A risk-off week for the ASX 200: Iron ore tumbles, US inflation and more rate hikes

The S&P/ASX 200 has spent the whole day selling off, with all sectors giving up early gains or extending losses.

The Materials sector is headlining losses as iron ore prices continue to trend lower. Investors seem unconvinced that China’s proposed US$220bn stimulus package will boost demand for the steel making material.

Risky and growth-oriented sectors like tech and discretionary are also struggling. 

ASX 200 intraday chart (Source: TradingView)

Why it’s a risk-off kind of week

Global equity markets started to bounce in early July, fuelled by hopes that the pullback in commodity prices will soon mark a peak for inflation.

The rally proved to be short-lived as investors face a data heavy week, with several central banks due to raise interest rates and a closely watched US CPI reading on Wednesday night. 

US inflation is forecast to climb to 8.8% in June, up from 8.6% in May. This would mark the highest inflation reading since December 1981. 

Goldman Sachs expects a 75 bps hike from the Fed at the July meeting, followed by 50 bps in September and 25 bps each in November and December.

A hotter-than-expected inflation reading could embolden the Fed to take an even more hawkish stance on interest rates, especially given its new-found view to move ‘expeditiously’ to fight inflation.

On the flip side, a cooler-than-expected reading, in tandem with recent economic data suggesting that the US economy is beginning to slow and easing oil prices, could lower interest rate and inflation expectations. 

When will the oil and inflation divergence close? (Source: TradingView)

Not a good track record

The last two inflation readings from the US both came in hotter-than-expected.

• May 8.6% versus. 8.3% forecasts

• April 8.3% versus 8.1% forecasts

Both times, the S&P 500 sold off more than -1.5%.

Inflation surprise selloffs circled (Source: TradingView)

Hike, hike, hike

Korea and New Zealand central banks are both expected to hike interest rates by 50 bps to a respective 2.25% and 2.5% on Wednesday.

The Bank of Canada is forecast to hike by an outsized 75 bps to 2.25% on Thursday.

China pains

To add further insult to injury, Chinese iron ore futures have dipped -4.5% on Monday. Chinese steel mills continue to ease production due to weak margins and high inventories.

Covid cases are climbing in the background, with Shanghai reporting 69 new infections on Sunday, the most since late May.

Residents in China's financial hub continue to face rounds of mass testing, with new sub-variants proving to be a constant challenge to the country's 'zero-tolerance' approach.