July Market & Economic Update
Global Markets Resilient Amid Trade Turbulence and Policy Uncertainty
Just over three months after the introduction of the Liberation Day tariffs, markets are showing surprising resilience. Despite elevated geopolitical tensions and persistent policy uncertainty, global equities have rebounded from the losses recorded in April, with many indices now trading at fresh record highs.
Technology and AI Driving Optimism
Much of this rebound is being driven by the technology sector, particularly developments in artificial intelligence. The standout is Nvidia, which recently became the first company in history to reach a market capitalisation of US$4 trillion, a symbolic milestone that underscores the market’s belief in AI’s long-term growth potential.
This optimism has, for now, outweighed concerns about the global trade environment and the potential inflationary impacts of tariffs. While the inflation impact remains inconclusive, broad fiscal support and accommodative policy stances across major economies are helping to sustain investor sentiment.
Tariff Volatility Fuelling Uncertainty
However, volatility in trade policy continues to inject risk into the global economic outlook. The US has implemented or proposed tariffs ranging from 25% for Japan and South Korea to 30% for Mexico and the EU. Australia currently faces a lower 10% base tariff, but there is speculation this could rise to 15% or even 20%.
This fluid situation is dampening US business sentiment and casting uncertainty over labour markets and broader economic activity. Despite June’s core CPI printing at a moderate 2.9% year-on-year, the Federal Reserve has opted for a cautious approach, holding rates at 4.325% and signalling a ‘wait and see’ stance. This has drawn criticism from President Trump, who has expressed frustration with the Fed’s reluctance to cut and has publicly questioned Fed Chair Jerome Powell’s position.
Markets remain alert to the potential for a leadership change at the Fed, a shift that would have significant implications for US monetary policy credibility and bond market stability.
Europe and the UK: Mixed Signals, Diverging Paths
European and UK stock markets have also rallied, seemingly comfortable that official interest rates are heading toward less restrictive levels. The Eurozone has a clearer path forward, with CPI at 1.9% and underlying inflation at 2.3%, supporting expectations of further rate cuts from the current 2.0% deposit rate. The newly imposed 30% US tariffs only strengthen that case.
The UK, however, presents a more complex picture. Core inflation rose to 3.7% in June, raising concerns about the timing of any rate cuts. Nonetheless, markets are still pricing in an 85% chance of an August rate cut, even as S&P recently warned of the UK government’s limited fiscal space for budget repair. The Bank of England’s policy decisions in the months ahead will be watched closely.
China: Industrial Strength vs Domestic Fragility
China’s economic data continues to offer a mixed view. Official GDP growth remained solid at 5.2% year-on-year in Q2, with industrial production also surprising to the upside at 6.8%. However, retail sales slowed to 4.8%, and property investment remained weak, indicating that domestic demand is still under pressure.
Independent forecasts suggest Chinese growth will moderate to around 4.5% in 2025. As global trade tensions persist, China’s policy response will be critical in sustaining growth momentum, not just for its own economy, but for trade within the broader Asia-Pacific region.
Australia: Cautiously Navigating Global Headwinds
RBA Surprises by Holding Rates in July
Closer to home, the Reserve Bank of Australia (RBA) surprised markets by holding the cash rate steady at 3.85% in July, despite market pricing reflecting a 98% probability of a cut. This decision highlights the RBA’s preference for aligning major policy changes with quarterly economic releases and its ongoing emphasis on a data-dependent approach.
The RBA also made history by releasing its internal voting breakdown, revealing a 6–3 split in favour of holding. Governor Michele Bullock and Deputy Governor Andrew Hauser are believed to have led the hold vote, persuading a majority of the nine-member board.
Labour Market Weakness Reinforces Dovish Expectations
Latest labour force data further justifies calls for easing. The national unemployment rate rose to 4.3% in June, the highest since November 2021, and only 2,000 new jobs were added, all part-time. Hours worked fell by 0.9%, and underemployment increased slightly to 6.0%.
Though some volatility may be due to statistical sampling, it signals a softening labour market. Inflation, meanwhile, remains contained, with the latest monthly CPI reading at 2.4%, well within the RBA’s target band.
Business and Consumer Confidence Improve
Consumer confidence is slowly recovering, although the July decision not to cut interest rates tempered enthusiasm. The Westpac-MI Consumer Sentiment Index rose by just 0.6% to 93.1. Business conditions were more encouraging, with business confidence rising 3 points to +5 in June and business conditions improving to +9 with the strongest gains in Queensland and Tasmania.
These trends support the view that inflation, Australia’s primary economic challenge of the past 18 months, is now broadly under control. While trade and geopolitical risks remain, Australia appears relatively well-positioned, with strong fundamentals in key regions and sectors.
Interest Rate Outlook: Steady Easing Ahead
The August RBA meeting is now expected to deliver a 25 basis point cut, bringing the cash rate to 3.6%. Some speculation remains around a larger 50bp cut, though this would be inconsistent with the RBA’s stated preference for gradual and consistent policy moves.
Looking ahead, quarterly rate cuts are likely to continue, with a base case path down to a neutral rate of 3.1%, before potential tightening again in FY27.
Looking Forward
Markets remain focused on the balance between technological optimism and geopolitical disruption. AI-driven growth continues to buoy equities and broader risk sentiment, but bond markets are more cautious, particularly as fiscal stimulus, trade policies, and central bank independence remain in flux.
In Australia, inflation containment is allowing for a more supportive monetary policy stance, which, combined with improving sentiment and regional economic strength, provides a stable foundation for growth, even in a globally uncertain environment.
The challenge now is navigating this optimism responsibly and ensuring the benefits of emerging technologies and easing inflation are shared equitably across regions and sectors. The short to medium-term outlook appears bright, but not without complexity.
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