US looks towards rate cuts, Australia lags behind

A raft of economic data came out from the US overnight with US Federal Reserve chair Jerome Powell indicating the US could cut interest rates at least once this year.

A lower-than-expected May CPI print was encouraging, but the FOMC still kept its funds rate target at 5.25-5.5% in a unanimous decision.

However, the Fed acknowledged "modest progress" to its 2% inflation target after previously stating there was a "lack" of progress and retained its stance that the next rates move would be down.

The FOMC now projects it will reduce the funds rate by only 25bp by the end of 2024.  In March, the FOMC projected three 25bp cuts by the end of 2025.

VanEck portfolio manager Cameron McCormack said 'supercore inflation' rate - being that which excludes food, energy and shelter inflation - turned negative month-on-month for the first time since 2021.

"This has boosted rate cut bets, with a higher probability of the first rate cut happening in September this year. Sticky services inflation is finally showing signs of consistently unwinding, while energy and goods prices remain muted," McCormack said.

"An overlooked risk in the market is the potential reacceleration of energy prices, which could occur due to a rally in commodity prices that is driven by the central bank rate cuts in Europe and Canada. Such a development would push out the timeline for US rate cuts to next year."

McCormack said despite the encouraging sign inflation was easing, one month "doesn't make a trend" and investors should remain cautious.

"Powell reiterated a hawkish tone that aligns with VanEck's house view of maximum one rate cut this year," he said.

"This is one more rate cut than Australia is likely to get this year, given inflation has re-accelerated and persistent services inflation - which the US appears to have tempered - remains unresolved."

McCormack said the Reserve Bank of Australia (RBA) appears poised to be the last developed market central bank to cut rates.

"Additionally, high wages growth in both public and private sectors show no significant sign of easing, as unemployment hovers near record lows. The stage 3 tax cuts that are rolling out in a couple of weeks are also the equivalent of two to three rate cuts," he said.

"It's worth noting that historically, moderate rate cuts have tended to bolster equity market performance."