ASX set to slide as Wall Street retreats on fading rate cut hopes

By Stan Choe

Wall Street is slipping after stronger-than-expected data on the economy weakened hopes that easier interest rates will arrive soon.

The S&P 500 was 0.8 per cent lower in afternoon trading and on track for a second straight drop after closing out its 10th winning week in the last 11. The Dow Jones was down 0.3 per cent and the Nasdaq composite was 1.1 per cent lower. The Australian sharemarket is set to fall, with futures at 4.57am AEDT pointing to a loss of 34 points, or 0.5 per cent, at the open.

Wall Street is set for a second-straight day of losses.
Wall Street is set for a second-straight day of losses.Credit: AP

Rising yields in the bond market were once again putting downward pressure on stocks. Yields climbed after a report showed sales at US retailers were stronger last month than economists expected. While that’s good news for an economy that’s defied predictions for a recession, it could also keep upward pressure on inflation.

That in turn could push the Federal Reserve to wait longer than traders expect to begin cutting interest rates after jacking them drastically higher over the last two years. Lower rates would relax the pressure on the economy and financial system, while also goosing prices for investments.

The yield on the 10-year Treasury jumped immediately after the retail-sales report and climbed to 4.09 per cent from 4.06 per cent late Tuesday and from 3.85 per cent a few weeks ago. Higher yields can crimp profits for companies, while also making investors less willing to pay high prices for stocks.

Higher yields hurt all kinds of investments, and high-growth stocks tend to be some of the hardest hit. Drops of about 1 per cent or more for Tesla, Nvidia, Apple and Amazon were some of the heaviest weights on the S&P 500. The smaller stocks in the Russell 2000 index also slumped more than the rest of the market, down 1.1 per cent.

The Dow Jones, meanwhile, has less of an emphasis on tech and high-growth companies. That helped limit its losses relative to the rest of the market.

The yield on the two-year Treasury, which more closely tracks expectations for the Fed, also jumped. It climbed to 4.36 per cent from 4.22 per cent late Tuesday as traders trimmed their expectations for the Fed’s first rate cut to arrive in March. Traders are now betting on a 53 per cent probability of that, down from a shade more than 70 per cent a month earlier, according to data from CME Group.

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A top Fed official, Governor Christopher Waller, said Tuesday that the central bank could take its time before its next move on rates given how resilient the economy has remained.

“These comments leave a rate cut as early as March on the table but also indicate that such a move is not a done deal,” according to economists at Deutsche Bank led by Amy Yang.

On Wednesday, across the Atlantic Ocean, the head of the European Central Bank warned in a speech about the risks of cutting rates too soon.

If Wall Street’s predictions for the timing of the rate cuts it desires so much do indeed prove wrong, it would be just the latest example of over zealousness by traders.

Interest rates are one of the main levers that set stock prices. The other is corporate profits, and several companies reported weaker results on Wednesday than analysts expected.

US Bancorp dropped 2 per cent after reporting weaker profit than analysts expected. Big 5 Sporting Goods fell 10.5 per cent after its said it expects to report a worse loss for the last three months of 2023 than earlier expected because of weak sales of winter-related products. It said it’s been hurt by warmer temperatures and a lack of snowfall in the West.

Charles Schwab reported stronger profit for the latest quarter than analysts expected. But its stock still fell 1.9 per cent. Its revenue fell short of estimates, and analysts said its better-than-expected earnings were likely due in part to easier tax rates.

Spirit Airlines was under heavy pressure again and sank 23.5 per cent. Its stock nearly halved a day before after a US judge blocked its purchase by JetBlue Airways out of fear that it would lead to higher airfares. JetBlue lost 8.9 per cent.

Wednesday’s slump for Wall Street followed a rough day for financial markets worldwide. Stock indexes fell more than 1 per cent in Europe following the comments by Christine Lagarde, the head of the European Central Bank.

They dropped even more sharply in Asia. Stocks sank 3.7 per cent in Hong Kong and 2.1 per cent in Shanghai as worries continue about a sluggish recovery for the world’s second-largest economy.

Japan’s Nikkei 225, which has been one of the new year’s biggest winners, also fell and slipped 0.4 per cent.

AP

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Source: Thanks smh.com