Benign economic data and corporate earnings buoy markets

Our weekly podcast by Kevin Lings

US inflation ticks up as higher tariffs start to push prices

In this podcast, STANLIB’s Chief Economist, Kevin Lings, touches on China’s sustained economic growth, largely on the back of strong exports as it is selling to other markets and using them as a conduit to the US. He also discusses the 2.7% y/y inflation rate in the US in June, which is likely to escalate above 3% as import tariffs bite. As a result of continuing uncertainty, the US Federal Reserve remains in “wait and see” mode on interest rate cuts.

The focus areas during the week included

The S&P 500 Index increased by a further 0.6%, taking the year-to-date index return to 7.1%. The gain was fuelled by a series of market-friendly economic data, highlighting that the US economy remains on a solid footing, coupled with better-than-expected corporate earnings. Initial jobless claims declined, pointing to stable labour market conditions, retail sales rose more than expected in June, showing that consumers keep spending and, although inflation is still a concern, it appears to be contained for now. The expected rise in consumer and producer goods prices (due to tariffs) has been largely restrained by a decline in services inflation. At this stage the combination of resilient economic growth and expectations for a further reduction in interest rates later this year should provide a constructive backdrop for equity market returns.

Japan’s stock markets registered modest gains, with the Nikkei 225 Index rising 0.6% and the broader Topix Index up 0.4%. Returns were capped by political uncertainty ahead of Japan’s Upper House election on 20 July. At this stage it appears that Prime Minister Shigeru Ishiba’s ruling Liberal Democratic Party-Komeito coalition failed to retain majority control, which will further unsettle financial markets, given uncertainty on the outlook for fiscal policy.

SA’s All-Share Index rose by an impressive 1.5%, with most of the gain (1.4%) occurring on Friday. The uplift on Friday was mainly driven by platinum companies, banks and the large insurers. Over the past month, the index has climbed almost 4% and it is up 23.5% compared to the same time last year.

The rand gained 1.3% against the US dollar (despite the dollar strengthening by 0.4% against the euro) and is up a solid 6.1% year-to-date. This compares relatively favourably with the Emerging Market Currency Index, which is up 7.5% year-to-date against the dollar.

In June 2025, US consumer inflation rose by an elevated 0.3% m/m, which was in line with market expectations. The annual rate of inflation increased more than expected to 2.7% from 2.4% in May. The market expected US headline inflation would rise to 2.6%. At this stage, we expect it will average 2.9% in 2025, moving meaningfully higher over the next 12 months, given the impact of higher import tariffs. The relatively large monthly increase in prices was due to a combination of factors, including additional upward pressure on food prices (0.3% m/m), a 0.9% m/m rise in energy costs, and a sizeable increase in some tariff-related categories such as clothing (0.4% m/m), household appliances (1.9% m/m), sporting equipment (1.8% m/m), and toys (1.8% m/m). These increases were partly offset by a further decline in new vehicle prices (-0.3% m/m), another decrease in used vehicle prices (-0.7% m/m), lower airline fees (-0.1% m/m) and a more modest increase in vehicle insurance (0.1% m/m), as well as shelter inflation (0.2% m/m).

US consumer inflation has slowed meaningfully since the beginning of 2024 and has tended to surprise on the downside in recent months (which ordinarily would have encouraged the Fed to continue to cut interest rates). Unfortunately, the unknown inflationary impact of the recent increase in US import tariffs, as well as the pending fiscal stimulus as a result of President Trump’s One Big Beautiful Bill in early 2026, is encouraging the Federal Reserve (Fed) to continue to adopt a “wait-and-see” approach to monetary policy. Interestingly, during the week Fed Governor Waller suggested that a rate cut at the July meeting could be appropriate, arguing that the Fed should look past temporary tariff-driven price increases and act before the labour market weakens. However, markets still see a September cut as a more likely outcome, pricing a slightly higher than 50% chance of the Federal Open Market Committee cutting interest rates by 25 bps in September, which is unconvincing.

According to the US Census Bureau, retail sales rose by a better-than-expected 0.6% m/m in June after declining by 0.9% m/m in May. The June increase was well above market expectations for a rise of 0.2% m/m. A breakdown of the sales report revealed that motor vehicles were a large contributor, rising 1.2% m/m, while clothing store sales were up 0.9% m/m. Some of the increase in retail spending in June may be attributable to higher prices (driven by increased import tariffs), but consumer spending supports continued economic growth, although with a softening bias.

The University of Michigan consumer confidence index increased to 61.8 in July 2025 from 60.7 in June. The July reading was above market expectations for an increase to 61.5. While sentiment reached its highest value in five months, it remains a substantial 16% below December 2024 and is well below its historical average. A breakdown of the survey shows that the current conditions index improved to 66.8 from 64.8 and the expectations gauge rose to 58.6 from 58.1. The University of Michigan highlighted that consumers are unlikely to regain their confidence in the economy unless they feel assured that inflation is unlikely to worsen. It is encouraging that one-year ahead inflation expectations fell for a second straight month, falling from 5% last month to 4.4% this month. In addition, long-run inflation expectations receded for the third consecutive month, falling back from 4% in June to 3.6% in July. Both readings are the lowest since February 2025 but remain above December 2024, indicating that consumers still perceive substantial risk that inflation will increase in the future.

