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Economic update: January 2026

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As 2026 gets underway, it is still not clear which import tariffs have been authorised in the US – and the US Supreme Court is yet to rule on whether the tariffs are legal. The issue is that Congressional approval is required to sanction new tariffs and taxes but Trump has tried to circumvent this due process. Trump invoked old statutes to declare national emergencies so Congress could be by-passed.

Trump and his administration have stated that, if the tariffs are deemed to be illegal, they will use other methods to achieve the same aim.

All legitimate economic thinking reasons that import tariffs are nothing but a tax that will reduce consumption in the US and raise prices. Trump argues that tariffs will raise lots of revenue that can be used to good effect in the domestic economy. The problem that Trump’s thesis encounters is that the majority of revenue raised will have been paid for by consumers and US businesses.

Trump ‘negotiated’ trade policy using threats and penalties against those that did not comply with his position. The main protagonist in the trade war is China. China has retaliated by withholding exports of rare earths that it has a near monopoly over and which are essential for modern production of electronic vehicles (EV) among many other high-tech goods. It has also substituted the supply of some agricultural commodities from the US to South America. China has held firm in the face of Trump’s threats.

US farmers have suffered because of China’s actions. China stopped importing soybeans from the US. US farmers lost a major source of income while farm inputs – such as imports of fertilizer and farm machinery – have increased in price. Trump has moved to subsidise farmers using tariff revenue. Since the tariffs caused the problems, using tariff revenue to solve the problem is a less efficient way of running the economy. The US is ultimately worse off.

Trump is now partnering with some US firms by taking a share of export revenue of the likes of Nvidia. In other situations, he has ‘negotiated’ for foreign companies to invest vast sums in US manufacturing. It is far from clear that these investments will bear fruit. Neither is it clear that the US has the workforce willing and able to work in such industries.

Before Trump started this round of trade negotiations, the average tariff on US imports was 3%. That average has now lifted to near 18%.

Some commentators and politicians have stated that US inflation has not gone up as a result of the tariffs. Leading economists dispute that. Since importers and exporters around the world have been rescheduling trade to minimise the impact of the tariffs, and US companies are possibly cross-subsidising products within their portfolio, big jumps in inflation were not on the cards.

After separating out goods from the CPI basket, it can be shown that inflation of that subset has gone up from about 1.5% to just under 3%. US Federal Reserve (Fed) chair, Jerome Powell expects these one-off price changes to peak in the March quarter of 2026. Again, Trump has stated that he wants to give most US consumers the benefits of the tariffs. In other words, he took from consumers and businesses and now he wants to give it back!

Trump set Elon Musk up to run DOGE (Department of Government Efficiency). Lots of promises and initiatives were announced. A year down the track and reportedly nothing was saved and Musk retreated after his business interests seemed to suffer from his lack of focus.

The Fed paused its interest rate cutting cycle at the start of 2025 while it assessed what the impact on inflation of the new tariffs might be – and what impact they might have on the US economy. Trump threatened Powell with the sack and disparaged his performance as Fed chair. Powell held his ground and then brought in three successive interest rate cuts of 25 bps by the end of 2025.

Trump and his acolytes are bemoaning that yields of longer-term assets, like 10-year bonds and home mortgages, have not come down enough. It is well known by professional economists that Fed funds rate changes have little or no impact on long-term yields.

Powell’s term as chair of the Fed was set to end in May 2026. The incumbent can be re-appointed but Powell’s two terms mark a reasonable period of public service. He comes from investment banking and he possibly wishes to return to that world.

The government shutdown followed from the failure of Congress to agree on how to manage the deficit in time for the financing Bill to be passed. It turned out to be the longest shut-down in history – at 43 days. One important consequence of the shutdown was its impact on publishing official economic data such as employment data by the Bureau of Labour Statistics. Some publishing dates were delayed and some were cancelled.

Jobs data have become a major focus as the Fed has two goals – 1. stable prices and 2. full employment. Jobs growth has slowed down in recent months and Powell has stated that he believes there is a bias in the survey data – to the tune of overstating jobs growth by about 60,000 per month.

The Fed is predicting an end-of-2026 Fed funds rate of 3.4% against a market expectation of 3.07%. The current range is 3.5% to 3.75%. It seems quite likely that there will be two or more interest rate cuts this coming year.

