The S&P/ASX 200 Index (ASX: XJO) is sliding lower today, down 1.1% in early afternoon trade.
This comes following the release of the latest inflation data out of the United States.
That resulted in a mixed day in US markets (overnight Aussie time), which saw the Nasdaq Composite Index (NASDAQ: .IXIC) close up 0.6% while the Dow Jones Industrial Average Index (DJX: .DJI) closed 0.5% lower.
At the time of writing, futures indicate all the major US exchanges will come under selling pressure tomorrow. Which, in turn, could throw up some short-term headwinds for ASX 200 shares.
Because, like it or not, fast-rising prices and the resulting central bank tightening in the world's top economy have a major spillover effect on the ASX 200's performance.
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ASX 200 dips as US inflation remains concerning
Looking on the positive side, annual inflation in the US edged lower to 6.4%, down from 6.5% in December. And well down from the 9.1% figures posted in June.
But even after seven months of declines, 6.4% is way above the Federal Reserve's 2% target range.
Which means ASX 200 investors can expect another interest rate rise from the Fed when its board meets again in March. And that most likely won't be the last hike in 2023 either.
Indeed, on Monday, before the latest CPI data was released, Fed governor Michelle Bowman said, "I expect we'll continue to increase the federal funds rate because we have to bring inflation back down to our 2% goal, and in order to do that we need to bring demand and supply into better balance."
ASX 200 shares have broadly come roaring back in 2023. Despite the higher interest rate environment in Australia, the US, and most of the developed world, the benchmark index is up 4.4% year to date.
But if rates keep ratcheting higher, some sectors, like consumer discretionary stocks, could come under renewed pressure as households begin to feel the pinch.
Growth stocks, priced with future earnings in mind, could also get hit with renewed headwinds.
What the experts are saying
"Inflation slowed again, but the details show the Fed's fight is far from over. Services inflation is still fiery hot, and that's the kind of inflation the Fed is trying to get under control," Callie Cox, US investment analyst at eToro said.
Cox recommended caution to investors in US equities. Advice that would likely also serve ASX 200 investors well.
"The inflation crisis isn't over yet, and as we've seen recently, it's easy for markets to get carried away. We may not see new highs until inflation is fully under control," she said.
Most analysts are convinced the Federal Open Market Committee (FOMC) will raise rates at both of its next two meetings. Consensus expectations are for a 0.25% increase each time.
Many also believe we could see the world's most influential central bank begin to ease by the end of the year, which could see the ASX 200 finish 2023 with a bang.
According to Morgan Stanley's Ellen Zentner (quoted by The Australian Financial Review):
We expect the Fed tightening path to be largely set through the May FOMC, with a 25bp hike at each of the upcoming meetings. Beyond May, however, a slowing labour market and more moderate inflation outcomes should set the stage for a stop in the tightening cycle and an eventual first rate cut in December.
Oxford Economics' Ryan Sweet added:
All told, risks are weighted toward inflation being higher in the first half of this year than we anticipated in the February baseline. Still, inflation should moderate more noticeably in the second half of this year as goods disinflation intensifies and services inflation peaks.
