Monthly Market Commentary
As at 30 April 2025
Economic Overview
Australia
Australian inflation returned to the Reserve Bank of Australia’s (RBA’s) target band of 2 – 3%.
Australian inflation for Q1’25 remained unchanged at 2.4%, above the consensus of 2.3%. The trimmed-mean inflation, the RBA’s preferred measure of inflation, dropped from 3.3% to 2.9% for the quarter and is now back in the RBA’s target range of 2 - 3%.
The largest contributors to the Q1’25 inflation data were education, up 5.2%, and rising healthcare costs. Following its release, the higher-than-expected inflation data pushed the Australian dollar (AUD) higher.
The recent consumer and business confidence data suggested that the geopolitical environment has weighed on both Australian consumers and businesses. The consumer index fell to a 6-month low of 90.1, with sentiment 10% lower after the US tariffs announcement.
The RBA kept interest rates unchanged at 4.1% in April. Despite global concerns, the decision was based on Australia’s tight labour market, with the unemployment rate remaining steady at 4.1% in April. After the RBA meeting and the US reciprocal tariffs announcement, expectations shifted significantly, with the market now anticipating four interest rate cuts by the end of 2025.
International
Reciprocal tariffs increased the average tariff rate on US imports.
President Trump announced reciprocal tariffs, which were later delayed for 90 days. He introduced a universal 10% tariff on all US imports and larger tariffs on about 60 nations with trade imbalances, raising the average tariff rate on US imports to over 20%. An extra 84% tariff was added to Chinese imports, making the total tariff on China 145%. Other countries faced different rates: Vietnam at 46%, Taiwan at 32%, India at 27%, South Korea at 25% and Japan at 24%. Australia received a 10% tariff, despite having a trade surplus with the US.
University of Michigan 1-year forward inflation expectations rose to 6.5%, the highest reading since 1981, due to US tariffs on imports. Federal Reserve (Fed) Governor Powell hinted that the new tariffs are “significantly larger than expected” and may have a persistent inflation impact.
China is considering tariff negotiations with the US. Declining port traffic from China suggests potential supply shortages in the US.
US economic growth contracted by -0.3% QoQ, down from growth of 2.4% in Q4’24, mainly due to a surge in imports, likely from pre-emptive actions against import tariffs. Without this distortion, growth was not as bad as the headline suggested, with consumption falling but remaining solid.
However, this economic growth data will likely have minimal impact on the Fed. Probably, more crucial is how the economy will respond to the reciprocal tariffs and related developments. While inflation may have decreased in April due to falling energy prices, tariffs are likely to push prices higher in the coming months. However, with wage growth continuing to decline, underlying inflation pressures should hopefully remain well anchored.
Market Review
Australia
Australian shares were up 3.6% in April, outperforming international shares, with the communication services and information technology sectors posting the strongest gains.
Australian listed property rose significantly by 6.3% in April. This increase was broad based across most of the shares in the index, as investors saw value following a significant sell off over the past several months.
The AUD started the month weaker, dropping to 0.59 against the US Dollar (USD), after the announcement of the US reciprocal tariffs, before rallying strongly to end the month at 0.64.
International
International shares (hedged) were marginally down -0.4% over the month.
International government bonds increased by 1.2% over the month, as bond yields fell due to reduced tariff rhetoric and President Trump’s assurance that there were no plans to remove Governor Powell as Fed Chair.
Oil prices dropped by -15.5% in April, as OPEC announced a significant increase in output, coinciding with investors likely preparing for a drop in demand due to weakening global growth.
Market insights
Australia
Inflation continued to moderate and weakening confidence suggests the RBA will likely cut interest rates.
US reciprocal tariffs may impact Australian growth through China, our largest export partner. China is likely to expand its policy stimulus, focusing on consumption and stabilising the property market. Therefore, we believe Chinese growth will remain relatively unaffected compared to many of its trading partners.
While trimmed-mean inflation appears under control, we expect the RBA to continue interest rate cuts in 2025. We retain our overweight to Australian government bonds. The global trade uncertainty and impact to global growth also supports this position.
While unemployment remains low, both wage growth and job vacancies continue to fall, which suggests we should see the labour market begin to soften and a modest rise in unemployment in 2025.
We continue to expect growth to remain weak, as higher interest rates and cost-of-living pressures are likely to keep consumption suppressed. Geo-political concerns are likely to make businesses cautious about investing.
International
Tariffs and resulting uncertainty may push the US into a mild recession.
We believe that the recent tariffs and resulting uncertainty is likely to push the US into a mild recession and cause a moderate slowdown elsewhere. The main impact on the US is likely to be sudden fiscal tightening, due to the sharp rise in import prices.
In Europe, a significant fiscal boost in Germany should support medium-term growth; though US trade tensions may pose challenges. After a positive start to the year, China’s economy may slow due to tariffs, but the government might counteract this with looser fiscal policy.
Central banks around the world are likely to gradually cut interest rates in response to slowing growth. Meanwhile, the Bank of Japan is in a rate-hiking cycle, with further increases expected as inflation remains above target. These rises may be postponed, due to tariff uncertainty and a stronger Yen.
We have a negative outlook on growth assets, as tariffs are likely to impact US economic growth in the coming quarters and the effect on corporate earnings is possibly underestimated by share markets with companies withdrawing forward earnings guidance. We favour Japanese shares, due to the growth rebound and solid earnings growth.
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