US headline PPI inflation rose by 2.3% y/y in June 2025, its lowest rate of increase since September 2024. The slowdown in producer inflation was helped by a decline in service costs. In contrast, goods prices saw the largest monthly increase since February 2025. Producer prices are expected to move higher over the next few months as pre-tariff inventories are being drawn down and some companies pass through a portion of the higher costs of imported goods. Fed officials are likely to remain in wait-and-see mode until they have more clarity on how the higher import tariffs feed into inflation. However, with policy interest rates still restrictive, the Fed is expected to cut rates later this year.

US initial weekly jobless claims fell to 221 000 in the week, below market expectations for the number of claims to rise to 232 000. Continuing claims, which measure the total number of people receiving unemployment benefits, were roughly unchanged at 1.95 million. US jobless claims have trended lower in recent weeks while continuing claims remain elevated, suggesting that, while the US labour market remains relatively strong, it is becoming more difficult for people to find employment.

On Wednesday, President Trump announced that the US and Indonesia had reached an agreement on trade and tariffs. According to Reuters, the US set a tariff rate of 19% for Indonesian exports to the US. This was much lower than the 32% that was initially proposed by Trump in April before he agreed to a 90-day pause on reciprocal tariffs. Reuters also reported that Trump claimed that Indonesia had agreed to buy 50 airplanes made by Boeing and to spend $15 billion on US energy supplies, as well as $4.5 billion on US agricultural goods.

In May 2025, SA’s mining production rose by an impressive 3.7% m/m. On a yearly basis, mining production increased for the first time since October 2024: it went up by 0.2% y/y, an improvement from April’s decline of 7.7% y/y. Gains in mining output were broad-based, with seven of the 12 mineral groups recording annual increases. The single biggest driver of the improvement in May was iron ore production, which increased by 12.5% y/y, contributing 1.7 percentage points to the overall uplift in production. Other positive contributors included gold (1.5% y/y); other metallic minerals (11.4% y/y); and chromium ore (3.7% y/y). Despite the surge this month, the underlying performance of the mining sector remains erratic and weak overall. In fact, mining production is still 11.6% below the level of production that prevailed in January 2020, prior to the Covid outbreak.

Chinese economic growth held up well in Q2 2025, with GDP growing by 5.2% y/y, driven by export front-loading to take advantage of the tariff truce with the US, and strong government support for infrastructure and various consumer goods trade-in programmes. This was above market expectations for a deceleration in growth to 5.1% y/y (Bloomberg) but lower than the previous quarter’s growth of 5.4% y/y. Quarterly data maintained some momentum, with China’s GDP growing by 1.1% q/q, lower than last quarter’s expansion of 1.2% q/q but above market expectations for growth of 0.9% q/q. China’s economic growth rate remains biased to the downside, given worsening deflationary pressures, weak retail sales growth, and the potential for a flare-up in US trade tensions once a temporary deal expires in mid-August.

In June 2025, China’s trade balance (in US dollar terms) recorded a surplus of $114.8 billion, above market expectations for a surplus of $112.1 billion (Bloomberg) and above the May surplus of $103.2 billion. The acceleration in the trade surplus in June was the result of exports surging during the month while imports fell. In particular, shipments to the US benefited from the 90-day tariff truce. Ongoing strong demand from Asia, particularly shipments to ASEAN countries, provided additional support. In contrast, exports to BRICS countries weakened in June, with growth to Russia (-16.2% y/y), Brazil (-8% y/y), and SA (-0.6% y/y) falling.

New home prices, measured in 70 cities in China, fell 0.27% m/m in June, while values of existing homes declined 0.61% m/m. In addition, residential property sales dropped 12.6% in June from a year earlier, the sharpest decline this year. China’s property slump is in its fifth year.

Inflationary pressures in Japan showed some (tentative) signs of easing, as Japan’s core consumer price index (CPI) rose 3.3% y/y in June 2025, less than consensus estimates for an increase of 3.4% and down from 3.7% in May. The softening in core inflation was due mainly to falling contributions from energy prices, reflecting government subsidies.

Japan’s exports fell 0.5% y/y in June 2025, the second monthly decline in export and below consensus estimates for a 0.5% increase. In particular, exports to the US declined sharply due to weaker shipments of vehicles, vehicle parts, and pharmaceuticals. Sales to China also fell. A week ago the US announced that it will implement a 25% reciprocal tariff on Japanese imports, effective 1 August, but bilateral trade talks between the two countries are ongoing.

Industrial production in the Eurozone expanded by 1.7% m/m in May, rebounding from the 2.2% decline recorded in April and beating market expectations for a rise of 0.9%. Increased output of energy, capital goods, and non-durable consumer goods drove most of the increase. Over the past year, industrial production accelerated by an impressive 3.7%, up from a mere 0.2% y/y in the prior month.