Recent economic data out of the United States has surprised to the upside, suggesting the world’s largest economy is expanding more quickly than many had anticipated. That’s good news for corporate earnings and growth, but it also complicates the outlook for interest rate cuts, that creates a series of flow-on effects for global markets, including here in Australia.
S&P Global’s flash composite PMI for July climbed to 53.6, its highest reading in eight months. Any figure above 50 signals expansion, and this latest result points to roughly 2% annualised GDP growth in the third quarter.
The strength wasn’t limited to one corner of the economy. The report showed rising input costs, persistent supply chain disruptions, and the fastest increases in selling prices in years. All of that signals an economy still running hot, despite the Federal Reserve holding interest rates at elevated levels for an extended period.
For markets, the headline takeaway is simple: if the US economy continues to expand at this pace, the Fed has little reason to cut rates anytime soon. Markets had been pricing in potential rate relief later this year, before inflation raised it’s head, but the latest data has pushed those expectations back toward 2027 at the soonest.
Whilst the Nasdaq 100 fell back 1.12% on Friday, this morning’s early action Stateside has the QQQ ETF trading up 1.62%, suggesting a strong bounce at the open.
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Why Does It Matter To The ASX?
For Australian markets, a higher-for-longer US rate environment creates a few clear areas of interest. The first of which is that it tends to support a stronger US dollar, and when US rates stay elevated relative to other developed markets, capital flows toward dollar-denominated assets, pushing the greenback higher. That has a direct impact on Australian commodity exporters, particularly miners. A stronger USD makes Australian exports more expensive for international buyers and can weigh on commodity prices when quoted in US dollar terms.
Then you have global bond yields, which tend to move in sympathy with US rates. If the Fed stays on hold, it becomes harder for other central banks, including the RBA, to cut aggressively. That keeps funding costs elevated for Australian businesses and households, and it can weigh on valuations for rate-sensitive sectors like property and utilities.
The ASX listed banks face a more complicated environment. While higher rates support net interest margins in the short term, persistently elevated rates can also dampen credit growth and increase the risk of loan defaults. If the RBA delays rate cuts in response to offshore conditions, Australian mortgage holders remain under pressure, and that flows through to the broader economy.
The PMI report comes at a time when inflation remains sticky and supply chains continue to face disruptions. While headline inflation in the US has cooled from its 2022 peaks, core measures remain above the Fed’s 2% target. Rising input costs and faster selling-price increases suggest businesses still have pricing power, which makes it harder for inflation to fall back to target without a slowdown in demand.
