S&P/ASX 200 Index (ASX: XJO) investors will know tomorrow morning whether the US Federal Reserve will keep interest rates on hold or surprise markets with a rate cut. While there are no guarantees, the world's most influential central bank will almost certainly not move to increase rates.
Either way, the Federal Open Market Committee will announce its decision overnight Aussie time tonight.
Should the FOMC move to cut rates from the current 23-year high 5.25% to 5.50% target range, I imagine the ASX 200 will have an absolute cracker of a day tomorrow.
That's because markets have virtually priced out any odds of an interest rate cut this week.
This is despite the Bank of Canada cutting rates last week by 0.25% to the new 4.75%. The European Central Bank followed suit the next day, dropping rates by 0.25% to the new 3.75%. This was the first easing by the ECB since 2019, despite the bank noting that inflation in some areas was proving sticky.
But with the latest batch of US labour data showing the nation added 272,000 jobs in May, far surpassing consensus expectations of 185,000, investors are all but ruling out an interest rate cut announcement from Federal Reserve chair Jerome Powell.
With the resilient US economy likely to keep the heat on inflation, investors are now eyeing September as the earliest date that US and ASX 200 investors may see some rate relief from the Fed.
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What are the experts saying on the interest rate outlook?
Commenting on the latest economic data out of the US, Sandy Villere, portfolio manager at Villere & Co said (courtesy of The Australian Financial Review):
This tells you there's certainly not going to a cut in the short term, and with the bond yields going back up it's putting a lot of pressure on the risk-on trade, which is probably small caps.
It's just a function of interest rates and maybe a little higher for longer, and people have to recalibrate for that type of environment.
Ryan Detrick, chief market strategist at the Carson Group is now looking ahead for a potential Fed interest rate cut in September.
"No one expects the Fed to cut [rates next week], but will they open the door for a cut as soon as September is the big question on everyone's mind," he said.
Analysts are now keeping a sharp eye on the Fed's dot plot projections.
"We expect the [Fed] will raise the dot plot from an anticipated three cuts to just one to two cuts for this year with a modest upside tweak to the end 2024 inflation forecasts," Tom Kenny, a senior economist at ANZ Group Holdings Ltd (ASX: ANZ) said (quoted by the AFR).
"We should see the 'dots' show a central tendency for two 25-basis points-rate cuts, from three, this year, but there is a small chance they move to one cut – an outcome that would rock markets," Chris Weston, head of research at Pepperstone Group added.
And the RBA?
As for the Reserve Bank of Australia, ASX 200 investors will have to wait until next Tuesday, 18 June for that interest rate decision.
According to the ASX rate tracker, only 5% of traders expect the Aussie central bank to cut rates from the current 4.35% this month. More than half of investors expect the RBA to hold tight into early 2025.
"We assume the RBA will lag easing, but now with global central banks starting to cut rates, the RBA is unlikely to remain alone forever," George Tharenou, chief economist for Australia at UBS said.
Tharenou is forecasting ASX 200 investors will see the first RBA interest rate cuts in 2025.
