Ahead of the game: 26 May 2025

Wall street falls as yields surge; Australia 200 mixed post-rate cut

United States (US) stock markets fell this week as investors adopted a more cautious stance. US bond yields climbed following a weak bond auction and Moody's recent downgrade. The advance of President Trump's tax bill through the House of Representatives added further pressure. The legislation is expected to increase debt by $4 trillion over the next decade if passed by the Senate, contributing to the rise in yields.

Locally, the Australia 200 (ASX 200) received a boost from a dovish 25 basis points (bp) interest rate cut by the Reserve Bank of Australia (RBA). However, gains were limited as surging long-term bond yields pressured interest rate-sensitive sectors. The financials, real estate, and consumer discretionary sectors bore the brunt of this pressure. These three sectors collectively represent about 50% of the Australia 200's weighting, explaining the index's muted response despite the central bank's dovish stance.

The week that was: highlights

• US Flash purchasing managers' index (PMI) beat expectations, with the composite index rising to 52.1 in May from 50.6 prior
• US initial jobless claims decreased by 2000 from the previous week to 227,000 for the period ending 17 May. This marked the lowest reading in four weeks and came in below market expectations of an increase to 230,000
• In the United Kingdom (UK), headline inflation rose to 3.5% year-on-year (YoY) in April from 2.6% YoY, exceeding market forecasts of 3.3%. Meanwhile, the core measure surged to 3.8% from 3.4% prior, also exceeding market forecasts of a rise to 3.6%
• In Japan (JP), headline inflation held steady at 3.6% in April. The core measure of inflation accelerated to 3.5% from 3.2% prior, reaching its highest reading since January 2023
• In China (CN), new home prices in 70 cities shrank 4% YoY in April, marking the 22nd consecutive month of price drops
• Staying in CN, retail sales rose by 5.1% in April, falling short of the 5.6% rise expected. Industrial production and fixed asset investment were also weaker than expected
• In Australia (AU), the RBA cut rates by 25 bp to 3.85% and adopted a dovish tone
• Crude oil fell 1.84% this week to $60.85
• Gold rose 3% this week to $3302
• Bitcoin surged 4.83% this week to $112,000
• Wall Street's gauge of fear, the volatility index (VIX), rose to 20.27 from 17.25 last week

Key dates for the week ahead

Australia & New Zealand

• AU: Construction work done quarter-on-quarter (QoQ) (Wednesday, 28 May at 11:30am AEST)
• AU: Monthly consumer price index (CPI) indicator (Wednesday, 28 May at 11:30am AEST)
• New Zealand (NZ): Reserve Bank of New Zealand (RBNZ) interest rate decision (Wednesday, 28 May at 12:00pm AEST)
• NZ: Australia and New Zealand Banking Group (ANZ) business confidence (Thursday, 29 May at 11:00am AEST)
• AU: Retail sales and building permits (Friday, 30 May at 11:30am AEST)

China & Japan

• JP: Consumer confidence (Thursday, 29 May at 3:00pm AEST)
• JP: Tokyo CPI (Friday, 30 May at 9:50am AEST)
• JP: Retail sales and industrial production (Friday, 30 May at 9:50am AEST)
• CN: National Bureau of Statistics (NBS) PMI (Saturday, 31 May at 11:30am AEST)

United States

• US: Federal Reserve (Fed) Chair Powell speech (Monday, 26 May at 4:40am AEST)
• US: Durable goods orders (Tuesday, 27 May at 10:30pm AEST)
• US: Conference Board consumer confidence (Wednesday, 28 May at 12:00am AEST)
• US: Federal Open Market Committee (FOMC) minutes (Thursday, 29 May at 4:00am AEST)
• US: Core personal consumption expenditures (PCE) price index (Friday, 30 May at 10:30pm AEST)

Europe & United Kingdom

• EU: Economic sentiment (Wednesday, 21 May at 4:00pm AEST)

Key events for the week ahead

AU: monthly CPI indicator

Date: Wednesday, 28 May at 11.30am AEST

In the March 2025, headline inflation rose by 0.9%, keeping the annual rate steady at 2.4%. This came in higher than the expected 2.3%. The RBA's preferred measure of inflation, the trimmed mean, rose by 0.7% in the first quarter (Q1) 2025. This allowed the annual rate to fall to 2.9% from 3.3% prior. The monthly CPI indicator for March showed headline inflation rising 2.4% YoY, unchanged from February. The annual trimmed mean inflation measure within the monthly CPI indicator edged up to 2.9% YoY in March from 2.7% in February.

At the RBA's Board meeting earlier this week, the RBA delivered a dovish 25 bp cut to its cash rate to 3.85%. The rate cut was widely expected following the weaker inflation readings outlined above. Both trimmed mean and headline inflation fell back within the RBA's 2% - 3% target range for the first time since the fourth quarter (Q4) of 2021.

The RBA's dovish stance was evident in several ways. The central bank lowered its inflation forecasts and, during the press conference, the RBA Governor acknowledged that a 50 bp cut was considered. The Governor also indicated that the RBA would likely have cut rates even without the Liberation Day fiasco.

Market expectations for the monthly CPI indicator in April point to headline inflation easing to 2.1% from the previous 2.4%. The rates market finished this week pricing in a 60% chance of a 25 bp RBA rate cut in July. A cumulative 67 bp of rate cuts is expected between now and year-end.

AU monthly CPI indicator chart

JP: Tokyo CPI

Date: Friday, 30 May at 9:50 am AEST

This week, Japan's nationwide headline inflation remained steady at 3.6% YoY in April, unchanged from March. However, the core measure of inflation accelerated to 3.5% YoY in April from 3.2% prior. This marked the highest reading since January 2023.

Core inflation, which excludes fresh food and energy, increased to 3% from 2.9% in March. This measure provides insight into underlying price pressures across the economy. The rise in nationwide inflation was anticipated by Tokyo's core CPI reading four weeks earlier. Tokyo's core CPI jumped to 3.4% YoY in April from 2.4% in March, providing a solid indication of the nationwide inflation increase to come.

This month, the Tokyo inflation reading will again be closely monitored. It serves as an early indicator for the nationwide inflation figure, which is released a month later. The preliminary expectation is for Tokyo core CPI in May to ease to 3.3% YoY from 3.4%.

The Bank of Japan (BoJ) has kept its short-term interest rate on hold at 0.50% since January. Markets largely expect a prolonged pause due to several factors. The impact of US tariffs and weakening export demand are key considerations for policymakers. However, persistently strong inflation readings could change this outlook. Such data will likely encourage the BoJ to raise rates again before year-end, despite external headwinds.

Tokyo core CPI chart

US: Core PCE price index

Date: Friday, 30 May at 10:30 pm AEST

Last month, the March headline PCE price index rose by 2.3% YoY. This marked the lowest increase in five months but exceeded market expectations of 2.2%. The Fed's preferred measure of inflation, the core PCE price index, increased by 2.6% YoY. This represented a slowdown from the 3% rise in February and marked the smallest gain since March 2021.

Additional details from the report showed robust consumer activity. Personal income grew by 0.5%, while personal spending expanded by 0.7%. Both figures beat expectations, indicating continued consumer resilience.

For the April reading, preliminary expectations point to the headline PCE price index easing to 2.1%. The core measure is expected to remain steady at 2.6% YoY. These forecasts suggest inflation continues its gradual decline towards the Fed's 2% target.

The US rates market reflects cautious optimism about future rate cuts. Markets are pricing in an 80% chance of a 25 bp rate cut in September. A total of 50 bp of rate cuts is priced between now and year-end, indicating expectations for modest monetary policy easing.

US core PCE price index chart