Economic Update December 2025

In this month’s update, we provide a snapshot of economic occurrences both nationally and from around the globe.

Key points:

• – US Fed is back looks set to resume its interest rate-cutting cycle.
• – Central banks remain on an easing bias, but it appears we are getting toward the cycle end
• – Australian CPI edges higher due to ABS treatment of electricity subsidy rather than prices generally
• – Share markets have a soft month but finished strongly

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture

November began with the US government still ‘in shutdown’ since the two parties couldn’t agree on how to extend funding for medical needs. The deadlock was broken after a record 43 days. The Democrats capitulated.

One major consequence of the shutdown for the conduct of economic analysis was the closure of the government agencies that produce the much-needed macroeconomic data. Only the September CPI Inflation was released (at the end of October) in the shutdown because that data is essential to recalibrate government benefits.

This lack of clarity in assessing the state of the economy led Federal Reserve (Fed) chair, Jerome Powell, to draw an analogy with driving in thick fog – you slow down! So, policy changes slow when data visibility drops.

At the September Fed meeting we were given to expect two more interest rate cuts in addition to the one handed down on September 18th. The Fed did cut rates again on October 30th by 0.25% points to a range of 3.75% to 4.0%.

Uncertainty over the strength of jobs and inflation during a data-starved November led to the estimated probability of that third cut on December 10th falling from around 90% to 30%. It rose back up to near 90% when the New York Fed President, John Williams, came out to say an interest rate cut was needed ‘soon’.

Aided by Trump’s attacks on the Fed, the typical consensus Fed view on interest rates had been split into three groups. It was speculated by many that Williams’ comments had been encouraged by Powell to try and move the Federal Open Markets Committee (FOMC) back to consensus.

The Reserve Bank of Australia (RBA) also went through some major changes in expected future interest rate cuts. A December 9th rate cut looked highly likely until Australia’s CPI inflation report was published on November 26th. The inflation read rose again – this time from 3.6% to 3.8%. RBA Governor Michele Bullock seemed taken aback by this data release. She even went so far as to say that she would want a restrictive policy even if the CPI was within the traditional target band of 2% to 3% but above 2.5%.

We are very much of the opinion that the method of calculating inflation in electricity prices in the face of the energy subsidies is flawed and is influencing the CPI data creating a false read on inflation which is then being used by the RBA in forming its interest rate policy settings.

As the subsidy or rebate payments come to their conclusion, the Australian Bureau of Statistics (ABS) method of price change calculation produces significant but illusory, inflation estimates. For example, the last three months of ‘official’ annual electricity price inflation data have been 24.6%, 33.9% and 37.1% respectively. The ABS noted that, without their adjustment, electricity price inflation would only have been 5.0% and not 37.1%. The estimated probability of a December interest rate cut fell to 6%. There have even been calls for an interest rate hike from some quarters.

Even if there was some validity in trying to create a price series out of a flat subsidy, interest rates on hold or even hiked would have no impact on electricity prices. The subsidy component would eventually work its way out of the system without any action from the RBA. We have calculated that it is highly likely the next CPI data, to be published on 7th January, will show a marked fall in inflation with the CPI possibly even going back to within the target range of 2.0 % to 3.0%. Unfortunately, the CPI data come out after the RBA meeting and its rate decision!

The Australian and US labour force data published in November showed mixed signs of strength and weakness. The US unemployment rate rose to 4.4%, the highest read since October 2021 during the pandemic. But US jobs rose by 119,000! The prior months’ jobs change was revised to a negative.

Because of rounding error, the Australian unemployment rate seemed to have fallen from 4.5% to 4.3% but the actual change was only 0.1% points (approximately = 4.45 – 4.34). And the latest figure was higher than all of the previous published rates since 2022. It was reported that there were 42,000 new jobs. However, in a separate report it was revealed that the growth in government jobs over the financial year 2024/25 was +5.6% while total jobs only increased by +1.7%. Government jobs do not indicate strength in an economy since they are funded from debt or taxes. Government jobs should not influence monetary policy decisions.

China has been struggling to redirect its trade in the face of Trump’s tariffs for US imports. Exports to the US fell by 25% while total exports from China were almost flat at 1.1% over the year.

There have been complex trade negotiations between the US and China with special focus on China’s near monopoly of rare earths and other strategic minerals, and the demand for advanced chips from Nvidia by China. Deadlines for new China tariffs keep being pushed back. Although some ‘wins’ have been reported by the US, it is quite possible that the lack of detail in these reported deals means the ‘successes’ might not eventuate.

Trump signalled that he is aware that his tariffs hurt US consumers and businesses even though he doesn’t explicitly state this. Trump has always maintained that he wanted to restore the cost-of-living imbalances in the US. However, roasted coffee prices have risen by 33% and beef prices by 12% to 15% in the face of his huge tariffs of up to 50% on Brazil and Argentina. That Trump felt the need to reset these tariffs to zero on specific agricultural commodities goes to the heart of the problems tariffs are creating for the US.

