Australian shares are set to dive again on Tuesday after a bout of selling swept through Asian markets on Monday with investors responding to worrying US inflation data late last week that pointed to a faster pace of Fed tightening.
“We are still seeing the fallout from the blowout CPI number on Friday in the US and that has led to heightened concern about how much the Fed will raise rates and increasing fears of a US recession,” he said.“It’s the same theme that has been driving things all year, but it has intensified. There was hope US inflation had peaked. Friday’s numbers put an end to that idea.”
Financial markets now place a one-in-four chance the Fed will raise rates by 0.75 of a percentage point when it meets on Wednesday in the US, or early Thursday Sydney time. Such an increase would mark the biggest single increase since 1994. Bond futures imply a further 50 basis point rise in the cash rate when the Fed meets in July and a strong chance of a similar move in September.
Bond markets are now pricing the Fed’s benchmark rate to reach 3.8 per cent by May next year, versus 3.7 per cent expected for the Reserve Bank of Australia’s cash rate for the same period. In addition to the Fed, the Bank of England will also meet this week and is widely tipped to raise interest rates at its policy meeting on Thursday for the fifth time since December.It’s expected to lift its benchmark by 25 basis points to 1.25 per cent with investors giving a one-in-three chance of a 50 basis points lift to quell annual inflation nearing double digits.
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