June 2025 quarter economic and market commentary
Financial markets through the June quarter were dominated by assessments of the likely consequences of the economic policy agenda of the Trump Administration encompassing not only tariffs but the Administration’s budget legislation known as the ‘One Big Beautiful Bill’ (OBBB).
Geopolitical developments also proved of interest as the US sought to militarily neutralise Iranian nuclear capabilities. The latter proved to be of ephemeral concern as it quickly became clear that Iranian retaliatory capacity was limited and hostilities proved short-lived.
The beginning of the quarter saw financial markets take what proved to be an overly pessimistic view of the likely return implications of the Trump trade agenda. That pessimism reached its nadir in early April in the wake of the President’s ‘Liberation Day’ announcement on April 2nd as the S&P500 fell around 12 per cent in early April.
That pessimism was short-lived as the Trump Administration walked back some of the more severe elements of those ‘Liberation Day’ announcements. That walking back came in the wake of a sharp increase in US 10-year bond yields as the bond market digested the likely inflation consequences of an aggressive tariff agenda.
In the immediate wake of the ‘Liberation Day’ announcement, recession fears had emerged against a background of still ‘sticky’ inflation, fears about which were only elevated by the effect of tariffs on inflation and inflation expectations. This led markets to contemplate a ‘stagflation-lite’ scenario where economic activity declined but inflation proved stubborn. Such an environment was thought to limit the ability of the Fed to lower the policy rate which, together with a gargantuan budget deficit, would see at best only limited declines in bond yields. Markets came to a judgement that the headwinds to equity market performance were set to intensify.
But those fears proved short-lived.
Inflation – at least temporarily – remained relatively quiescent and US economic activity relatively resilient.
The result was a sharp rebound in US equity markets to the extent that the S&P500 finished the quarter almost 25 per cent above the early April lows. This was despite US 10-year bond yields being more or less unchanged over the quarter finishing at 4.23 per cent.
In commentary throughout the quarter, the Fed appeared to confirm a reticence to contemplate policy rate reductions given already ‘sticky’ inflation and the potential impact of the Administration’s tariff agenda on inflation and expectations thereof. That, along with the prospect of an even higher budget deficit as the OBBB wound its way through Congress, probably put a floor under bond yields but, as already canvassed, not to the extent that it prevented the sharp bounce in risk markets from early April.
Budget and trade issues saw a continued significant depreciation of the USD versus the EUR in the quarter.
Gold (in USD terms) exhibited strong price appreciation during the quarter. This reflected a weaker USD but also some nascent concerns regarding the durability of the ‘safe-haven’ attributes of US Treasury bonds.
Bitcoin also exhibited strong price appreciation perhaps assisted by the prospect of a lighter regulatory regime.
Locally, inflation data showed that inflation was declining. That saw the RBA on May 21st announce a decline in the policy rate from 4.10 per cent to 3.85 per cent. Markets are anticipating further cuts from the RBA in 2025.
The Australian equity market also rebounded strongly largely reflecting US developments but also aided by the prospect of multiple cuts in the policy interest rate. The ASX200 finished the quarter close to record highs.
Going forward, the key issues for 2025 revolve around how the Trump agenda might evolve. Certainly, there remain some residual fears that ‘sticky’ inflation and the Trump tariff agenda could still yet result in a ‘stagflation-lite’ scenario. That might yet arrest the current positive tone in markets. Having said that, there is very little evidence of such a scenario in the hard economic data.
That suggests that there may be episodic bouts of volatility where the potential for seismic shifts in sentiment and the prices of financial assets exist.
July 2025
