(US) – Bond traders have slightly increased their expectations of higher interest rates in Australia following the release of hotter-than-expected US services sector data, which raised concerns that the fight against inflation might not be over.
Futures now imply a 38% chance, up from 35% on Wednesday, that the Reserve Bank will raise the cash rate to 4.35% before May next year.
Interest rates and inflation concerns
The unexpected rise in the Institute for Supply Management’s services index to 54.5 in August, defying expectations of a fall to 52.4, contributed to this shift in expectations.
The US 10-year note yield rose 2 basis points to 4.28%, while gold fell 0.5% to $1916.6 an ounce. In Australia, three-year bond yields increased by 4 basis points to 3.85%, and the 10-year rate gained 3 basis points to 4.17%. Fed funds futures now imply a 48% chance that the US Federal Reserve might deliver another rate increase in November.
Stephen Miller, a strategist at GFSM fund management, stated that the data suggests a soft landing in the US but also reinforces the notion that Fed Chairman Jerome Powell will keep rates high for an extended period.
Miller also expressed concern about inflation in Australia and the potential for one or two more rate increases by the Reserve Bank by the end of the year.
Diana Mousina, AMP deputy chief economist, pointed to recent leading indicators of inflation and potential sources of inflation risk in Australia, including business survey price indicators and knock-on price impacts from the El Nino weather cycle.
She cautioned that upside inflation shocks could lead to renewed concerns about rate hikes, higher bond yields, and the risk of a recession.
