The inflation news was broadly positive with US inflation moving closer to the 2 per cent target, whilst in Europe inflation dropped below 2 per cent. While this reinforced market pricing of further rate cuts by the Fed and the ECB, long term bond yields, particularly in the US and Japan, continued to rise. The US 30-year treasury bond yield hit 5 per cent, the highest level since 2007 while Japanese 30-year yields breached 3 per cent. In the case of the US the rise in yields reflected concerns over the persistent and rising budget deficit, exacerbated by the House of Representatives approval of the extension of 2017 tax cuts, as well as rating agency Moody’s downgrade of the US’s credit rating and a broad aversion to US assets given the uncertain policy backdrop. 

 

In Japan, higher inflation and poor demand-supply dynamics after financial year-end contributed to the rise. Although equity markets still managed to rise during the bond sell-off, further lifts in bond yields would begin to challenge lofty valuations.

 

The domestic backdrop improved over the course of the month with the RBA cutting the cash rate for the second time in this cycle. In reducing the cash rate 25 basis points to 3.85 per cent, the RBA noted the improved inflation picture and the uncertainty that prevailed globally.

 

Australia’s March quarter GDP data showed that in the first 3 months of 2025, economic growth was very low, because of the continuing impacts of high interest rates on the economy, as well as poor weather disrupting production and exports. It is too soon to see the impacts of US tariffs on Australian exports in this set of data. March quarter GDP rose by 0.2% over the quarter, or 1.3% over the year which was below economist consensus forecasts of a 0.4% increase (we were expecting 0.3%). The pace of annual GDP growth is slowly increasing after bottoming at 0.8% (year on year) in September 2024. It was concerning to see a fall in per capita GDP again (it has fallen in the last 9 out of 11 quarters, the longest decline in per capita GDP on record) which is bad for living standards. Productivity growth looks shocking. It was flat over the quarter again, down by 0.9% over the year and the 5-year rolling average is flat. This is well below historical and more normal elves of 1-1.5% per year. Rising productivity is what matters for long-run wages growth and living standards.

 

Shares are at high risk of renewed falls given the ongoing tariff uncertainties, concerns about US debt, likely weaker growth and profits and the risk of a US/Israeli strike on Iran’s nuclear capability if diplomacy doesn’t work. However, with Trump likely to pivot towards more market friendly policies and central banks, including the Fed and RBA, likely to cut rates further, shares are likely to recover on a more sustained basis into year end. It’s likely to be a rough ride though.

 

Bonds are likely to provide returns around running yield or a bit more, as growth weakens, and central banks cut rates. A US public debt crisis is the main threat to this.

 

Unlisted commercial property returns are likely to improve in 2025 as office prices have already had sharp falls in response to the lagged impact of high bond yields and working from home.

 

Australian home prices have likely started an upswing on the back of lower interest rates. But it’s likely to be modest initially with US tariff worries constraining buyers. We see home prices rising around 3% this year but the risk is now on the upside given the more dovish RBA.

 

Cash and bank deposits are expected to provide returns of around 4%, but they are likely to slow as the cash rate falls.