Market Update - July 2025

Global equity markets rose in July. The S&P 500 gained 2.2% in local currency, reaching new highs. The appreciation of the USD led to an S&P 500 return of 5.5% in NZD terms. US bond prices experienced a slight decrease as the US 10-year interest rate increased by 0.15% over the month.

US economy

US company earnings and trade policy were in the spotlight. Tariff letters were sent internationally, with the deadline extended from July 9 to August 1. Trade agreements with Europe and Japan boosted risk sentiment.

US economic indicators continued to demonstrate positive momentum. Employment figures exceeded expectations, while both manufacturing surveys and retail sales improved. Consumer Price Index (CPI) inflation rose modestly, in line with forecasts.

The Federal Reserve held rates steady, as expected, with a 9-2 vote. Two members supported a cut, the first such dissent since 1993. Despite this, chair Powell's hawkish remarks highlighted potential inflation from tariffs and a strong US job market. The Fed will watch future employment and inflation data before deciding on a possible September rate cut. After the Fed announcement, market expectations for a cut in September dropped from 68% to 40% as interest rates moved higher, which added to USD appreciation.

Australian economy

The Reserve Bank of Australia (RBA) unexpectedly left interest rates unchanged, with the decision passed by a 6-3 majority. This was a surprise to markets, which were pricing in a 92% probability of a rate cut. However, the outcome was regarded as a dovish hold, reflecting a focus on timing rather than an outright policy shift. The RBA indicated it remains inclined toward monetary easing but prefers to evaluate additional data, particularly regarding progress toward its inflation target and developments in the labour market. The central bank reiterated its commitment to its dual mandate of price stability and full employment.

Australian data following the RBA meeting reinforced expectations of an August rate cut as employment fell short and CPI inflation eased more than forecast.

NZ economy

The Reserve Bank of New Zealand (RBNZ) maintained the Official Cash Rate (OCR) at its current level, as expected. Similar to the Fed and the RBA, the RBNZ expressed the need for additional data before its next move. However, the central bank did contemplate a cash rate reduction at the meeting and stated that, barring a significant upside surprise in economic data, further cuts are likely. The RBNZ also acknowledged that inflation is expected to increase from present levels, but this is not anticipated to impede future easing measures given the prevailing economic softness.

NZ CPI rose from 2.5% to 2.7%, matching RBNZ forecasts and easing concerns of a sharper increase. Markets now see a 92% probability of a rate cut at the August MPS.

New Zealand term interest rates showed little movement during the month, with 2-year and 5-year rates ending close to their previous levels. The NZD declined by 3.4% as the USD strengthened, influenced by the hawkish Federal Reserve and stronger US economic data.

Looking ahead

Global markets are watching US trade talks, jobs, and consumer data. Closer to home, key updates include NZ employment figures, and RBA and RBNZ meetings.