CIO market update for June 2025

In this CIO market update, Rob Hogg unpacks the major events shaping June: from Middle East tensions and trade developments to rate expectations, inflation trends, and what it all means for investors.

Jump to ⏬:  USA |  Germany  |  Australia  |  Outlook

In previous years, investors might have experienced far greater market turbulence from the war that erupted in the Middle East in June. But what was remarkable during the month was the very limited market reaction to the war – except for oil prices. Toward the end of the month, equity markets rallied solidly as a cease-fire seemed to be holding. Other important factors that seemed to impact positively on equity market performances later in the month included news suggesting a rising likelihood of trade deals between the US and both the EU and China. This came even as negotiations with Canada foundered on the Canadian call for a global digital tax (although this tax was cancelled on June 30).

The pending passage through the US Senate of Trump’s Big Beautiful Tax Bill seemed to add to the positive sentiment, as did talk that the US Administration may delete Section 899 from its budget legislation (this provision would have allowed the US to impose retaliatory taxes on companies and investors from countries that were deemed to have “punitive” tax policies).

CIO market update: Shifting sentiment and interest rate expectations

As noted above, equity markets rallied toward month-end (with the S&P index recording a new record high). US bond yields drifted lower, with curves steepening as shorter-dated US yields fell faster than longer-dated yields. Driving the steepening move in the yield curve was a slight weakening in US “hard” data, especially the labour market. This came even as previously weak “soft” data improved from extremely weak levels. Investors reacted by pricing a greater likelihood of US rate cuts before year-end.  But getting a clear read on the US economy’s strength is still difficult, with the tariff announcements causing significant volatility in US spending patterns.

Australian bond yields also fell over the month, but the domestic curve slightly flattened in contrast to the slightly steepening US curve (both measured as 10-year yields minus 2-year yields). The difference in curve change was due to US rate cut expectations moving significantly more than Australian ones during June. Nearly a full RBA July rate cut had already been fully priced by Australian money markets a month prior. Most other global bond markets recorded rising yields over the month. The US dollar continued its downward trend, falling a further 2.5% (DXY Index) over the month.
>Oil prices, which, as noted above, had experienced significant volatility during the month, drifted lower in late June, retreating from their June 23 peak at USD 78.40 (WTI August futures contract), ending the month at USD 65.10 (but still up from the May 30 close at USD 60.97)

Key market movements over the month were as follows:

• S&P/ASX300 Accumulation Index (i.e., including dividends) rose 1.4%.
• S&P/ASX Small Ordinaries (Australian Small Companies) Accumulation Index rose 0.85%.
• The US equity market (S&P 500) rose 5.0%.
• Australian 10-year bond yield fell by 0.09% to 4.165%.
• Australian 3-year bond yield fell by 0.07%, closing at 3.26%
• The US 10 bond yield fell by around 0.18%, closing at 4.23%
• The Australian dollar moved higher against the weakening USD. It closed the month at around USD 0.6580 from USD 0.6430 at the end of May.
• The trade-weighted USD (DXY Index) fell by 2.5%. Calendar year-to-date, the DXY has fallen by around 11%, its sharpest first-half fall since 1973    

Key market movements over the month:

 

In this CIO market update, we look at:

• The surprisingly low market volatility in June.
• The US Fed and the Bank of England both leave rates on hold, emphasising their preparedness to wait to learn more about the likely course of the economy.
• Highly unusual for bond yields to rise during a rate cutting cycle.
• US soft and hard data seem to be converging in a gentle downward trajectory.
• US data still impacted by tariffs – personal spending weak in the aftermath of tariff imposition, price pressures muted.
• German outlook brightens.
• Australian employment picture remains robust.
• The Australian May monthly CPI was the last key data point ahead of the July 8 RBA meeting, suggesting room for an RBA cut.
• The market is pricing more than a full 0.25% July RBA rate cut.
• Domestic equity market news.
• Where to from here?

Resilient markets despite global uncertainty

Market sentiment, particularly in the US, ended June more optimistically than may have been expected given the month’s events. This is likely partly because the Middle East war has proven contained, with a cease-fire holding. It’s also possible the impact from tariffs has been less than feared so far:

• inflation impact has been muted,
• financial conditions have now recovered back to pre-tariff levels (with equity markets at record highs), 
• trade policy uncertainty seems to have moderated following steps toward de-escalation (albeit with July 9 as the next key hurdle), and
• resiliency is still being displayed in “hard” economic data, although growth momentum appears to be easing.

