Investors dial up bets for higher Fed, RBA interest rates

Mixed US data suggests that the world’s largest economy is not slowing quickly enough to stop the Federal Reserve from raising interest rates next month and lifted expectations of higher borrowing costs in Australia.

Even so, futures traders have ramped up bets the US central bank will lift the policy rate by another quarter of a percentage point to a range of 5 to 5.25 per cent to repel still-too-high inflation. They have pushed out the timing of a rate cut to late this year. They imply an 81 per cent chance of an increase when policymakers conclude a two-day meeting on May 3, up from 67 per cent on Wednesday.The shift in interest rates outlook sent US 10-year yields to 3.

Treasury Secretary Janet Yellen said on Sunday that she was optimistic the US could avoid both a recession and a big jump in unemployment as the economy and inflation slow.But futures markets are not convinced and anticipate the central bank will reverse course and begin cutting interest rates in December.

Australia’s three-year bond yields, which are sensitive to the cash rate outlook, rose to 3 per cent and the 10-year return climbed to 3.4 per cent. Meanwhile, the Australian dollar held at US67¢, having dropped a full US1¢ on Friday as the greenback powered up.Inflation figures for Canada, the UK, Europe, New Zealand, and Japan will be released. Taylor Nugent at NAB said the outcome in New Zealand would be treated as a useful guide for the direction of prices in Australia.

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