With Trump due to appoint a new chair of the Fed – with the assent of the Senate – to start in May, there could be some additional friction around the transition in leadership of the Fed. The new chair will almost certainly be in favour of more interest rate cuts than less, but the chair only gets one vote out of 12.

It is important to acknowledge that there will be substantial government stimulus in the first half of 2026. Record tax refund cheques are due very soon and the so-called ‘Big Beautiful Bill’ will bring tax cuts and other benefits that will keep the economy ticking along. Growth for 2025 is likely to come in at around 2.5% for the year. That, and the stimulus to follow, means that a recession is unlikely unless Trump comes up with some unexpected action on the policy front.

With a modest economic growth scenario and falling interest rates, the US economy and, hence, stock markets are likely to do well for the first half of the year. What follows is highly dependent on what new actions Trump focuses on.

At home, Australia has had a data problem, but it was caused by the Australian Bureau of Statistics (ABS) trying to convert the energy subsidies into an electricity price change. It didn’t work out the way the government would have liked and, as the subsidies are ending, massive monthly contrived electricity price inflation data have entered the CPI calculations.

Because the RBA and the media do not seem to be aware of this issue, the market is now considering interest rate increases in 2026 to subdue inflation. Simple calculations show that CPI inflation is likely to start falling from the next data release on January 7th.

We think the next RBA board meeting at the start of February will pause while it considers the inflation problem in light of the most recent data. This has the potential to see a re-starting of the interest rate cutting cycle if the inflation data shows signs of moderating.

Besides all the usual policy changes that are designed to manage the economies, there has been a truly massive surge in the share prices of companies whose primarily business activity is directly in or related to Artificial Intelligence (AI). Presently, we do not see this as a bubble as the relevant companies have substantial revenue and earnings flows – unlike the start-up companies in the dot.com bubble of the early 2000’s. While each of the big tech firms seemingly have good strategies for expansion in place, it is less clear if all these companies together can fulfil expectations.

We see the Australian ASX 200 and the US S&P 500 share indexes performing well (long term average or slightly better) at least for the first half of 2026. The second half of 2026 should be re-assessed when it becomes clear what the political agenda and earnings profiles will be.

On top of the economic issues, there are many geo-political events that might cause increased market volatility: the Supreme Court’s ruling on tariffs; the Maduro court case and the Venezuela drugs blockade; the Russia-Ukraine conflict; Middle East unrest; and the management of the tariff problems with Canada, Mexico and China, amongst others.

ASSET CLASSES

AUSTRALIAN EQUITIES

After reaching an all-time high in October, the ASX 200 pulled back and finished up the year with +6.8% capital gains. Over December, the index grew a respectable +1.2%. Given the news that bombarded our market from the US, Ukraine-Russia and the Middle East, the index was resilient and made above-average returns in 2025.

When we include dividends (reinvested) the total return for 2025 was +10.3% this excludes the impact of franking credits.

INTERNATIONAL EQUITIES

Many thought the US markets would do well with Trump at the helm. He seems to like to judge his success as president by the performance of the market. The S&P 500 certainly took a pounding in April and May in the aftermath of the initiation of the ‘Reciprocal Tariffs’. That index recorded a capital gain of +16.4% for 2025 and it closed the year with a flat return of -0.1% in December after reaching a new all-time high during the month.

A key feature of Wall Street this year was the success of the so-called Magnificent 7 (‘Mag 7’) stocks. These businesses did particularly well on the back of massive pledges of investment in AI. However, towards the end of the year, these stocks tended to follow each other less closely than in the first half of the year as investors become more discerning as to the respective future propositions of each.

Some people are trying to equate the high performance of the Mag 7 with there being a bubble. A bubble does not exist if the fundamentals support the price movement. Unlike in the dot.com boom and bust, the Mag 7 stocks have strong revenue and earnings growth. While a pull-back is quite possible in some or all the component stocks, we think that would not just be due to a mispricing.

All the major indexes that we pay close attention to had solid capital gains in 2025: S&P 500 (+16.4%), UK’s FTSE 100 (+21.5%), Germany’s DAX (+23.0%), Japan’s Nikkei (+26.2%), China’s Shanghai Composite (+18.4%); and Emerging Markets (+28.1%).

