariffs being introduced.
Europe
UK growth beat expectations with a +0.7% gain for the quarter. Nigel Farage’s right-wing party did particularly well against both Labor and Conservative parties in local elections. It even won a seat in parliament in the Runcorn by-election.
Reuters reports the European Central Bank (ECB) is likely to cut its rate by 25 bps to 2.0% in its June 5th meeting and then skip in July.
Rest of the World
Trump spent time in the Middle East with an entourage of government and tech CEOs. Few hard details were reported but the tone of the statements and media coverage was positive for Trump – apart from the news he is to be gifted a $400m plane by Qatar. The distinction between Trump’s public and private negotiations continues to be blurred.
Trump removed all sanctions on Syria.
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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