Another positive development over the past month is the supportive backdrop for renewed US central bank rate cuts. Markets have moved to price this in. Earlier and larger cuts could occur if the US economy (labour market) deteriorates more than expected. They may also happen if inflation continues to surprise to the downside, as it did in June.

However, trade-related distortions (covered below) mean that it will be challenging to obtain an accurate read of the underlying pace of the US economy. This may remain the case for some months. The market has seemingly already decided that the tariff impact on activity and inflation will be minimal. However, risks remain around Trump’s deferred tariff date (July 9). Additionally, there’s the potential for bond yields to begin their rising trend again. This is especially true given the unhealthy state of US fiscal fundamentals in the context of the significant fiscal easing that will follow the Big Beautiful Bill if it’s passed in its current guise.

Key market focus next month will be progress toward trade agreements ahead of Trump’s July 9 deadline and US labour market data.

Australia’s outlook in focus

In Australia, the economy has yet to show clear signs of recovering following the beginning of the RBA’s rate-cutting cycle. But the May CPI release, in particular, suggests that the RBA will likely cut rates for the third time in early July.

Our view remains that the Australian economy continues to be better placed than many other economies to withstand the expected negative influence of global tariff developments:

• Australia’s exports to the US are a very small proportion of the overall economy.
• Australia’s starting point of high cash rates means the RBA has significant room to move rates lower if required.
• Fiscal support of the economy is likely to continue to have a positive influence.

While we maintain our cautious stance due to the global backdrop, we feel Australia has significant potential to fare better than most other economies and markets during this highly uncertain period.

CIO market update: June developments in review

Market volatility surprisingly low, given the events of June

As we noted above, it was remarkable that market volatility didn’t rise during June. Apart from the oil price, most other markets displayed surprisingly little weakness or volatility:

• The VIX Index, which measures expected volatility in the S&P 500 Index, rose to only 22.4 in June and closed the month at a lower level than end-May.
• The MOVE Index, which measures volatility in US bonds, rose to only 100 and also ended June at a lower level than its end-May reading.

It was also interesting that the USD, historically a safe-haven currency during times of global stress, weakened throughout the month, ending the month down 2.5%. It was also interesting that the AUD rose through the month. We have written about the changing dynamics of the USD in prior monthlies, highlighting that the currency’s safe haven status seems to have changed (perhaps because of the changing nature of portfolio flows into the US with the US current account deficit increasingly being financed by inflows into US equities rather than into US bonds as had historically been the case).

VIX and MOVE indexes (December 31, 2024 – June 30, 2025)

Source: Bloomberg

DXY and AUD/USD (December 31, 2024 – June 30, 2025)

Source: Bloomberg

 

• USA •

The US central bank leaves policy rates (unsurprisingly) unchanged, happy to wait to learn more about the likely course of the economy. Growth uncertainty is elevated.

As widely expected, at their mid-June meeting, the Federal Reserve’s policy-making committee – the Federal Open Market Committee (FOMC) – decided to maintain the target range for the federal funds rate at 4.25% to 4.5%. The Fed’s last policy move was in December last year.

Tariffs didn’t get a mention in the Fed’s accompanying statement, although their impact was alluded to as the Fed acknowledged that “swings in net exports have affected the data“.

The Fed appears in no rush to cut rates, noting that “recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate remains low, and labor market conditions remain solid… inflation remains somewhat elevated [and] uncertainty about the economic outlook has diminished but remains elevated”.

Fed Chair Powell further noted that “for the time being, we’re well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance”.

However, as the month evolved, several voting and non-voting members of the Fed’s monetary policy committee voiced opinions at odds with the chairman’s view, instead suggesting that a rate cut could occur as soon as July 30. Market pricing is for a rate cut by the September 17 meeting.

Bank of England also leaves rates unchanged, happy to take a careful and gradual approach to further potential rate cuts (like the Fed)

The Bank of England also left rates unchanged at their June meeting, although the vote was not unanimous, with three policy committee members wanting to cut rates. Like the FOMC, the BoE highlighted the “heightened unpredictability in the economic and geopolitical environment” and, with “two-sided risks to inflation”, the BoE prefers, like the Fed, to adopt a gradual and careful approach to the further withdrawal of monetary policy restraint”.  