The greatest losses might have been when investors sold their indexes at the bottom of the market in the June quarter and were too slow in getting back in to the market. The S&P 500 gained +37.4% from the intra-year low in April. The Nikkei rose +61.7% since its low from this point.

BONDS AND INTEREST RATES

A number of central banks might be getting near the end of their interest rate cutting cycles. That could not be said of the US Fed and the RBA.

The Fed made three 25 bps interest rate cuts toward the end of the year and arguably will continue cutting in the first half of 2026. The RBA is awaiting clarity of inflation data potentially skewed by the electricity price component. With greater clarity we think the RBA could cut interest rates several times in 2026, assuming data indicates inflation is softening post the electricity subsidy impact being removed from the series.

OTHER ASSETS

Brent Crude (-2.0%) and West Texas Intermediate (WTI) (-1.0%) oil prices were down moderately in December.

The price of gold rose in December by +3.0% but ended the year slipping back a little.

The price of copper (+12.1%) grew strongly in December. The price of iron ore gained +1.9% over the month.

Despite the market gyrations over 2025, the US equity market volatility index (VIX) otherwise known as the ‘fear index’, returned to normal levels at the end of 2025. It closed the year at 15.0.

The Australian dollar appreciated by +2.4% against the US greenback in December.

REGIONAL REVIEW

AUSTRALIA

Jobs in Australia held up better than expected because of government spending. Even so, 21,300 jobs were lost in the last reported month (November) and the pain hit harder in full-time jobs since they lost 56,500 jobs. The unemployment rate might seem low at 4.3% but that is well up from the 3.4% low experienced near the end of 2022.

CPI inflation rose from 3.6% to 3.8% in October which surprised most – including the RBA. We pointed out earlier that the electricity price index has been corrupted by the ABS having tried to work the flat energy subsidies into price changes. That took electricity price inflation – as reported by the ABS – to 37.1% in October, from 33.9% in September. However, the ABS reported that the electricity price index without the questionable subsidy calculation would only have been 5.0%. That means there was 32.1% (= 37.1% – 5.0%) inflation in a significant component that has caused an upward bias in the data.

Since the annual inflation figure is a composite of the trailing 12 months readings, we can say that the next CPI figure should fall back to around the target rate. An unusually big reading will have fallen out of the 12-month window to be replaced by a more benign monthly reading for November. Of course, the ABS might try and overhaul the index to remove the problem – which we would welcome.

Since the next CPI read will be published on January 7th 2026, there will be plenty of time before the next RBA interest rate decision, which is due on February 3rd, to work out a new policy strategy. Unlike the RBA and the market, at this point, we do not see an interest rate hike being necessary in 2026 unless a new macro problem emerges.

Australian GDP growth came in for September quarter 2025 at 0.4% with the annual reading being 2.1%. In per capita terms, the September quarter growth figure was 0.0%. Based on this measure, more interest rate cuts are needed and we do not see inflation being a problem.

An interesting feature of the National Accounts, that contains a variety of indexes, is the major revision in the Household Savings Ratio. It had been languishing at historically low levels but jumped up to 6.4% for the September quarter – a very reasonable and welcome reading. The ABS reported that the 6.4% reading followed a 6.0% for the June quarter. While that is true, the June quarter reading was revised upwards to 6.0% from 4.2% the month before. Revisions of this magnitude are quite rare. No explanation has been provided by the ABS for the revision.

CHINA

China data are still underperforming expectations. Some of the problems likely stem from China having to rearrange its imports and exports to work around US tariffs.

Some China data have been quite strong. For example, exports rose 5.9% for the month but partially because the previous month had been soft. Exports from China to the US fell -2.9%.

China is playing a long game in getting a trade deal with the US to work. They have the box seat on what are known as rare earths and critical minerals. The West is scrambling to find alternative supplies but the task is not easy. While reserves are plentiful around the globe, the by-products from mining and processing are problematic pollutants to deal with. That is most likely why China has been able to process while the West has struggled. These minerals are extremely important in the manufacture of high-tech goods like EVs and missile guidance systems.

We await a resolution to the China US tariff agreement.

