ASX set to edge up as Wall Street swings higher

Stocks are swinging through mixed trading on Wall Street following reports suggesting the economy and corporate profits may be doing better than expected.

The S&P 500 was 0.5 per cent higher in early afternoon trading, the Dow Jones was up 0.1 per cent after erasing an earlier gain of 177 points. The Nasdaq composite was 0.8 per cent higher. It sets up the Australian sharemarket to open higher with futures at 5.06am AEDT pointing to a gain of 10 points or 0.1 per cent, at the open. The ASX was closed on Thursday for the Australia Day public holiday.

More swings may still be ahead, as each of the reports guiding the market had both positives and negatives for investors. Markets have veered up and down recently as worries about a severe recession and drop-off in profits battle against hopes the economy can manage a soft landing and the Federal Reserve may ease up on interest rates. A day earlier, stocks tumbled to sharp losses out of the gate, only to roar all the way back to finish nearly flat.

Thursday’s headline report showed the overall economy held up better through the last three months of 2022 than economists expected, even with the weight of all the rate hikes the Fed approved last year to combat inflation. The economy’s growth slowed to an annual rate of 2.9 per cent in the quarter, but that was still stronger than the 2.3 per cent that economists had forecast.

Other reports showed that orders for long-lasting goods from factories strengthened by more than expected in December and fewer workers applied for jobless claims than expected last week.

Such strength gives hope the economy can withstand last year’s blizzard of rate hikes by the Fed, plus at least one more expected next week, without crashing to a deep recession. Higher rates intentionally slow the economy by making it more expensive to borrow to buy a home, a car or anything else on credit. They also drag down prices for stocks and other investments.

But a stronger-than-expected economy, particularly in the job market, can also carry counterintuitive risks. It could push the Fed to keep rates higher for longer in order to ensure inflation really is crushed. That would dash hopes on Wall Street that the Fed may cut rates later this year. Such hopes have been one of the main reasons stocks have remained as high as they have recently, and the S&P 500 is close to its best level in nearly eight weeks.

The yield on the 10-year Treasury, which helps set rates for mortgages and other loans crucial for the economy, rose to 3.49 per cent from 3.45 per cent late on Wednesday. The two-year yield, which tends to more closely track expectations for Fed actions on interest rates, rose to 4.19 per cent from 4.13 per cent.