Trump has spoken of giving $2,000 to most US citizens to offset cost-of-living increases. That would amount to upwards of $500 bn! The US is not collecting that much in tariffs. Moreover, simply taking from consumers only to give it straight back is an inefficient way to run a country.

The latest US consumer confidence data shows that consumers are almost as gloomy as they were during the pandemic lockdowns.

Major equity markets did not do well in November, but key indexes finished the month strongly. The September quarter company reporting season in the US went better than expected. The ‘magnificent 7’ stocks, excluding Tesla, did particularly well. The existence or otherwise of an AI ‘bubble’ is still being discussed. However, each time there is a heightened volatility in equity markets, the AI stocks tend to bounce back. Investors seem to be ‘buying the dips’ which is a strong commitment to extending the current rally.

While many commentators expect a continuation of the ‘momentum rally’ on Wall Street for some months, many also see problems arising as the US tries to deal with its $38 trn debt.

There are patches of weakness in the Australia economy that could impinge on the ASX 200 performance, but government spending continues to paper over the cracks.

Asset Classes

Australian Equities 

After reaching an all-time high in October, the ASX 200 finished November about 5% off that high. However, the dip in the index was thwarted by a strong last week’s performance of +2.3%.

The Financials ( 7.4%) and IT ( 11.6%) sectors were the biggest casualties during November. Materials and Consumer Staples each posted a +1.5% gain over the month.

The ASX 200 is up +5.6% over the year-to-date which is about the average historical gain for a full year. The forecast yield from dividends is 3.0% plus any franking credits.

International Equities 

The S&P 500 posted its seventh consecutive month of gains in November, but the latest gain was only +0.1%. This index lost 5% from its October peak before recovering almost its entire loss with a strong +3.7% gain in the last week of November.

The London FTSE and the German DAX were all but flat over November but the Shanghai Composite ( 1.7%) and the Nikkei ( 4.1%) posted losses. Emerging Markets too were down 1.7%.

Bonds and Interest Rates

The Fed’s FOMC did not meet in November, but it is widely expected to cut interest rates again by 25 bps on December 9th. While inflation remains a little over its 2% target, mainly due to tariffs, the labour market is starting to cause concern. At this point there is not an across-the-board softness in jobs, but there are too many patches of uncertainty for the Fed not to cut interest rates again this year.

The US 10-year Treasury yield has been stable at close to 4% and the 30-year at about 4.65%. Theses yields are well below those in April, of 4.5% and 5.0%, that caused the Administration so much angst.

The RBA is not expected to cut at its December 10th meeting, but we feel this decision has been unduly influenced by a spike in inflation that is due more to statistical issues rather than an underlying increase in prices.

The RBNZ cut its interest rate in New Zealand by 25 bps to 2.25%.

Other Assets 

Brent Crude ( 2.9%) and West Texas Intermediate WTI ( 4.0%) oil prices were down moderately in November.

The price of gold rebounded by +5.6% after a fall in October.

The price of copper (+0.8%) grew only slightly in November. The price of iron ore lost 1.3% over the month.

The VIX ‘fear’ index finished November just above normal levels at 16.4.

The Australian dollar was down 0.3% against the greenback in November.

Regional Review

Australia

At first glance, the additional 44,200 jobs seemed a significant positive but much of job creation over the last 12 months or so has been in the government sector. While the unemployment rate fell slightly to 4.3%, the trend over the last three years has been strongly up from 3.4%.

The Westpac-Melbourne Institute consumer confidence index rose sharply from 92.1 to 103.8 in November. The wage price index rose 3.4% over the year which is about in line with the CPI inflation.

China 

China continues to negotiate with the US over tariffs. Around the world, new projects to mine rare earths have proliferated in response to China’s monopoly and export controls. However, the main issue with rare earth production is in the control of harmful pollution created during the processing.

China’s exports fell 1.1% over the year while imports rose +1.0%. However, exports to the US fell by 25% owing to the new tariffs.

After many months in deflation, the China CPI rose by +0.2% for the month and the year. Retail sales missed the expected +6.5% with a +4.9% outcome.

US

Patchy data out of the US is signalling a weakening labour market and inflation that is slightly elevated. It has been announced that some October data cannot be produced in hindsight. Inflation and jobs data are being posted with a delay.

After an about-face in November, the Fed seems to be on track to cut its interest rate to around 3% or below during 2026.

Europe

British growth for the September quarter came in at +0.1% from +0.3% in the June quarter. The Labour government brought down a budget which is attempting to impose big tax increases on the wealthier citizens.

Rest of the World

Japan posted negative growth ( 0.4%) for the quarter but this was slightly better that expected ( 0.6%). Like Australia, the government is looking to provide subsidies to help with energy costs.

Although Trump announced an additional 10% tariff on Canada because of its ‘anti-tariff’ TV adverts, it appears that the tariff hike hasn’t yet been imposed.

We acknowledge the significant contribution of Dr Ron Bewley and Woodhall Investment Research Pty Ltd in the preparation of this report.