UNITED STATES

The government shutdown prevented the normal flow of macroeconomic data. The jobs data were softening before the shutdown and Fed chair Powell has opined that there is a bias of about 60,000 jobs per month reported more than will be seen after the annual revision takes place. In the last two years, the aggregate downward revision for each year has been quite close to a million jobs.

This statement by Powell looks to us like he is gathering support for a consensus view within the Fed – and from the media and the markets – that more interest rate cuts are needed.

Inflation data reporting has been thrown into confusion. There is no doubt that inflation has been rising since the new tariffs started to be rolled out in June. However, the increase in inflation has not been as bad as some had feared. Trump cut many of the ridiculous tariffs before they had an effect and even removed some new tariffs completely. Powell expects tariff inflation to peak in the March quarter of 2026, unless, of course, there is a change in policy or new penalties for what are perceived as unfriendly behaviour by foreign countries.

Since Trump is prone to make up a new tariff in front of camera with seemingly little or no thought, volatility in equities, bonds and confidence have been buffeted.

Many of the so-called ‘tariff deals’ have been made with little detail. It is not clear if many of the foreign investment pledged by US trading partners will come to pass.

There is no doubt that there have been some US casualties from Trump’s tariffs. Farmers have suffered from increased fertilizer and agricultural machinery prices. They also suffered from China redirecting the sourcing of its imports from the US largely to South America, as a penalty.

Consumers are paying more for a whole range of goods such that Trump is putting subsidies in place. He is considering $2,000 per person, subject to some income limit; he has sent out cheques to servicemen and women, and farmers are also getting some of his largesse.

It has also just been revealed that US companies filing for bankruptcy is the highest in 15 years – and bankruptcies are up 14% in the last year.

US government debt has reached $38 trn and shows no signs of abating. At current rates, the US is spending one trillion dollars a year on interest payments alone – hence Trump’s desire to get interest rates down.

Since the Fed only really impacts the ‘short end’ of the yield curve – for terms up to about two years or so – Trump needs to win confidence from US and foreign powers that the future US economy will be stable. To date, he’s not winning many plaudits on that front.

The well-regarded University of Michigan Consumer Sentiment index is slightly above the reading recorded when ‘reciprocal tariffs’ were introduced in April 2025. However, the general level in this year is around that scored in the pandemic, the GFC and the 1970s oil crises.

Record tax refund cheques are going out in the March quarter and there are many disparate schemes that will provide fiscal stimulus to US households. The US economy seems safe from recession while there is an emphasis on stimulus. With US debt reaching problematic levels, stimulus is merely kicking the can down the road.

While Trump seems to be hopeful a new Fed chair will resolve US debt problems, this is very unlikely. The chair has the power to try and reach a consensus on interest rate decisions. He is only one vote in 12 (only 12 of the 19 committee members have a vote at any point in time). As much as Trump would like to be able to direct the Fed to do his bidding, this is unlikely to be a success.

EUROPE

The British unemployment rate climbed to a four-year high of 5.1%. Inflation in the latest report did fall from 3.5% to 3.2%. The Bank of England cut its interest rate by 25 bps to 3.75%.

The European Central Bank (ECB) kept its interest rate on hold but slightly increased its growth forecast to +1.4% for 2025 and +1.2% for 2026.

Europe is trying to work together to help resolve the Ukraine conflict.

REST OF THE WORLD

Japan reported inflation above its target for the 44th month in a row. The Bank of Japan raised its interest rate from 0.5% to 0.75%. Japan exports grew by +6.1% beating the expected +4.8%.

The Organisation of Economic Cooperation and Development (OECD) posted its list of member countries’ rates of productivity. Australia was positioned second last!

 

Practical Holiday Finance Tips: Enjoy the Festive Season Without Breaking the Bank

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The holiday season is a time for joy, family, and celebration—but it can also bring financial stress. Between gifts, travel, and entertaining, expenses can quickly spiral out of control. The good news? With a little planning and discipline, you can enjoy the festivities without starting the new year in debt.

1. Create a Realistic Holiday Budget

Start by listing all anticipated expenses—gifts, decorations, food, travel, and events. Assign a spending limit for each category and stick to it. Use budgeting apps or a simple spreadsheet to track your spending in real time. This helps you avoid impulse purchases and keeps your finances on track.

