Hopes of US rate cut and Russia/Ukraine peace deal lift market mood

Our weekly podcast by Kevin Lings

US inflation starts to show effect of tariffs; SA’s economic growth picks up

In this podcast, STANLIB’s Chief Economist, Kevin Lings, looks closely at underlying US inflation and labour trends. Inflation shows a clear drift upwards as a result of tariffs, while labour market signals are uncertain, presenting a dilemma for the US Federal Reserve in determining interest rates. Kevin also examines SA’s surprising uplift in economic performance in Q2 2025.

The focus areas during the week included

The S&P 500 index finished up 0.9%, despite some weakness at the start and again at the end of the week. Over the past two weeks, the US equity market has been supported by heightened expectations that the US Federal Reserve (Fed) will resume its interest rate cutting cycle at the next Federal Open Market Committee (FOMC) meeting on 17 September 2025. Tariff and trade news was less dominant this week, although on Monday the Trump administration announced that the US and China had agreed to extend the deadline for higher tariffs for a further 90 days while a broader deal is negotiated.

The tone in international equity market was generally positive, with the STOXX 600 equity index gaining 1.2%, boosted by hopes that the meeting between Presidents Trump and Putin might deliver progress towards a peace agreement in the Russia-Ukraine war. The press conference following the meeting on Saturday was disappointing. It showed a clear lack of progress and the reality that the US is likely to put the Ukraine under further pressure to capitulate on land and other security issues. Hopefully, the EU will continue to support Ukraine, although the extent of that support is likely to be underwhelming.

SA’s All-Share Index (ALSI) had another strong week, gaining a further 1.1%. Year-to-date the market is up 21.2%, having reached another record high on Wednesday. More remarkably, in dollar terms, the ALSI has gained almost 30% year-to-date, which is well ahead of the 9.7% year-to-date gain by the S&P 500.

In July 2025, US consumer inflation rose by a modest 0.2% m/m, in line with market expectations. This kept the annual rate of inflation unchanged at 2.7%, which was slightly below market expectations for an increase to 2.8%. In contrast, core consumer inflation increased by 0.3% m/m in June, in line with expectations, but it pushed the annual rate of core inflation up more than expected from 2.9% to 3.1%. The market expected core inflation to rise to 3%. While core inflation has slowed from 3.3% at the start of 2025 it is, obviously, not in sight of the inflation target and heading in the wrong direction, partly due to higher import tariffs. The pass-through of higher tariff rates into consumer prices was relatively modest in July, with core goods prices rising 0.2% m/m and many of the most tariff-sensitive products increasing by less than reported in the previous month. Instead, the rise in services inflation was more pronounced in July, particularly airfares, which surged by 4% m/m, reflecting the ongoing strong demand for domestic airline travel. This upward pressure on airline fees is expected to persist in the coming months. Lastly, shelter inflation rose by an encouraging 0.2% m/m in July, which allowed the annual rate to continue to ease from 3.8% to 3.7%. In the past 12 months, the monthly rate of increase in shelter inflation has tended to slow, and it is expected to slow further in the months ahead, given that the ZORI index remained well contained at 2.9% y/y. Importantly, if shelter inflation is excluded from the data, the inflation rate would be 2.1%, which is up from 1.5% y/y two months ago and higher than it has been in recent months. That suggests that tariff-induced upward pressure on inflation is starting to play a greater role in keeping US inflation elevated – and shelter is no longer the main concern.

US PPI inflation for July was well above expectations at 0.9% m/m, against market expectations for an increase of only 0.2%. It was also well above last month’s reading of 0% m/m. The July increase in PPI was the biggest monthly gain since June 2022. Over the past year PPI has risen by 3.3%, up from 2.6% y/y in June. The services component of PPI increased by a substantial 1.1% m/m in July, driven by an increase in trade services (retail margins), while goods inflation rose by 0.7%, driven in large part by food inflation. The increase in PPI inflation is likely to be an early sign of the impact of tariffs on companies. While some companies may choose to absorb the higher prices in the form of lower margins, other companies may choose to pass them onto consumers. Although one month does not make a trend, the large jump in PPI inflation is probably another indication of a pending increase in CPI. Despite the higher PPI inflation reading for July, markets are still pricing in about a 92% probability of a September interest rate cut. However, the probability of October and December rate cuts eased after the PPI data was released. The Fed’s Jackson Hole conference on 21 to 23 August will be a suitable forum for the Fed to signal any upcoming shift in its interest rate policy stance.

US retail sales increased by 0.5% m/m in July. Robust sales by online retailers (+0.8% m/m) were helped by Amazon’s Prime Day campaign, which appears to be increasingly mirrored by other major retailers such as Walmart and Target. Spending on motor vehicles and parts was also strong at +1.6% m/m, while the data for June was revised higher, suggesting some improvement in consumer spending in recent months after a meaningful slowdown previously. However, the news was not all positive. Spending on building materials recorded a further decline (-1% m/m) while sales at restaurants and bars was weak (-0.4% m/m). This component of retail activity is used as a proxy for broader consumer spending on services.

