Why is the ASX 200 tumbling on the latest US inflation print?

After three days of gains, the ASX 200 is taking a fall today.

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The S&P/ASX 200 Index (ASX: XJO) is taking a beating today.

After closing higher on Monday, Tuesday, and Wednesday this week, the benchmark index is down 0.57% around Thursday lunchtime.

The ASX 200 is following the lead of United States markets, which all closed sharply lower overnight after the latest US inflation readings through to the end of March.

Here's what's happening.

ASX 200 catching US inflationary headwinds

Following on the inflation data released by the US Labor Department, the S&P 500 Index (INDEXSP: .INX) closed down 1.0% while the tech-heavy Nasdaq Composite Index (INDEXNASDAQ: .IXIC) ended the day down 0.8%.

This came after hotter than expected inflation readings pushed back investor expectations of when we can expect an interest rate cut from the US Federal Reserve. Those revised expectations also look to be pressuring the ASX 200 today.

The US core consumer price index, which takes out volatile food and energy prices, was up 0.4% from February. Year-on-year core CPI remained unchanged at 3.8%, against consensus expectations of a pullback.

Headline inflation increased 0.4% in March with inflation now running at 3.5% on an annual basis, up from 3.2% last month.

That's well above the Federal Reserve's 2% target. And it could see the official US cash rate stay at the current 5.25% to 5.5% for considerably longer than ASX 200 investors have been hoping.

Former Obama administration economist Jason Furman noted that the core inflation figures in the US were picking up at a historical pace.

According to Furman (quoted by The Australian Financial Review):

Over the last three months, core CPI has risen at a 4.6% annual rate. That is faster than any three-month period from August 1991 to 2020. Over the last twelve months core CPI has risen 3.5%. That is faster than any twelve-month period from February 1993 to 2020.

What are the experts saying about rate cuts now?

Commenting on the sticky inflation in the world's top economy, David Kelly, chief global strategist at JPMorgan Asset Management, said (quoted by Bloomberg), "The sound you heard there was the door slamming on a June rate cut. That's gone,"

As for when ASX 200 investors might expect the Fed to begin easing now, Bloomberg Economics Anna Wong and Stuart Paul said:

The Fed is likely to take a stronger signal that disinflation momentum is slowing from this report. We push back our expectation for a first rate cut to July, from our previous baseline of June.

Closer to home, the economists at National Australia Bank Ltd (ASX: NAB) are also dialling back rate cut forecasts (courtesy of the AFR).

According to NAB:

The market now has between one and two Fed rate cuts priced for year-end, from between two and three. [The inflation data] reduced the implied odds of a June rate cut to less than 20% from around 50% heading into the release.

"The modest overshoot in US March CPI inflation was sufficient to force a fragile market to reprice the first full 25bp rate cut from the Fed back to November from July," ANZ Group Holdings Ltd (ASX: ANZ) economists added.

Could ASX 200 investors see interest rates actually go higher now?

While most analysts are still confident that the path for interest rates from the Fed, along with other leading central banks like the RBA, is lower, former US Treasury Secretary Lawrence Summers cautioned that a rate hike wasn't off the table.

He forecast the odds of a Fed rate hike were between 15% and 25%, saying, "We do not need rate cuts right now."

Summers noted (quoted by Bloomberg):

You have to take seriously the possibility that the next rate move will be upwards rather than downwards. On current facts, a rate cut in June it seems to me would be a dangerous and egregious error comparable to the errors the Fed was making in the summer of 2021.

A likely delayed rate cut from the Fed is already sending the ASX 200 sharply lower today.

An unexpected rate increase would be most unwelcome.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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