ASX set to dip as inflation, rates weigh on Wall Street

Wall Street is slipping, adding to losses from the end of last week on worries about higher interest rates and inflation.

The S&P 500 was 0.5 per cent lower in mid-afternoon trading and on track for a second straight fall after a stunningly strong report on the US jobs market dented the market’s hopes for easing interest rates. The Dow Jones was down 0.2 per cent while the Nasdaq composite was 0.9 per cent lower. The Australian sharemarket is set to start the day lower with futures at 4.58am AEDT pointing to a dip of 2 points at the open. The ASX lost 0.3 per cent on Monday.

Some of the sharpest action was again in the bond market, where expectations are rising for the Federal Reserve to stay firm on keeping interest rates higher for longer to combat inflation. It’s something the Fed has been talking about for a long time, but also something the market has been stubborn about not believing fully.

The yield on the two-year Treasury, which tends to track expectations for the Fed, leaped. It zoomed to 4.46 per cent from 4.29 per cent late Friday and just 4.10 per cent the day before. That’s a significant move for the bond market. The 10-year yield, which helps set rates for mortgages and other important loans, jumped to 3.64 per cent from 3.52 per cent late Friday.

Higher rates slow the economy by design, in hopes of suppressing the demand for purchases that can fuel inflation. But they also raise the risk of a severe recession and hurt markets in the meantime.

Friday’s jolting jobs report showed that U.S. employers added a third of a million more jobs than expected last month despite higher rates. Normally, such strength would be good news for markets. At the least, it should mean higher sales for many companies.

But it also raised worries a too-strong labor market will keep inflationary pressures alive and force the Fed to keep rates higher for longer. That’s in direct opposition to hopes in the market that cooling inflation could get the Fed to pause its rate increases soon and then cut rates late this year.

Such hopes had driven a big rally on Wall Street to start the year, and the S&P 500 still remains up more than 7 per cent for 2023 so far. The stocks leading the way had been the ones most beaten down last year by the rattlingly swift rise in rates engineered by the Fed to combat inflation. Those include tech stocks and others seen as the riskiest or most expensive.

Investors came into the year extremely sceptical about such stocks, and once they got a spark higher, momentum for them quickly snowballed. Analysts have said the rebound was more about improvements in sentiment than any changes in the economy or other fundamentals.