The University of Michigan’s estimate of Consumer Sentiment for August 2025 unexpectedly dropped to 58.6 from July’s reading of 61.7. The monthly decline was (understandably) largely driven by “rising worries about inflation”. Consumer expectations for year-ahead inflation rose to 4.9% from 4.5% in July.

South African retail sales were unchanged month-on-month in June 2025 after growing by a revised 0.2% m/m in May and a solid 1.1% m/m in April. This was below market expectations for growth of 0.3% m/m. Over the past year sales have risen by 1.6% y/y (real), partially boosted by subdued inflation (real income growth), ongoing two-pot withdrawals, and relatively strong growth in credit card debt. While the growth in retail spending in June was below market expectations, the Q2 2025 performance is encouraging at +0.9% q/q, which will boost Q2 2025 GDP. This is significantly better than the decline of -0.4% q/q recorded in Q1 2025.

In Q2 2025, there were 16.807 million people employed in SA (including informal sector employment), which is an increase of 19 000 jobs in the quarter, and up 154 000 jobs over the past year. This equates to an official unemployment rate of 33.2%, up from 32.9% in Q1 2025. The official unemployment rate has trended higher for many years, which is understandable given that the rate of economic growth has averaged a mere 0.7% a year over the past 10 years compared with an annual population growth rate of around 1.4%. SA’s rate of unemployment is extremely high by international standards. This has (periodically) raised questions about the accuracy of SA’s labour market data, especially the measurement of SA’s informal sector. It is encouraging that Stats SA has indicated that it will be upgrading the household survey questionnaire to better capture the size and scope of SA’s informal labour market in Q3 2025. In all economies with large informal sectors there is a tendency to underestimate both the level of economic activity and the level of employment, for a variety of reasons, including a hesitancy and/or reluctance by informal sector participants to fully disclose their personal information.

In June 2025, South African manufacturing production was unchanged month-on-month, after growing by 2.2% m/m in May and 1.6% m/m in April. The stagnant performance was well below market expectations for an increase of 0.7% m/m. Encouragingly, in Q2 2025 manufacturing grew by a robust 1.5% q/q after declining in each of the prior two quarters. This will meaningfully boost the Q2 2025 GDP performance. Over the past year production was up 1.9%, but it is still struggling to reflect a positive change in momentum given that the annual average rate of growth remains negative at -0.9%. Despite the improvement in Q2 2025, manufacturing activity is currently about 4.6% below the level of output achieved prior to the start of Covid in 2020.

South African mining production rose by 0.2% m/m in June 2025, although this was below the revised 3.9% m/m growth recorded in May. On a yearly basis, mining production rose for the second consecutive month and by a robust 2.4% y/y. Importantly, in Q2 2025 mining production surged, rising by 3.9% q/q, the highest quarterly increase since Q1 2021. This is the first quarterly increase in mining activity since the third quarter of 2024, as the industry continues to grapple with structural issues. Despite the surge this month, the underlying performance of the mining sector remains erratic and weak. Effectively, mining production is still 11.3% below the level of production that prevailed in January 2020, prior to the Covid outbreak.

In July, China’s total retail sales of consumer goods grew by 3.7% y/y, down from 4.8% y/y in June, hurt by a pause in the government’s consumption trade-in programme. The July reading was below market expectations for growth to only slow marginally to 4.6% y/y (Bloomberg). On a monthly basis, retail sales fell for the second consecutive month, decreasing by -0.14% m/m in July, a sign that momentum in consumption activity remains extremely weak. The pullback in activity was broad-based, with sales growth in most goods decelerating in July. In contrast, online activity accelerated, growing by 9.2% y/y from 8.5% y/y in June. The ecommerce share of total retail sales was 24.9% in July, largely unchanged from June.

China’s industrial production lost momentum in July 2025, with growth at 5.7% y/y, down from 6.8% y/y in June. This was below market expectations for growth to slow to 6% y/y, despite a solid export performance. The latest deceleration in industrial production was partly hurt by a moderation in vehicle production, which grew at its slowest pace since October 2024. The more sluggish growth in production activity is boosting calls for additional monetary easing and fiscal support. The Chinese authorities signalled that they would continue to take a measured approach to stimulus, with a focus on managing overcapacity and addressing the “disorderly competition” among businesses that is adding to the deflationary trend in the economy.

The ZEW institute’s Economic Sentiment Index, which measures German investor confidence, fell to 34.7 in August from 52.7 in July. ZEW attributed the first decline in four months to disappointment with the US/EU trade deal and Germany’s (modest) contraction in the second quarter of 2025.

Japan’s economy grew by 1% q/q on an annualised basis in Q2 2025, ahead of consensus expectations for growth of 0.4% q/q and outpacing the first quarter’s revised expansion of 0.6% q/q. The better-than-expected GDP performance reinforced expectations that the Bank of Japan will continue its (gradual) path towards rate hikes. In the quarter, exports rebounded sharply as Japanese companies accelerated US shipments ahead of tariff increases, while capital expenditure remained resilient and growth in private consumption was better than anticipated.

Norges Bank (Norway’s central bank) kept its key interest rate at 4.25%, as expected, having lowered it in June 2025 for the first time in five years. The central bank said that if economic conditions evolved as anticipated, it could ease monetary policy further this year.