Highly unusual for bond yields to rise during a rate-cutting cycle

One of the highly unusual aspects of the current rate-cutting cycle in the US is the performance of US bond yields. The chart below from Goldman Sachs captures the 11 official rate-cutting cycles over the past 40 years. Specifically, it covers the nine-month period after the first cut in each cycle. Except for the late 1990s experience, the chart below illustrates how highly unusual it is for bond yields to be rising when the Fed is cutting.

Although US yields ended June at lower levels than the end of May, yields on 10 and 30-year bonds are still significantly higher than they were ahead of the Fed’s first rate cut in September last year. This is due to both higher “real” (TIPs – Treasury Inflation-Protected securities) yields and higher inflation expectations (“break-even” inflation expectations).   

Change in US Treasury yields during Fed rate-cutting cycles.

Source: Goldman Sachs

 

US soft and hard data seem to be converging in a gentle downward trajectory.

Several months ago, the market began to be concerned by the very sharp fall in “soft” US economic measures, such as consumer and corporate confidence surveys, which occurred as tariff uncertainty rose sharply. However, expectations that the real economy would, in turn, deteriorate have been confounded, as “hard” data failed to follow the weak, soft data. Additionally, the extremely weak soft data has recently begun to rebound somewhat, although most measures remain well below their end-2024 levels.

However, it may still be too early to fully assess the impact of the tariffs on the economy. The charts below show that on prior occasions, when a catalyst led to a sharp weakening in soft (survey-based) data, hard data eventually followed. And it does seem that labour market data in the US, a key example of “hard” data, is slowing.

Evolution of “soft” and “hard” economic data in the early days after key catalysts

Source: Goldman Sachs

 

US data still impacted by tariffs – personal spending weak in the aftermath of tariff imposition, price pressures muted

Evaluating the US economy’s true momentum remains challenging due to the distorting effects of the tariffs. Import and export data, as well as consumer spending, seem to have been most impacted. Labour market indicators are less susceptible to these distortions, suggesting that a moderate slowdown is underway as payroll growth has eased and initial jobless claims have edged higher.

Potentially impacted by the pull-forward of spending to beat the imposition of tariffs, US personal spending was weak in May, significantly impacted by a USD50 billion fall in motor vehicle sales for the month (measured as an annual rate of spending). Ahead of the very weak May outcome, March motor vehicle sales had increased by USD 56.6 billion as buyers rushed to buy ahead of the imposition of tariffs before falling by USD 4.5 billion in April.

Changes in US monthly consumer spending (USD $ billions at a seasonally-adjusted annualised rate (SAAR))

Source: US Bureau of Economic Analysis

 

Although the imposition of tariffs had been expected to drive inflation higher, so far, there is little sign of this outcome. Indeed, measures of inflation across total personal spending areas were very muted in May. The Personal Consumption Expenditure (PCE) price index increased by just 0.1%. The core PCE price index increased by 0.2%. This pattern is very encouraging for the US central bank, suggesting little price impact (so far) from the imposition of tariffs.

• Germany •

German outlook brightens

The Ifo Business Climate Index, a key barometer of German business conditions, rose further in June.

Forward expectations of business conditions have continued to improve following Germany’s election and the passing of fiscal reform legislation. Notably, Germany’s Ifo index doesn’t wait until spending begins to recover. Rather, in anticipation of greater fiscal stimulus in 2026 and beyond, Germany’s industrial and services sectors are reviving.

Ifo Business Climate Index

Source: Ifo

 

• Australia •

Australian employment picture remains robust

Because the number of people unemployed fell by 3,000, the unemployment rate remained at 4.1% in May, despite employment falling by 2,000. Even with this small fall in employment for the month, the total number of people employed remains up 2.3% over the year to May 2024. That is stronger than the pre-pandemic 10-year average annual growth of 1.7%.

Hours worked during the month rose by 1.3% and have risen by a solid 3.1% over the year.

Australian Unemployment Rate (%)

Source: ABS

 

Relative to RBA expectations in their May forecast update, the labour market is continuing to outperform, with the unemployment rate lower at 4.1% (the RBA had forecast 4.2%), underutilisation and unemployment slipping lower (against RBA forecasts for them to move higher), and accelerating growth in hours worked. This combination makes it difficult for the RBA to decisively cut rates. RBA Governor Bullock noted in her most recent post-meeting press conference: “We’ve still got this labour market issue … we need to make sure that we … see the strong labour market, but we don’t want that to result in inflationary pressures”.

