February 2025 Market Review: Key Trends and Insights

The global financial landscape in February 2025 was marked by shifting monetary policies, trade tensions, and mixed market performances. The Reserve Bank of Australia (RBA) cut interest rates, the U.S. imposed new trade tariffs, and the equity and bond markets experienced fluctuations. Here’s a breakdown of the key developments and their implications for investors.

Key Highlights:

• RBA Cuts Rates: The Reserve Bank of Australia lowered the cash rate by 0.25% to 4.10%, citing easing inflation. However, future cuts remain uncertain due to a tight labor market.

• U.S. Trade Tariffs: The U.S. government imposed a 25% tariff on steel and aluminum imports, potentially affecting inflation and economic growth.

• Market Performance: Australian shares declined by -3.8%, while international shares saw a marginal loss of -0.9%. Bond markets performed positively as yields declined.

• Australian Employment Growth: The economy added 44,000 jobs in January, though unemployment rose slightly to 4.1%.

• Currency Fluctuations: The Australian dollar remained volatile, trading between 0.61 and 0.64 USD.

Economic Review: A Mixed Outlook

Australia’s Interest Rate Cut

For the first time since 2020, the RBA cut interest rates to 4.10%, reflecting easing inflationary pressures. However, the central bank signaled caution on further rate cuts, emphasizing that the labor market remains strong and that wage growth slowed to 3.2% YoY in Q4 2024.

U.S. Tariff Impact

President Trump’s decision to impose 25% tariffs on steel and aluminum—with plans for reciprocal tariffs on other trading partners—has raised concerns about its impact on inflation and economic growth. The U.S. Consumer Price Index (CPI) for January exceeded expectations, prompting fears that these tariffs could further elevate inflation.

United Kingdom and Global Developments

• The Bank of England cut interest rates by 0.25%, citing progress in controlling inflation.

• Japan’s economy showed signs of recovery, benefiting from rising income levels and increased capital expenditure.

Market Performance: A Challenging Month for Equities

Stock Market Movements

• Australian shares fell -3.8%, underperforming global markets. The banking sector, in particular, struggled due to lower-than-expected earnings.

• International shares (hedged) declined -0.9%, influenced by weak U.S. economic data and investor concerns about trade policies.

• Emerging market stocks posted modest gains of 0.8%, driven by renewed optimism in Chinese technology stocks.

Bonds and Fixed Income

• International sovereign bonds increased by 1.0%, supported by lower yields amid softer economic data.

• Australian sovereign bonds rose 0.9%, with investors favoring them over cash holdings.

• Credit markets performed well, with international credit up 1.4%, despite no significant movement in credit spreads.

Real Assets and Currency Trends

• International listed property gained 2.0%, benefiting from stable fundamentals and attractive valuations.

• Australian listed property declined -6.1%, impacted by capital raising activities.

• The Australian dollar remained volatile, fluctuating between 0.61 and 0.64 USD, reflecting broader currency market trends.

Market Insights: What’s Next?

Australia’s Monetary Policy Outlook

While the RBA has cut rates, it is unlikely to rush into further reductions without clear signs of a weakening labor market and slowing wage growth. Employment remains strong, but a gradual rise in unemployment is expected in 2025.

Global Interest Rate Trends

• The U.S. Federal Reserve (Fed) faces challenges in balancing tariff-related inflation risks with economic growth concerns.

• Japan may see interest rate hikes, breaking a decades-long cycle of deflation.

• Other central banks, including those in Europe and the UK, are expected to continue cutting rates as inflation moderates.

Investment Strategies

• Japanese equities remain attractive, supported by solid earnings growth and economic expansion.

• International listed property offers favorable valuations and stable fundamentals.

• Australian sovereign bonds are preferred over cash, given that interest rates may have peaked for this cycle

Conclusion

February 2025 was a turbulent month for financial markets, with interest rate adjustments, trade tensions, and fluctuating equity performance shaping the investment landscape. While the RBA’s rate cut provided some relief, broader global uncertainties remain a challenge. Investors are advised to maintain diversified portfolios and closely monitor upcoming events, including the U.S. Federal Reserve’s rate decision on March 20th and key labor market updates.

Source: Mercer Investments. (2025, February). Monthly Mercer Market Review – February 2025. Mercer Investments (Australia) Limited.

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