ASX slides 0.4% after Fed signals two more rate hikes

The S&P/ASX200 slipped 0.4% in early Tuesday trade, snapping a four-session winning streak. The decline followed the US Federal Reserve's decision to hold interest rates at 3.75% while signaling two additional quarter-point increases later this year. Wall Street sold off after the decision, with the S&P 500 falling 1.2% and the Nasdaq Composite dropping 1.6%.

The Fed's updated dot plot showed two rate increases penciled in for the second half of 2025, a shift from the prior projection of one. Chair Jerome Powell told reporters the committee saw "limited progress" on inflation and needed to keep policy restrictive. The two-year Treasury yield, which tracks near-term rate expectations, jumped 12 basis points to 4.18%, its highest since early March.

The Australian dollar weakened 0.5% against the greenback, slipping below $0.6450. The rate differential widened after the Fed's hawkish stance. The move came despite a stronger-than-expected jobs print from Australia last week, which had briefly pushed the currency above $0.6500.

A weaker Australian dollar has mixed implications for the domestic market. Companies with significant import exposure, such as retailers and airlines, face higher costs. Exporters, particularly miners that earn in US dollars, benefit from a translation boost. For the ASX's biggest weighting, the banks, the primary channel flows through global funding costs. Higher US rates make it more expensive for Australian lenders to raise wholesale funding offshore, squeezing net interest margins.

For Australian equities, the immediate pressure fell on financials and growth stocks. The financial sector, which accounts for roughly a third of the ASX200, was broadly lower. The Big Four banks all declined in early trade. Mining stocks were mixed: iron ore miners edged higher on steady futures, while gold miners retreated after the stronger dollar pushed bullion lower, extending recent losses in the gold market.

The Reserve Bank of Australia meets next on June 17. Markets now price a 20% chance of a rate cut by August, down from 35% before the Fed decision. The RBA's own cash rate sits at 4.10%, and Governor Michele Bullock has repeatedly said the board is not considering easing until inflation is sustainably inside the 2-3% target band.

The RBA's next decision comes after the April CPI print. The central bank has held its cash rate since November, and Bullock has pushed back against market expectations of an early cut. A CPI print above 3.5% would strengthen the case for the RBA to hold or even hike, traders said. The longer the global rate tightening cycle persists, the harder it becomes for the RBA to ease without further weakening the local currency and stoking imported inflation.

A Sydney-based equities trader said the market had already priced a cautious Fed hold. The trader added that the dot plot shift caught some by surprise, and the next question is whether the RBA follows the Fed's lead or maintains its own course. Trading volumes on the ASX were roughly in line with the 20-day average, suggesting the move was orderly. The VIX, Wall Street's fear gauge, rose 1.5 points to 18.2, still below the 20 threshold that typically signals sustained stress.

The next domestic data point is the April consumer price index, due May 28.