May monthly CPI was the last key data point ahead of the July 8 RBA meeting – suggesting room for an RBA cut

The monthly CPI indicator rose 2.1% in the 12 months to May, following a 2.4% rise in the 12 months to April. Underlying measures also exhibited falls in their annual growth. The indicator, excluding volatile items and holiday travel, rose 2.7% in the 12 months to May, following a 2.8% rise in the 12 months to April. The trimmed mean measure was 2.4% in May (the lowest annual rate since November 2021), down from 2.8% in April. (The trimmed mean is calculated using a weighted average of percentage change from the middle 70 per cent of the distribution of price changes over the relevant period.)

As the ABS themselves note, when prices for some items change significantly, measures of underlying inflation (such as the annual trimmed mean) can provide more insight into how inflation is trending. This is why this measure attracts significant focus from the RBA, which could use the continued downward trend in trimmed mean inflation as a catalyst to cut rates in early July.

Annual movements in the Australian Consumer Price Index

Source: ABS

 

The market is pricing more than a full 0.25% July RBA rate cut

Although June began with markets seeing a high probability of a 0.25% rate cut in July (with a 0.18% point rate cut priced at that time), the month ended with 0.27% points of the possible 0.25% point rate cut priced. Most of this move in expectations occurred following the release of the May CPI.

Australian monetary policy rate cut expectations

Source: ANZ, Bloomberg

 

Domestic equity market news

The local broad market (ASX 300 Accumulation Index) returned 1.4% in June (calendar YTD up 6.4%). It outperformed the Small Ordinaries’ monthly performance (+0.85%). Reflecting the rise in the oil price in the month, energy was the best-performing sector. Financials followed, boosted again by the performance of CBA.

CBA hit yet another record high in June and closed the month at $184.75, up 5% from its $175.95 close in May. The CBA share price has now risen around 20% so far this calendar year. Analysts often contrast the performance of CBA with that of CSL. The CSL share price fell 3% in June, closing at $239.48. CSL’s share price has fallen around 15% this calendar year. The below charts from Macquarie compare the performance drivers of these two stocks over the past 10 years. The CBA chart shows that the change in multiple (P/E re-rating) has been significant in driving the stock’s total performance. This factor far outstrips the return generated by dividends.

CBA performance drivers

Source: Macquarie

 

In contrast, the performance of CSL has been driven almost entirely by earnings alone over this time period. The stock has suffered a P/E de-rate in recent times.

CSL performance drivers

Source: Macquarie

 

During the month, Santos (STO) received a non-binding, indicative proposal from a consortium led by XRG, a subsidiary of Abu Dhabi National Oil Company, and Carlyle, to acquire all the shares in STO for cash consideration of USD 5.76 (AUD 8.89 at the time of the offer) per share, via a scheme of arrangement. This offer boosted the stock, which ended the month 16% higher at $7.66.

• CIO market update: Outlook •

Where to from here?

The volatility of US policy announcements and the uncertainty up to Trump’s July 9 trade agreement deadline are the key next hurdles for markets.

Regarding the July 9 trade deadline, there is a range of potential outcomes, including:

• US announces deals/frameworks with a few trading partners.
• Deadlines are extended with a few other trading partners.
• A new tariff rate is set for the remaining trade partners.

It still seems most likely that the uncertainty created by the on-again/off-again tariff narrative (and the imposition of tariffs at some level) will lead to a slowing in the US economy. We may be starting to see in the key labour market data already.

In June, markets moved to price a “Goldilocks” scenario. This arose from increased expectations of a more dovish Fed, de-escalation of Middle East tensions, progress in US trade negotiations, and the removal of Section 899 from Trump’s budget bill. But it is still probably too early to be sure of the impact of tariff changes and lingering uncertainty. Should the already-slowing pace of US economic growth accelerate, it’s not clear that markets are priced for such an outcome

The Australian market, having posted a further gain in June, is not cheap. While it is relatively well-positioned, it remains vulnerable to market shocks. The overwhelming positive influence of one stock – CBA – still confounds many investors.

Perhaps the greatest domestic risk is that consumers are slow to respond to rate cuts. This could cause companies to reassess their earnings outlooks.

This sort of volatility, however, presents an opportunity for active managers like us. We continue to look to establish or add to our positions in excellent-quality companies that offer a real margin of safety over the long term.

 

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