Tip: Review last year’s holiday spending to set realistic expectations. Factor in inflation and rising costs when planning

2. Prioritise What Matters Most

Ask yourself: What brings the most joy during the holidays? Is it a lavish meal, meaningful gifts, or simply quality time with loved ones? Focus your budget on what matters most and cut back on non-essential extras. This approach reduces stress and keeps spending aligned with your values.

3. Plan Your Gift List Early

Avoid last-minute shopping, which often leads to overspending. Make a list of recipients and set a spending cap for each person. Consider alternatives like Secret Santa or group gifts to reduce costs. Thoughtful, low-cost gifts—such as homemade treats or experience-based presents—often mean more than expensive items.

4. Take Advantage of Sales—But Stay Disciplined

Holiday sales can be tempting, but only buy what’s on your list. Use price-tracking tools and shop early to secure the best deals. Avoid “Buy Now, Pay Later” schemes unless you have a clear repayment plan—they can lead to long-term debt.

5. Limit Credit Card Use

Whenever possible, pay with cash or debit to avoid overspending. If you use credit cards, choose those with cashback or rewards and pay off the balance immediately. Set up spending alerts to monitor activity and prevent surprises

6. Share the Costs

Hosting a big holiday meal? Make it a group effort or rotate hosting duties among family members. Sharing expenses not only eases financial pressure but also makes gatherings more collaborative and fun.

7. Start Saving for Next Year

Once the holidays are over, set up a dedicated savings account for next year’s festivities. Even small monthly contributions can add up, reducing stress when the season rolls around again.

Financial wellness during the holidays isn’t about cutting out joy—it’s about making joy sustainable. By planning ahead, prioritising what matters, and spending mindfully, you can celebrate the season without financial regret.

Economic Update – June 2025

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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 your Financial Adviser.

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. Its 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.

Purpose-Driven Retirement: More Than Just Financial Planning

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For many, retirement is viewed as the end goal of decades of work – a well-earned reward marked by freedom from alarm clocks, meetings and deadlines. But beyond the spreadsheets and superannuation balances lies a deeper question: What does retirement mean for you personally?
While financial preparedness is critical, it is only one part of the fulfilling retirement. Increasingly, is has been known that retirees are discovering that having a purpose – a reason to get up in the morning – plays a huge role in their well-being and happiness.

Why Does Purpose Matter?

Research shows that retirees with a strong sense of purpose enjoy better physical health, sharper mental activity and have a more positive outlook on life. Purpose gives structure to days that are no longer dictated by work, and it helps prevent the common traps of boredom, isolation, or feeling directionless.
Retirement is not just about winding down. It is about redefining what your life can be.

Transitioning To Something, Not Just From Work

It is known that the most successful retirees are those that are retiring to something. Be it volunteering, learning a new skill, travelling, mentoring, or even part-time work in a passion project.
It is important to ask yourself:
What activities energise me?
Are there causes or communities I would like to contribute to?
What hobbies or talents have I always wanted to explore?
By answering these questions, you can start to build a guide on how you can spend your time meaningfully, far beyond the numbers in your bank account.

Aligning Purpose with Your Financial Plan

A purpose-driven retirement isn’t about ignoring your finances but rather using them strategically to support the life you wish to lead.
For example:
Do you want to volunteer overseas? Budget for travel and healthcare.
Are you thinking of starting a small business or creative pursuit? Explore the financial feasibility and risks associated.
Planning to support your community? Consider charitable giving strategies that are tax effective.
Linking together your financial plan with your personal goals allows for your money to become a tool for impact and enjoyment – not just security.

Talk to Your Adviser About the Why, Not Just the How

Your adviser is here to help you think beyond just savings and investments. They are here to support your lifestyle aspirations and ensure your financial strategies are aligned with your values and visions for retirement. No matter if you are 5 years from retirement or already there, it’s never too late to explore what gives your life meaning and to plan for it accordingly.

Economic Update – May 2025

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In this month’s update, we provide a snapshot of economic occurrences both nationally and from around the globe.

Key points:

  • Trump suspends reciprocal tariff policy above 10% hours after introduction
  • Markets respond positively to tariff hiatus, but many companies suspend forward earnings guidance
  • US consumer confidence falling sharply
  • RBA looks set to cut rates in May

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 your Financial Adviser.

