Positive news on tariff deals lifts US equities

Our weekly podcast by Kevin Lings

SA’s inflationary trends; implications of US trade deals

With SA’s inflation rate lifting to 3% in June, STANLIB’s Chief Economist Kevin Lings looks at the main categories driving inflation upwards and the likelihood of the economy achieving the Reserve Bank’s 3% target. He also examines some of the recent tariff agreements announced between the US and various trading partners and what this means for US inflation, economic growth and future global trading patterns, as well as for SA.

The focus areas during the week included

The S&P 500 Index gained 1.5%, reaching a record high for the second consecutive week. Year-to-date it is up 8.6%, after being down 15.3% year-to-date on 8 April 2025. The market was supported by the announcement of new trade deals between the US and a range of countries, including Japan, Indonesia, and the Philippines. There were also reports that the US and European Union (EU) are progressing towards a deal ahead of the 1 August deadline.

SA’s All-Share Index breached the 100 000 level on Wednesday, before pulling back on Thursday and Friday to end the week up a modest 0.2%. Year-to-date the market is up a very respectable 17.6%, although it was up 19.1% year-to-date on Wednesday.

The US-Japan trade agreement was the sixth announced since “Liberation Day”, and reports suggest that similar deals might be close for the EU and Korea. The agreement with Japan sets a 15% tariff for most Japanese goods exported to the US, including vehicles. The US had threatened to impose a 25% tariff rate, so the outcome was viewed as favourable. It was also announced that the Japanese government would support investments totaling around $550 billion to bolster a number of industries in the US as well as open Japan’s markets to key American goods. Reports suggest that Korea will also commit to investment in the US as part of this agreement, similar to the deal reached with Japan. If confirmed, these deals would help to ease uncertainty over trade policy and avert even more damaging tariff hikes. However, a 15% tariff still delivers a material increase in taxes on trade. President Trump signalled that this would represent a floor on US tariff rates, with some partners potentially hit by up to 50% levies. Vietnam has estimated that its deal – which includes a 20% tariff on locally-produced exports to the US and a 40% tariff on goods that are transshipped from China through Vietnam – would cut exports to the US by a third.

Evidently, US Treasury Secretary Scott Bessent plans to meet with Chinese officials in Stockholm, Sweden, this week for a third round of talks aimed at extending the current trade deal, which expires in August. The Stockholm meeting follows discussions in Geneva in May that produced a 90-day pause in tariffs and a second round in London in June that led to each country lifting export controls. News of the Stockholm talks raised hopes for a continued stabilisation of US/China relations after both countries appeared on track for decoupling when the Trump administration imposed 145% tariffs on China in April.

In June, SA’s headline inflation increased by 0.3% m/m, in line with market expectations. This pushed the annual rate of inflation up from 2.8% to 3%. Over the past nine months, the headline inflation rate has remained in a narrow range of 2.7% to 3.2%. Ordinarily this would encourage the Reserve Bank to cut interest rates further, even though inflation is expected to trend higher in the second half of 2025. Unfortunately, the timing of a meaningful reduction in SA’s inflation target remains uncertain, which is impacting the outlook for interest rates. Nevertheless, the combination of subdued inflation, a stronger currency and weak economic growth should allow the Reserve Bank to cut rates by at least a further 25 bps. Over the past nine months, inflation has benefited from a convergence of numerous positive factors that are not all likely to persist over the next 12 months. These include a year-on-year decline in the fuel price, subdued food inflation, a reasonably strong currency, China exporting deflation, and a weak housing market which has kept rental inflation below 3%. Consequently, inflation is expected to move back up to around 4.5% over the next 12 months as some of these factors become less supportive.

Foreigners bought a very welcome $1.55 billion of South African government bonds in June, after selling $0.33 billion in May. The increase in June means that year-to-date foreigners have bought a net $2.16 billion of South African bonds, despite some concerns about the stability of the GNU and government’s three attempts to deliver a National Budget.

S&P Global US PMI data for July indicated that business activity accelerated at the start of Q3 2025, with the composite PMI output index jumping 1.7 points to a seven-month high of 54.6. The expansion was entirely driven by growth in the services sector, with the services PMI rising to 55.2 from 52.9 in June. The manufacturing PMI dropped from 52.9 in June to 49.5 in July, the lowest reading since December. According to Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, “the flash PMI data indicated that the US economy grew at a sharply increased rate at the start of the third quarter…Whether this growth can be sustained is by no means assured. Growth was worryingly uneven and overly reliant on the services economy as manufacturing business conditions deteriorated for the first time this year, the latter linked to a fading boost from tariff front-running”.

US new orders for manufactured durable goods fell 9.3% m/m in June 2025, but this was better than market expectations for a decline of 11% m/m. The main reason for the decline was a 22.4% m/m drop in orders for transportation equipment (including aircraft). This follows a 16.5% m/m surge in orders for transport equipment (aircraft) in May. Excluding transportation, new orders rose by a modest 0.2%, which is more reflective of the underlying trend.

US initial weekly jobless claims eased further from 221 000 to 217 000, providing another signal that tariff uncertainty is not pushing firms to reduce their payrolls. However, those who are unemployed continue to struggle to find work, with continuing claims trending higher. The US economy has clearly slowed this year, with growth tracking at around 1% annualised in the first half of the year. This moderation is likely to persist into the second half of 2025, with tariffs likely to put some upward pressure on prices, while discouraging hiring and investment. Strong balance sheets should help the economy to weather these headwinds without going into recession, and there is some hope that activity could recover in 2026 as the impact of tariffs starts to fade, and a modest boost from tax cuts and deregulation support the economy.

On Wednesday, the US National Association of Realtors reported that existing home sales declined by 2.7% m/m to a seasonally-adjusted annual rate of 3.93 million in June 2025, while the median sales price of existing homes hit a record high of $435 300. The report noted that “high mortgage rates are causing home sales to remain stuck at cyclical lows”, while “multiple years of undersupply are driving the record high home price”.

At its policy meeting on 24 July, the European Central Bank (ECB) kept its key interest rate unchanged at 2%. The decision was in line with market expectations. The ECB has cut rates eight times since June 2024 and inflation in the Eurozone is currently at the ECB’s 2% target. ECB President Christine Lagarde said that the central bank was in a “wait-and-watch” situation, citing uncertainty caused by trade and tariffs. She reiterated the bank’s determination to keep inflation at its target and its commitment to data-dependent decision-making. Lagarde’s comments, suggesting that the central bank would not be swayed by small deviations away from its inflation target, were largely seen as hawkish.

The HCOB Eurozone Composite PMI Output Index rose from 50.6 in June to 51 in July, with output increasing modestly across both the services and manufacturing sectors.

The annual rate of growth in the core consumer price index (CPI) in the Tokyo area, which is regarded as a leading indicator of nationwide price trends, eased from 3.1% to 2.9% in July 2025. This was slightly below market expectations for an increase of 3%. With inflation remaining well above the Bank of Japan’s (BoJ’s) 2% target and, given that the recently announced Japan-US trade deal should help to ease uncertainty about the economic outlook, more analysts have converged around the view that the BoJ could raise interest rates again this year. It last raised interest rates in January 2025.