After months of speculation, the Reserve Bank of Australia cut its benchmark rate this afternoon, capping off a week of key market developments. In recent days, new U.S. inflation data has surprised markets, contributing to a weaker U.S. dollar amid lackluster economic figures. However, the Australian dollar also declined, meaning local markets did not benefit from the greenback’s losses.

RBA Cuts Rates Amid Mixed Signals
The Reserve Bank of Australia (RBA) cut its benchmark rate this afternoon by 25 basis points to 4.1%—the first easing since 2020—following a favourable inflation report last month. While many economists expected this move, Governor Michele Bullock cautioned that inflation pressures remain and further cuts aren’t guaranteed.

Bond markets, however, are pricing in a second rate cut in July and a strong chance of a third by year-end. Economists are split: Capital Economics sees a short easing cycle, while Schroders anticipates two more cuts at a gradual pace. In response, the big four banks—Commonwealth Bank, NAB, Westpac, and ANZ—lowered mortgage rates by 25 basis points.

U.S. CPI & Fed Positioning
Meanwhile, a surprise jump in the U.S. Consumer Price Index to 3% initially weighed on stocks and bonds last week. Fed Chair Jerome Powell reiterated patience, downplaying the near-term inflation spike. President Trump, however, called for lower rates to offset upcoming tariffs, aiming to let America “rock and roll.” The market reacted with renewed optimism, especially in tech, as the Nasdaq climbed 3%.

Australian Earnings: A Mixed Bag
The Australian market has generally lagged, reflecting a mixed Q4 2024 reporting season. While companies on the whole have exceeded expectations—particularly in margins, with a net beat of 16% in EPS (earnings per share) surprises—sector performance has varied. Cyclical retailers emerged as standout performers, with companies like JB Hi-Fi and Temple & Webster delivering strong earnings beats. Among Industrials, Seven Group’s construction materials business Boral did well, though housing-exposed companies such as Reliance Worldwide and GWA Group continued to face weak markets.

While results are “better than feared,” guidance and outlook statements remain cautious. Companies cite a challenging macro environment and heightened uncertainty around interest rates, leading to modest downgrades in consensus FY25 EPS growth forecasts for the ASX 200.

Despite strong earnings surprises in many cases, share price performance has not always followed suit. Financials, for instance, have broadly reported earnings ahead of expectations but remain laggards in market performance. Beyond financials, several companies failed to sustain early share price gains after posting better-than-expected results. This may reflect investors repositioning in already well-owned businesses or anticipating a slowdown in future earnings growth.

Global Developments
In Europe, hopes for lower energy prices arose after reports suggested China might mediate in Ukraine peacekeeping talks, boosting the euro and European equities. But renewed tariff threats from President Trump targeting countries with VAT or GST briefly rattled markets. Commodity prices were mixed—oil dipped on Ukraine news but rose on speculation that OPEC may delay production increases.

In Asia, strong credit growth and a meeting between President Xi and tech leaders suggested China could prioritize reviving domestic growth and easing its tech crackdown, sending Hong Kong’s Hang Seng up over 7%. Japan also surprised with stronger-than-expected Q4 GDP, fueling speculation of Bank of Japan rate hikes.

Looking Ahead
Attention now shifts to the upcoming EU emergency summit on defense spending and potential issuance of joint bonds of a fund up to €3.1 trillion. Amid ongoing tariff threats, uncertain inflation, and shifting monetary policies, investors are watching key data and policy announcements to gauge how markets will navigate these competing forces.