Ahead of the game: 19 May 2025

US-China tariff agreement boosts market sentiment

United States (US) stock markets surged this week after the US and China agreed to significantly lower tariffs for 90 days, while cooler consumer price index (CPI) and producer price index (PPI) data reenergised expectations for Federal Reserve (Fed) easing later this year.

Locally, the Australia 200 was supported by gains on Wall Street after the US and China agreed to roll back tariffs. The Australia 200 was also supported by a 'goldilocks' labour force report for April, which showed the Australian dollar labour market remains in good shape without being too tight to prevent the Reserve Bank of Australia (RBA) cutting interest rates next week.

The week that was: highlights

• In the US, April's CPI rose by 2.3% year-on-year (YoY), slightly below the expected 2.4%. The annual rate of core inflation held steady at 2.8%, in line with forecasts
• US PPI in April fell -0.5% month-on-month (MoM) versus the expected +0.2%, while core PPI fell by 0.1% versus the expected 0.3% rise
• US retail sales in April were weaker than expected as the all-important retail control group, which feeds through into gross domestic product (GDP), fell -0.2% MoM compared to the expected 0.3% increase
• US initial jobless claims remained at 229,000 last week versus the expected 220,000
• In the United Kingdom (UK), the unemployment rate rose to 4.5% in the three months from January to March, the highest rate since the three months ending in August 2021
• In the UK, first quarter (Q1) 2025 GDP was stronger than expected, rising by 0.7% quarter-on-quarter (QoQ) and 1.3% YoY
• In Japan, Q1 2025 GDP contracted by -0.2% quarter-on-quarrter (QoQ) for an annual rate of -0.7% from +2.4% prior
• The Australian economy added 89,000 jobs in April, almost four times the 25,000 gain the market had expected. However, the unemployment rate remained at 4.1% due to increased supply as the participation rate surged to 67.1% from 66.8% prior
• Crude oil was flat for the week, trading at $61.31
• Gold fell 2.76% this week to $3,235
• Bitcoin trades flat for the week at $103,000
• Wall Street's gauge of fear, the volatility Iindex (VIX), eased to 17.82 from 21.89 last week

Key dates for the week ahead

Australia & New Zealand

• AU: RBA interest rate meeting (Tuesday, 20 May at 2:30pm AEST)
• AU: RBA Press Conference (Tuesday, 20 May at 3:30pm AEST)
• NZ: Trade Balance (Wednesday, 21 May at 8:45am AEST)
• AU: S&P Flash purchasing managers' index (PMI) (Thursday, 22 May at 9:00am AEST)

China & Japan

• JP: Industrial Production and Retail Sales (Monday, 19 May at 12:00pm AEST)
• JP: Balance of Trade (Wednesday, 21 May at 9:50am AEST)
• JP: Inflation (Friday, 23 May at 9:30am AEST)

United States

• US: S&P Flash PMI (Thursday, 22 May at 11:45pm AEST)
• US: Existing Home Sales (Friday, 23 May at 12:00am AEST)
• US: New Home Sales (Saturday, 24 May at 12:00am AEST)

Europe & United Kingdom

• UK: Inflation (Wednesday, 21 May at 4:00pm AEST)
• UK: S&P Flash PMI (Thursday, 22 May at 6:30pm AEST)
• UK: Retail Sales (Friday, 23 May at 4:00pm AEST)

Key events for the week ahead

AU: RBA interest rate meeting

Tuesday, 20 May at 2:30pm AEST

At its last meeting in April, the RBA kept its official cash rate unchanged at 4.10%. Its 'on-hold' decision was widely expected and followed a 25 basis point (bp) rate cut at its February board meeting, which was its first cut since November 2020.

The RBA noted that the continued decline in inflation was welcome. However, it needs to continue to ease in line with forecasts, to increase confidence that it will return sustainably to target.

'Nevertheless, the Board needs to be confident that this progress will continue so that inflation returns to the midpoint of the target band on a sustainable basis.'

The language from the February meeting had more dovish undercurrents. Previously, the Board said it was 'cautious on prospects for further policy easing,' but in April, it said it was 'cautious about the outlook' noting an uncertain global environment influenced by tariff risks.

In the press conference, RBA Governor Bullock sounded balanced, noting that the decision to hold rates was a consensus decision and that the board did not explicitly consider another rate cut. However, she did not push back against market expectations of further easing, as she did in February.

With trimmed mean inflation for Q1 2025 at 2.9% YoY - back into the RBA's 2% - 3% target for the first time since fourth quarter (Q4) 2021, coupled with downside risks to global growth due to still elevated tariffs, we expect the RBA to lower rates by 25 bp to 3.85% at its meeting next week.

RBA cash rate chart

UK: inflation outlook

Wednesday, 21 May at 4.00pm AEST

For March, the UK's annual inflation rate slowed to 2.6% from 2% - 8% in February, falling below both market expectations and the Bank of England (BoE) forecast of 2.7%. Annual core inflation eased to 3.4% from 3.5%, matching market consensus while registering its lowest level since December.

The more moderate inflation numbers enabled the BoE to lower its official cash rate by 25 bp to 4.25% three weeks later at its meeting in early May. The decision was narrowly passed with a 5:4 vote; two members advocated for a more significant reduction to 4%, while two others preferred keeping the rate at 4.5%.

Looking forward, a temporary increase in headline inflation is expected to 3.5% in the third quarter (Q3), due to earlier energy price spikes, before easing thereafter. The anticipated increase may begin to materialise in April, with preliminary forecasts suggesting headline inflation will rise to 3.1%.

Headline inflation rate

US: S&P Flash PMI

Thursday, 22 May at 11.45pm AEST

In April 2025, the US economy showed signs of slowing. The S&P Flash US Composite PMI dropped to 50.6 from 53.5 in March, indicating the weakest private sector expansion since September 2023. Uncertainties related to US trade policy weighed on sentiment. The Manufacturing PMI held steady at 50.2, while the Services PMI fell to 50.8 from 54.4, marking a 17-month low in growth.

US tariffs have led to higher input costs, reduced export demand, and eroded business confidence. Firms report deteriorating sentiment and slower hiring due to trade uncertainty. With some tariffs rolling back and progress on trade deals, market participants will watch closely for signs of improved economic conditions and reduced recession risks.

S&P Global US Composite PMI chart

JP: inflation outlook

Friday, 23 May at 9.30am AEST

Japan’s annual inflation rate eased slightly to 3.6% in March 2025, down from 3.7% in the previous month, marking the lowest level since November 2024. However, underlying price pressures remain strong, with core CPI rising 3.2% YoY. Core-core inflation, excluding fresh food and energy, increased to 2.9% from 2.6% in February.

Tokyo’s core CPI, excluding fresh food, jumped to 3.4% YoYin April from 2.4% in March. This suggests inflation remains sticky despite the Bank of Japan’s (BoJ) rate hikes. Nationwide core inflation is expected to increase to 3.4% year-on-year, up from 3.2%.

Persistent inflationary pressures could complicate the BoJ’s policy path. The central bank has kept its short-term interest rate steady at 0.50% since January. Markets largely expect a prolonged pause due to the impact of US tariffs and weakening export demand. A stronger inflation reading may prompt markets to reconsider the timing of the next rate hike, potentially moving expectations forward to Q4 2025.

Japan inflation rate chart