Global sharemarkets have commenced the week on the back foot as traders recalibrate United States interest rate expectations following a hawkish message from Federal Reserve chairman Kevin Warsh. In his first major speech, Mr Warsh vowed to stamp out inflation, reiterating the central bank’s commitment to its 2 per cent inflation target. He noted that financial conditions were not currently restrictive, fuelling expectations of an imminent rate rise, though he refrained from explicitly signalling a September increase.
Markets reacted swiftly. Wall Street saw a sell-off, the US dollar climbed, and two-year Treasury yields surged. Traders now price in over a 50 per cent chance of a Fed rate increase next month. This risk-off sentiment translated to the Australian market, with ASX futures pointing down 0.4 per cent. A decline in the gold price is also set to weigh on the local mining sector.
Australia experienced similar market shifts last week after a hotter-than-expected inflation report, prompting expectations for a fourth interest rate increase by the Reserve Bank of Australia (RBA) this year. Some economists forecast a rise at the RBA’s September meeting, making policy decisions “live.” Stephen Miller, an investment strategy consultant, suggested both the Fed and the RBA will likely raise rates next month, creating communication challenges.
Investors will closely monitor upcoming economic data. Australia’s second-quarter GDP, expected at 0.4 per cent growth, is a key focus. Westpac noted Australia’s economy “remained stuck in the slow lane” but proved “a little more resilient than feared.” The US non-farm payrolls report is anticipated on Friday, while New Zealand’s Reserve Bank is expected to lift its cash rate by 25 basis points to 2.75 per cent this week.
