ASX 200 dips amid slowing US inflation and Fed rate hike bets

The S&P/ASX 200 Index (ASX: XJO) is down 0.07% in early trade today after the benchmark index closed up 0.5% yesterday.

The ASX 200 is following the lead of US markets, which all closed lower overnight.

This came after the United States Bureau of Labor Statistics released its March Consumer Price Index (CPI) data during trading hours in the US yesterday.

Here’s what we know.

ASX 200 dips despite slowing US inflation

US markets and the ASX 200 are both trending lower despite headline CPI slowing to 5% in March after coming in at 6% in February.

CPI in the world’s largest economy hit a high of 9.1% last June. March marks the sixth consecutive month that the pace of inflation has been slowing.

While that’s good news, at the end of the day it wasn’t good enough to boost US stocks. Or the ASX 200.

The Federal Reserve’s inflation target is 2%, mind you. Meaning there’s quite some way to go yet before the Fed, and investors, can breathe easy.

Core inflation, which strips out volatile goods like energy and food, also remains a concern. Core CPI edged higher month on month in March and now sits at 5.6% in the US.

Then there’s the jobs market. Which is strong.

While no one likes to see people out of work, the 3.5% unemployment rate in the US remains an issue for Fed chair Jerome Powell as the tight labour market will put upward pressure on wages, making inflation stickier.

Can we expect another rate hike from the Fed?

While slowing headline CPI in the US is certainly welcome news, ASX 200 investors should expect another 0.25% rate hike when the Federal Open Market Committee (FOMC) meets next month.

According to Oxford Economics chief US economist Ryan Sweet (quoted by The Australian Financial Review):

We expect the Fed to increase the target range for the fed funds rate by 25 bps in both May and June and then pause through the remainder of this year. However, the odds of a pause in June are rising.

As for the banking crisis in the US and Europe, Citi economist Andrew Hollenhorst said that was unlikely to derail the FOMC members from lifting rates to tamp down inflation:

Fed members [John] Williams along with [James] Bullard, [Thomas] Barkin and [Patrick] Harker (as well as Treasury Secretary Yellen) suggested that while it is possible tighter credit conditions will slow the economy, they are not yet seeing evidence that will be the case.

We agree with that assessment.

So, despite slowing CPI figures, prices are still rising too fast in the US.

And with another rate hike from the world’s most influential central bank now looking very likely in May, ASX 200 shares are facing some headwinds today.

The post ASX 200 dips amid slowing US inflation and Fed rate hike bets appeared first on The Motley Fool Australia.

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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