The Big Picture

The global economy is highly dependent on the US economy. The current performance of the US economy is highly dependent on the policies of the incoming president – Donald Trump. New presidents are often judged by what they achieve in their first 100 days. That window is now closed. Trump campaigned on several initiatives. We think at least four were central to his dream to ’Make America Great Again.’ There is no doubt the US debt is unsustainable at $36 trillion. Neither Biden, nor Trump in his previous term, addressed the issue in a meaningful way. Action on debt is appropriate but is Trump misguided in his current strategy? Trump promised to end the Russia-Ukraine war on ‘day one’. He was to stop immigration at the borders and deport large swathes of existing illegal, or ‘undocumented’, immigrants; there are reportedly well over 11 million of them in the US! He was also to impose import tariffs that he claimed would rapidly generate substantial revenue to reduce US debt. And he was to reduce government wastage and inefficiencies (using deregulation) to stimulate business growth and cut debt. After 100 days there have been no noticeable improvements in the resolution of the Ukraine conflict. Trump did, however, berate the Ukrainian president, Zelenskyy, in the White House on live television. It was embarrassing to watch. No leader should be treated like that. We can only presume Trump was venting his frustrations at having made no progress on ‘stopping the war.’ It appears that some gains have been made in reducing the inflow of legal and illegal immigrants. Several attempts have been made to deport groups to Central America but some of these actions have fallen foul of the law. Various court orders were made to reverse some of the deportations. Indeed, at least three US citizens were incorrectly deported – at least two of whom were small children. The process is in chaos. Trump seems to be challenging the judicial demands more in the fashion of a dictator than an elected president. Trump did reverse his decision on student visa cancellations. The tariff policy was destined to fail before it was implemented. We know of no respected economist who supports the policy as a mechanism for redressing trade deficits. The trade advisor to Trump, Peter Navarro, has been accused of fabricating academic support for his views. Before Trump returned to the White House, the average import tariff in the US was 3%. After the so-called ‘reciprocal tariffs’ were announced, that average jumped to 27%. On delaying the introduction of the reciprocal tariffs, the average tariff fell to 23%. When China is excluded (with a 145% tariff), the average tariff is to be still massive at 18%. The reciprocal tariffs are not as named. They are penalties to attempt to reduce trade deficits on goods on a bilateral basis. There is nothing wrong per se with trade deficits. Such deficits reflect investment wishes of the US exceeding savings. There are proper ways of addressing trade deficits; imposing tariffs is not one of them. Importantly, the Smoot-Hawley tariff act of 1930 in the US most probably caused the Great Depression! The situation got to boiling point as Trump has been accused of lying about the trade deals he claims he is doing. One report we saw said Trump claimed to be negotiating with China and talking to President Xi Jinping on the phone. China claims there have been no phone calls and no negotiations. Trump blustered under questioning by the media. Navarro claimed that they could do 90 deals (with 90 countries) in 90 days. When asked why no deals had yet been announced, Trump said lots had been done. Indeed, he claims 200 have been done. Since Trump apparently has no trouble telling lies to the media there is no knowing how this will all end. However, Trump has apparently added a few more concessions here and there. He needs an exit plan. At the time of writing the US Customs and Border Protection department claimed about $500 million had been collected in tariffs over the period of a few weeks but Trump claimed they would collect about $2 billion per day. One particularly important retaliatory non-tariff response by China was the cessation of the granting of export licences for its reserves of several ‘heavy rare earth minerals’. China has a near monopoly on about six of them which are essential in the manufacture of EVs, fighter jets and drones, etc. The US has been operating on a just-in-time inventory of them so the US could soon suffer serious consequences. China has also stopped importing beef from the US. Instead, it has reverted to importing beef from Australia. Elon Musk was appointed as a non-elected official in charge of DOGE (Department of Government Efficiency). Many claims have been made about savings, but few are backed up with receipts. Trump claimed there will be $2 trillion of savings. So far only $160 billion had been recorded on their web site and 60% of that sum was not itemised. Several pre-emptive moves have been made to alleviate the impact of the tariffs. China exports grew 12.4% in March against an expected 4.4%. US orders for autos in the US soared 9.2% in March compared to 0.9% in February. People wisely bought ahead of time to reduce tariff payments. From our reading, the US Secretary of the Treasury, Scott Bessent, appears to be changing his stance. He was very pro-Trump in the beginning, but he appears to have been the architect behind delaying the reciprocal tariffs by 90 days – conducting the meeting on the topic when Navarro was known to be otherwise engaged. Equity markets have been recovering from the initial impact of the tariff saga. More than half of the loss from the recent high in the S&P 500 has been regained. The VIX ‘fear index’ has retraced from the recent high in April of 52.3 to about 25 at the end of that month. Values in the range 12 to 15 are usually considered to reflect normal conditions. Australians voted in the Federal election on May 3 and have returned the Labour government in a land slide win that has increased their majority in the House of Representatives. Our assessment is that the election outcome does not result in any material changes to the course of the Australian economy or financial markets in the near term. Australian labour force data reflected an economy that is ticking along. A total of 32,200 jobs were created in March and the unemployment rate was 4.1%, an historically low rate. Retail sales adjusted for inflation grew 1.3% over the prior 12 months. The RBA held interest rates ‘on hold’ in April but the chance of a rate cut or two in May is judged to be high by the RBA interest rate tracker tool on the ASX website. It is never an option not to have an opinion about the investment future. Even just holding cash is an actively made decision. We see more volatility in months to come but the medium term for the major asset classes does not appear to have yet been put materially off track. That said, the path of US economic policy and the many twists and turns we expect it to take will be a major source of volatility. This being the case, we may need to amend our views, but we do not consider it necessary at this juncture as we await further developments to the tariff policies. Despite the elevated inflationary risk resulting from these policies both the US Fed and the RBA look set to cut rates several more times this year as recession risk builds.

