Thursday is shaping up to be a potentially huge day for S&P/ASX 200 Index (ASX: XJO) shares.
ASX 200 shares are already enjoying a strong run today, with the benchmark index up 0.66% in late afternoon trade.
The market rally comes on the back of lower-than-expected inflation data out of the United States overnight.
The US Labor Department reported that with November's 0.1% increase, the consumer price index (CPI) is up 7.1% year on year. Consensus expectations had forecast that figure would come in at 7.3%.
That lower-than-expected inflation print saw the S&P 500 Index finish up 0.7%.
Tomorrow could see another big run in US equities and ASX 200 shares, with that performance hinging on the next rate hike decision from the Federal Reserve.
What's in store for ASX 200 shares tomorrow?
Before the latest CPI print, a number of economists forecast that Fed chair Jerome Powell might keep his foot on the gas and announce another 0.75% rate hike tomorrow.
With inflation showing some signs of slowing down in the world's top economy, consensus expectations are now for a 0.50% increase.
That would bring the federal funds rate (which is like the RBA's cash rate) to a range of 4.25% to 4.50%. That's up from a range of 0% to 0.25% at the start of the year and would mark the highest interest rates in the US since 2008.
With a 0.50% increase largely baked into the market, this would be unlikely to drive any outsized gains on the ASX 200 tomorrow.
And indeed, there are some reasons to believe the Fed won't raise by less than that, or even better, pause its tightening cycle.
Chief amongst those reasons is the continuing strength of the US labour market along with an unexpected uptick in services inflation.
US investment analyst at eToro Callie Cox said that was a "discouraging detail".
"Services inflation accelerated again last month, and that's got to give the Fed some pause in declaring this report a victory," Cox said. "The Fed has more control over services prices, so fiery hot services inflation could hint that Powell needs the economy to cool down more."
Deputy chief economist at Bank of Montreal Michael Gregory is among those expecting a 0.50% increase. According to Gregory (courtesy of The Australian Financial Review):
Reflecting a higher policy rate profile, we're expecting to see slower growth and higher joblessness. But we're also expecting to see more stubborn inflation indicating that the net risks for policy rates rest decidedly on the upside.
Chief US economist at RBC Capital Markets Tom Porcelli (quoted by The Australian) added that with CPI data slowing, "There is no need at this point to continue hiking rates but, of course, they will. So we'll get the much anticipated 50 basis point hike tomorrow."
We'll find out soon enough what Powell and the Federal Open Market Committee members decide.
But if they opt for some patience and raise rates by an unexpectedly low 0.25%, ASX 200 shares could be in for a good day tomorrow. On the other hand, hawkish sentiments from the Fed could send the local bourse tumbling lower.
