FinX Weekly 16 June 2025

Oil prices surged on Friday as Israel struck Iranian nuclear sites, prompting retaliatory drone and missile attacks. Equities dipped as investors retreated to safe havens, though losses were contained by supportive liquidity conditions and more positive economic news.

US-China trade talks yielded a framework deal, avoiding a return to peak tariffs. China’s trade surplus has increased despite recent tensions.

US inflation readings rose by less than feared, and consumer sentiment and small business confidence improved. Australian surveys were mixed.

This week, attention turns to global central bank decisions. The Fed’s updated projections and Australian jobs figures will be closely watched, while the Prime Minister is scheduled to meet the American president on the sidelines of the G7 meeting due to take place in Canada.

Global equity markets recorded modest gains through most of last week, underpinned by supportive inflation data and better sentiment, before turning sharply lower on Friday following Israel’s airstrikes on Iranian nuclear and military targets. The strike marked a major escalation in regional tensions, prompting a swift response from Iran involving drones and missile attacks, with further exchanges continuing over the weekend.

The timing and coordination of Israel’s attack raised questions internationally, particularly around the extent of US involvement. Secretary of State Marco Rubio initially denied advance knowledge, a claim later contradicted by President Trump. The escalation comes after repeated warnings by Prime Minister Netanyahu regarding Iran’s nuclear ambitions and is the first major foreign-policy test of Trump’s second term.

Markets responded with a shift to safe havens. Brent crude surged by nearly +12% over the week, while gold price gains were just shy of +4%.

Equity indices dipped, though losses were less severe than might have been expected, helped by relatively ample liquidity conditions. The US Treasury has been drawing down its General Account and moderating bond issuance while the president’s flagship “Big Beautiful Bill” remains under scrutiny in the Senate.

Risk sentiment was also buoyed by an apparent breakthrough in US - China trade talks in London. The two countries reached a framework agreement that appears to prevent tariffs from returning to the peak levels seen in April. China committed to a limited resumption of rare earth exports to the US, but the broader trade relationship remains strained. Structural issues, including China’s growing trade surplus and allegations of dumping, remain unresolved. Data released Monday showed China’s surplus widening further as imports contracted faster than exports.

Under the terms of the deal, tariffs on Chinese goods will remain at 30%, or 55% when including prior measures. China will add 10% tariffs on US imports in response. The framework awaits final sign-off by both presidents.

Bond yields drifted lower for most of the week, supported by US inflation data that came in slightly softer than feared. Headline CPI rose to +2.4% yoy in May from +2.3% in April, held down by a -3.5% yoy drop in energy prices.

Core CPI remained steady at +2.8% yoy, just below expectations, while the “supercore” measure of services excluding shelter rose marginally and is now up +2.9% yoy, well below its +4.0% pace earlier in the year. PPI also firmed modestly, but did little to alter expectations for the Fed’s preferred PCE measure, due later this month.

Nonetheless, inflation remains above target and is moving in the wrong direction. Market pricing still reflects two rate cuts this year, though the Fed is expected to project fewer cuts in this week’s updated “dot plots”.

Consumer inflation expectations remain elevated: the New York Fed survey showed one-year inflation at +3.2%, while the University of Michigan survey placed the one-year outlook at +5.1% and five-year expectations at +4.1%. Even so, as these expectations have moderated somewhat in recent weeks, consumer sentiment improved, with the Michigan index rising to 60.5 in June, up nearly +16% from the prior month. Small business confidence also picked up to close to the long-term average level, according to the NFIB.

In Australia, economic indicators were mixed. The NAB business conditions index continued to ease in May, but Westpac’s consumer sentiment index rose in June. The S&P/ASX 300 reached a record high of 8,520 on Wednesday before declining alongside global markets after the Middle East escalation. The domestic labour market remains resilient, with this week’s jobs data expected to show the unemployment rate steady at 4.1%.

Looking ahead, several major central banks will hold policy meetings this week. The Federal Reserve, along with the central banks of Japan, China, the UK and Norway, are expected to leave policy settings unchanged, while rate cuts are likely in Switzerland and Sweden. Key economic releases include retail sales and industrial production figures from the US and China, along with Chinese monthly activity data. The US market will be closed on Thursday for the Juneteenth holiday

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