Asset Classes

Australian Equities

After a wild ride in April, the ASX 200 finished up 3.6% on the month which was much stronger than most major indexes. In April, only the Energy sector (-7.7%) returned a capital loss on sharply falling oil prices The index is now 10.0% off the low for 2025 but still -5.0% from the high.

International Equities

The S&P 500 finished April strongly with seven consecutive daily gains. However, it was still down -0.8% on the month and -5.3% on the year. Most of the other major indexes made modest gains or losses in April. The ASX 200 was the stand-out performer at +3.6%! The March 2025 quarter reporting season in the US has produced some big earnings forecast beats, mainly in Financials and the ‘Mag 7’. Most companies were limited in their forward guidance given the uncertainty over the Trump tariff policies and the impacts that they may have.

Bonds and Interest Rates

The Fed has been in a public conflict with Trump. Trump keeps saying rates should be lower and he “can’t wait until he gets a new Fed chair.” Jerome Powell, the current Fed chairperson has been steadfast in his calm view that he is poised to react to any new situation. Nobody really knows what will happen with tariffs and whether they would cause inflation. They will certainly increase prices, but will the change just be transitory? If long-term inflation does ensue, changing rates would not be the solution. It would be appropriate to reverse the cause and cut tariffs! The 10-year US Treasury yield fell to 4.0% before the reciprocal tariff narrative took centre stage. This yield shot up to 4.5% and this rise caused consternation. A huge tranche of US Treasurys is set to mature in June and needs to be rolled over (refinanced). The last thing Trump, the Treasury or the Fed wants is higher yields for this big roll-over. It was the day that the 10-year US Government Bond yield hit 4.5% that the reciprocal tariffs got delayed by 90 days! There is some common sense in the governing bodies. Since the delay, the 10-year yield has got back to under 4.2% and equity markets have stabilised. The US dollar is weaker. The RBA kept interest rates on hold in April as was widely expected as a move then might have been seen to be political given the impending general election. The market has all but priced in at least one RBA cut on May 20th with a reasonable probability of a double cut of 50 bps. We think it is quite possible the RBA will cut by 35 bps to restore the pre-emergency rates of simple multiples of 0.25%. 3.75% in May rather than 3.6% wouldn’t make a big difference to the economy. The official cash rate can always be cut again in June if the RBA wants. Cutting by 60 bps in May might be seen as destabilising.

