Ahead of the game: 30 June 2025

Australia 200 set for gains as US market rallies continue

United States (US) stock markets surged this week, fuelled by positive sentiment surrounding the Israel-Iran ceasefire. The rally was also supported by a continued run of soft economic data, strengthening the case for the Federal Reserve (Fed) to cut interest rates earlier and more deeply than expected in 2025.

Locally, the Australia 200 (ASX) is on track to record its ninth week of gains over the past 11 weeks. Momentum has been buoyed by gains on Wall Street and a cooler-than-expected monthly inflation reading for May, which is expected to prompt the Reserve Bank of Australia (RBA) to cut rates next month. The Australia 200 is poised to lock in a 9.56% gain for the June quarter and a 10.50% increase for the financial year.

The week that was: highlights

• In the US, the US 500 (S&P 500)  composite purchasing managers' index (PMI) eased to 52.8 in June from 53 prior
• The Conference Board (CB) consumer confidence survey dropped to 93 in June from 98.4 prior
• US first-quarter (Q1) 2025 gross domestic product (GDP) contracted by 0.5% – a sharper decline than the second estimate of a 0.2% drop. The weaker GDP figure was largely driven by significant downward revisions to consumer spending and exports
• Fed Chair Jerome Powell reiterated his previous message: the Fed is well-positioned to await further clarity. He noted that the economy and labour market are currently in solid shape. However, while tariffs might cause a one-time price increase, there's a risk that inflation could become more persistent
• US initial jobless claims fell from 246,000 to 236,000 last week. However, continuing claims rose to a new cycle high of 1.974 million, up from 1.937 million the week prior
• In the Euro Area, the Hamburg Commercial Bank (HCOB) composite PMI remained at 50.2 in June
• In the United Kingdom (UK), the US 500 composite PMI for June rose to 50.5 from 50.3 prior
• In Japan (JP), the Jibun composite PMI for June rose to 51.4 from 50.2 prior
• In Australia (AU), the monthly consumer price index (CPI) indicator for May rose by 2.1% year-over-year (YoY), easing from 2.4% in April. The annual trimmed mean inflation dropped to 2.4% YoY in May from 2.8%, marking the lowest rate since November 2021
• Crude oil  sank 11.42% this week to $65.41
• Spot gold fell 1.60% this week to $3314
• Bitcoin surged 6.11% this week to $107,189
• Wall Street's gauge of fear, the volatility index (VIX) , fell to 16.60 this week from 20.61 in the previous week.

Key dates for the week ahead

Australia & New Zealand

• AU : Building permits (Wednesday, 2 July at 11.30am AEST)
• AU : Retail sales (Wednesday, 2 July at 11.30am AEST)
• AU : Balance of trade (Thursday, 3 July at 11.30am AEST)

China & Japan

• China (CN): National Bureau of Statistics (NBS) manufacturing PMI (Monday, 30 June at 11.30am AEST)
• JP : Tankan (Tuesday, 1 July at 11.45am AEST)
• CN : Caixin manufacturing PMI (Monday, 30 June at 11.30am AEST)

United States

• US : Institute for Supply Management (ISM) manufacturing PMI (Wednesday, 2 July at 12.00am AEST)
• US : Job Openings and Labor Turnover Survey (JOLTS) job openings (Wednesday, 2 July at 12.00am AEST)
• US : Non-farm payrolls (Thursday, 3 July at 10.30am AEST)
• US : ISM services PMI (Friday, 4 July at 12.00am AEST)

Europe & United Kingdom

• EU : Inflation (Tuesday, 1 July at 7.00pm AEST)

Key events for the week ahead

CN: Caixin manufacturing PMI

Date: Monday, 1 July at 11.45am AEST

PMI data for May revealed a pronounced deterioration in China's manufacturing sector. Both the NBS and Caixin PMI readings fell below the critical 50 threshold, signalling sector contraction amid weakening foreign demand. While the services sector exhibited modest expansion, this failed to counterbalance the manufacturing downturn. Survey findings also highlighted intensified business competition placing additional downward pressure on pricing.

Looking ahead, we anticipate potential improvement in next week's figures, with manufacturing PMIs expected to recover above 50 while services PMIs should remain in modest expansion territory. This recovery may be driven by several factors, including recent constructive US-China trade discussions in London, while the 618 online shopping festival could provide domestic consumption support.

Key metrics to monitor include input costs and output pricing indices, which will offer insights into whether China's persistent deflationary pressures are beginning to ease

Caixin Manufacturing PMI chart

EU: Inflation

Date: Tuesday, 1 July at 7.00pm AEST

For May,  the headline inflation rate in the Euro Area declined to 1.9% YoY from 2.2% prior, falling below the European Central Bank's (ECB) 2.0% target for the first time since September 2024. The core measure of inflation eased to 2.3% from 2.7% in the previous month, reaching its lowest level since October 2021.

The cooler inflation readings allowed the ECB to cut interest rates by 25 basis points (bp) just two days later at its meeting in early June. This saw the ECB's key deposit rate fall to 2%, a decision that was accompanied by a dovish set of staff forecasts and guidance that the ECB remains data-dependent and will approach meetings on a meeting-by-meeting basis.

For June, headline inflation is expected to rise marginally to 2% YoY, and the core inflation rate is expected to increase to 2.4% YoY. The European rates market is pricing in a full 25 bp ECB rate cut in December, which would see the ECB's deposit rate finish the year at 1.75%.

EA core inflation rate chart

AU: Retail sales

Date: Wednesday, 2 July at 11.30am AEST

Next week's retail sales report for May is the last piece of important domestic data that the RBA will receive before its 8 July Board meeting.

While it's unlikely to alter market expectations of a rate cut in July – especially after this week's soft inflation data – it could reinforce the case for a cut, particularly if retail sales decline again, following the -0.1% dip in April.

The key takeaways from this week's inflation release:

• Monthly headline CPI indicator for May rose by 2.1% YoY, easing from 2.4% in April.
• Annual trimmed mean inflation dropped to 2.4% YoY in May from 2.8%, marking the lowest rate since November 2021.

Both key inflation readings dropped below the midpoint of the RBA's 2% –3% target band, as well as below the RBA's forecast of 2.6% for June 2025.

The apparent deflationary trend alongside the tepid growth trajectory of the Australian economy, reinforces our own call for the RBA to further loosen monetary policy and cut rates by 25 bp to 3.60% at its next Board meeting..

The preliminary expectation for May's retail sales report is for a fall of 0.1%. The Australian interest rate market is pricing in 23 bp of rate cuts for 8 July and a cumulative 81 bp of RBA rate cuts between now and the end of the year.

AU retail sales MoM chart

US: Non-farm payrolls

Date: Thursday, 3 July at 10.30am AEST

For May, the US economy added 139,000 jobs – a slowdown from April's 147,000– beating market expectations of 130,000, while the unemployment rate held steady at 4.2%.

For June, the market anticipates an increase of 100,000 jobs and expects the unemployment rate to remain at 4.2% for the fourth consecutive month.

However, there is a risk that the unemployment rate may rise to 4.3% in June. Following the narrowing in the labour market spread in this week's consumer confidence data and a rise in continuing claims to a new cycle high of 1.974 million.

An unemployment rate of 4.3% or higher would be the first time the US unemployment rate has been outside of the 4% to 4.2% range in 13 months and could spark concerns that a downturn is underway in the US labour market.

The US rates market is pricing in 6 bp of cuts for July, 28 bp of cuts for the September Federal Open Market Committee (FOMC) meeting, and a cumulative 65 bp of Fed rate cuts by the end of 2025.

US Unemployment rate chart