US Economic Surprise Pushes Rate Cut Expectations Back to 2027

The US economy has surprised to the upside with strong economic data in July. The S&P Global's flash composite PMI for July climbed to 53.6, its highest reading in eight months, indicating roughly 2% annualised GDP growth in the third quarter.

This strength wasn't limited to one corner of the economy, as rising input costs and persistent supply chain disruptions were accompanied by the fastest increases in selling prices in years.

For markets, the takeaway is that if the US economy continues to expand at this pace, the Federal Reserve has little reason to cut rates anytime soon. This means markets had been pricing in potential rate relief later this year, but now expect it to be pushed back toward 2027 at the soonest.

A stronger US dollar, resulting from a higher-for-longer US rate environment, will have a direct impact on Australian commodity exporters and global bond yields. For the ASX listed banks, persistently elevated rates can dampen credit growth and increase the risk of loan defaults if the RBA delays rate cuts in response to offshore conditions.