Other Assets

Brent Crude oil (-15.5%) and West Texas Intermediate crude oil (WTI) (-18.4%) prices were down sharply in April. The price of gold continued its strong rally with a gain of +5.9% in April. The price of copper (-2.4%) was down, as was the price of iron ore (-4.7%). The VIX ‘fear’ index is still elevated at 24.7 but well down from its intra-month high of 52.3. The Australian dollar (AUD) traded in a wide range ($US0.5975 to $US0.6437) over April finishing near its high ($US0.6402).

Regional Review

Australia

Australian jobs data for the latest month provided some evidence of an economy that is ticking along. The 32,200 new jobs in the month translates to a growth rate over the year of 2.2%. The full and part-time growth rates for the year are 1.6% and 3.3%. The big bulge in part-time growth rates above 6% last year have now dissipated. The unemployment rate was 4.1% maintaining a range of 3.9% to 4.3% for the last 12 months. Retail sales for the month were up 0.2% and 3.6% for the year. When adjusted for inflation, sales were up 0.1% and 1.3%, respectively.

China

There were a few surprises in China macro data in April. GDP growth came in at 5.4% against an expected 5.1%. Exports were 12.4% against an expectation of 4.4% but imports missed at -4.3% against and expected -2.0%. We put these big discrepancies down to a reorganisation of trade flows to try to beat the new US tariffs that were to kick-in during April. The 10% points outperformance of exports in March translates to about a month’s worth of exports. CNBC reported that about 25% of container ships from China to the US were cancelled for April. Since US Treasury Secretary Scott Bessent is freely commenting that the tariffs with China are unsustainable, we expect some mollification of the current situation. Trump even signed an executive order to that effect on the last day of April.

US

US jobs were up +228,000 in the latest month with an unemployment rate of 4.2%. The wage rate was up 0.3% for the month or 3.8% for the year. US CPI inflation came in at 2.8% from 3.1%. With shelter inflation at 4.0%, CPI-less-shelter inflation was well under target at 1.5%. There are well-known problems with the shelter inflation calculations. We deduce that inflation is under control when measured properly but the future of inflation is now uncertain. The Fed-preferred Private Consumption Expenditure (PCE) inflation measure was flat for the month in both headline and core but up 2.3% headline and 2.6% core on the year. The respected University of Michigan consumer sentiment survey reported another big monthly drop in the index – down to 47.3 from 76.9 last November at the time of the presidential election. The 1-year inflation expectations data came in at 6.5% – the worst result since November 1981. The 5-year inflation expectations were 4.4%. Both inflation expectations are sharply above those of last November. The Conference Board consumer confidence index also fell sharply – to 86.0 from 93.9 in the prior month and down from 112.8 in November 2024. The volatility/uncertainty created by Trump’s tariff policy has caused the US consumer to be less confident hence the decline in the confidence measure which is expected to feed into consumption data. The preliminary GDP growth rate for the March quarter of 2025 was published on the last day of April. The prior Atlanta Fed forecast was -2.5% for the quarter (annualised). The official estimate was -0.3%. While this rate may alarm some there are three sets of unusual circumstances to explain the big change from the 2.5% level reported for the December quarter of 2024. There were several devastating hurricanes on the East Coast early in the March quarter; the wildfires in California around the northern region of Los Angeles were significantly larger and far more impactful than normally experienced. Finally, there is reasonable evidence that imports boomed in the March quarter to get in ahead of the tariffs that were scheduled to start on April 2nd. The way GDP is calculated, imports detract from growth unless they are offset by inventories or investment in the same period. We expect this negative to be a one-off result, but we still expect growth to be lower in 2025 than 2024. Whether there is a recession, a slight recession or low growth is too hard to predict at this point in time given the fluidity of Trump’s policy changes. The latest Fed forecast is for trend GDP growth of 1.7% in 2025.

Europe

The European Central Bank (ECB) cut its reserve interest rate by 0.25% points to 2.4%. UK inflation dropped to 2.6% from 2.8%.

Rest of the World

Egypt cut its official interest rate by 2.25% points to 25.5% while Turkey hiked its rate by 3.5% points to 46% to defend the value of its currency. Japan’s inflation climbed to 3.6% for the headline rate and 3.2% for the core rate which strips out volatile items. Japan is still on course to raise its interest rate from its current 0.5% to end the year at 1.0%. After decades of weak or negative inflation, a reading of 3.6% is not yet a problem for them. The Reserve Bank of India cut its rate by 0.25% points to 6.0%.