Market Commentary
Last updated: March 2025
Economic review
Australia: The Reserve Bank of Australia cuts rates by 0.25% to 4.10%.
The Reserve Bank of Australia (RBA) cut the cash rate by 25bps to 4.10% in February, in line with market expectations. This marks the first time since 2020 that the central bank has cut rates. The RBA stated in its monetary policy statement that “inflationary pressures are easing a little more quickly than expected”. This along with other factors like slow growth in private demand and easing wage pressures supported the policy decision.
However, the RBA cautioned against expecting further easing, as the labour market conditions remain relatively tight evidenced by limited labour supply and stagnant productivity growth. It further warned that easing monetary policy too much too soon could stall progress on reducing inflation. The RBA increased its December 2026 core inflation forecasts by 0.2% to 2.7% and lowered its 2025 and 2026 unemployment rate forecasts by 0.3% to 4.2%. This decision can be seen as a hawkish cut.
Australian employment remained solid in January, with 44,000 jobs added and unemployment slightly increasing to 4.1%. Full-time jobs rose by 54,100, while part-time jobs fell by -10,100. The participation rate increased slightly to 67.3%. Although the labour market remained strong, wage growth weakened in Q4’24, slowing to 3.2% Year on Year (YoY) from the previous 3.5%.
Retail sales in December was -0.1% month on month (MoM), following solid retail sales growth in October and November. Retail sales growth was up 4.6% YoY. Household spending was up 0.4% MoM in December and the rise in household spending over Q4’24 may concern the RBA given the strength in the labour market.
International: US President Trump imposes tariffs on US steel and aluminium imports
The US has imposed a 25% tariff on steel and aluminium imports. Currently, 25% of steel consumed in the US is imported; with the three largest exporting countries being Canada, Brazil and Mexico.
President Trump announced that the next steps in his tariff plan will be reciprocal tariffs on all trading partners. These tariffs would be customised for each country and will match other countries’ tariffs on the US, as well as address any non-tariff barriers believed to disadvantage the US.
The impact of tariffs will likely be that businesses will question whether and when to invest especially with the risk of a prolonged trade war, which could impact international growth and reduce the demand for iron ore and other commodities.
Tariffs are also likely to create a one-off boost to inflation rates, as businesses increase prices to pass on some of the tariff cost to consumers. Central Banks will generally overlook these temporary effects; however, risks remain if tariffs lead to a sustained rise in consumer inflation expectations.
The US Consumer Price Index (CPI) for January was higher than expected, with the increases being widespread and not driven by shelter, unlike previous months.
In the UK, the Bank of England cut interest rates by 0.25% at their February meeting, noting significant progress in reducing inflation over the past two years, as external shocks have lessened. Domestic inflationary pressures are easing but remains somewhat elevated, and UK economic growth has weakened.
Market review
International shares (hedged) had a slightly negative return, down -0.9% in February; due to disappointing US economic data, rising inflation and investors’ sentiment around President Trump’s economic plans.
Australian shares were significantly lower than their international counterparts, down -3.8%. This underperformance was mainly due to disappointing earnings results from large cap shares in the banking sector.
International sovereign bonds were up 1.0% in February, as bond yields fell over the month driven by softer-than-expected US economic data. Australian sovereign bonds were up 0.9% in February, as RBA comments cautioning expectations for additional interest rates cuts caused bond yields in Australia to stay elevated compared to international yields.
International listed property returned 2.0% in February; and Australian listed property were down -6.1%, as there was some capital raising in the Australian REIT sector.
International credit was up 1.4%, although credit spreads were unchanged over the month, with the fall in absolute yields contributing to the positive return.
The Australian dollar (AUD) remained unchanged over the month but was volatile as it reacted to both the risk-off sentiment and the RBA’s statement from its February meeting. The AUD/USD traded between 0.61 and 0.64 in February.
Australia: No expectation that the RBA will rush into further rate cuts
While the RBA cut rates at its February meeting, the labour market is stronger than the RBA would prefer. Therefore, we do not expect the RBA to rush into further rate cuts. Further easing will likely depend on sustained signs of a loosening labour market and/or weakening wage growth. Markets are currently pricing in another two rate cuts by the end of 2025.
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.
Locally we favour Australian sovereign bonds over cash, with interest rates likely to have peaked this cycle.
International: US imposes tariffs on the US’s three largest trading partners.
It is likely the impact of tariffs will be a one-off impact to inflation, and Central Banks are expected to treat it as such. We believe that President Trump ultimately wants to strike a deal with economic partners; however, the longer the trade war continues, the larger the implications are likely to be for economic growth.
Central Banks around the world are likely to continue to cut rates, as inflation moderates but at a slower pace. The exception is Japan, where we expect interest rates to rise as it emerges from a multi-decade deflation period.
Japan is likely to continue to do well economically, driven by income growth and continued investment in capital expenditure. We continue to favour Japanese shares relative to other developed country share markets.
We favour International listed property, as fundamentals are broadly healthy, and valuations are attractive. Domestically, we favour Australian sovereign bonds over cash, with interest rates likely to have peaked this cycle.
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