ASX slumps after US inflation data rattles Wall Street; $A tumbles

By Sumeyya Ilanbey
Updated

The Australian sharemarket opened sharply lower after heavy losses on Wall Street, where hotter-than-expected inflation data for the US dashed hopes of an imminent rate cut by the Federal Reserve.

The S&P/ASX 200 fell 95.60 points, or 1.26 per cent, to 7508 at about 11.06am AEDT. The only sector trading in the green was industrials (up 0.10 per cent), which was buoyed by a rally in Seven Group Holdings (up 5.97 per cent) and Computershare (up 2.63 per cent) following the release of their half-yearly earnings. The financial, real estate, IT and mining sectors each slumped by between 1.2 per cent to 2 per cent.

The Australian dollar fell sharply after the release of the US inflation data. It was down 1.2 per cent at 64.52 US cents early this morning, and traded even lower at 64.50 US cents as of 11.10am AEDT.

Wall Street has fallen sharply after worse-than-expected inflation figures.
Wall Street has fallen sharply after worse-than-expected inflation figures.Credit: NYSE

Financials stocks (down 2 per cent) recorded the greatest declines after the Commonwealth Bank’s $5 billion cash profit fell short of analyst expectations, with profit margins suffering from competition in the mortgage market, and CEO Matt Comyn warned that Australian households continue to feel pressure and cut back on spending in the current environment. CBA shares plunged 3 per cent, NAB fell 1.82 per cent, Westpac declined 1.91 per cent and ANZ was down 1.63 per cent.

A rally in AMP (up 7.73 per cent), which promised investors to return a further $295 million through dividends or buying back shares even as its net profit fell 32 per cent, was not enough to boost the rest of the sector.

Other poor market performers were Northern Star Resources (down 3.38 per cent), Newmont Corporation (down 3.33 per cent) and Harvey Norman (down 2.92 per cent).

On the flipside, IDP Education cemented itself as the best performing large-cap stock after its shares soared 11.61 per cent on the back of its earnings report showing a 23 per cent jump in net profit to $107 million.

Shares of industrial giant Seven Group hit a record after its half-year result beat market expectations and it raised its forecasts for the full year. A strong result from its industrial services businesses, Boral, Coates and Westrac, saw revenue jump 17 per cent to $5.4 billion and net profit soar 31 per cent to $474 million. The stock jumped more than 6 per cent to a record high of $38.66.

On Wall Street overnight, the S&P 500 closed 1.4 per cent lower as traders delayed their forecasts for when the Federal Reserve will deliver the cuts to interest rates they crave so much. The hotter-than-expected inflation report may have put the final nail into hopes that the first cut could arrive in March. It also pushed many forecasts past May into June, according to data from CME Group.

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The Dow Jones fell 1.4 per cent, retreating from its record set a day earlier. The Nasdaq composite, which has been flirting with its all-time high set in 2021, lost 1.8 per cent.

High interest rates hurt all kinds of investments, and they tend to particularly hurt high-growth stocks like technology companies. A 2.2 per cent drop for Microsoft and 2.2 per cent dip for Amazon were two of the heaviest weights on the market.

The losses were widespread, with roughly 90 per cent of stocks in the S&P 500 falling in a wipeout. Stocks of smaller companies fell even more than the rest of the market because high interest rates could hurt them more than their bigger rivals by making it more difficult to borrow cash. The Russell 2000 index of smaller stocks dropped 3 per cent.

Some analysts warned the inflation data could mean not only a delay to rate cuts but also the possibility that the Fed would raise rates further. The Fed has already pulled its main interest rate to the highest level since 2001 in hopes of grinding down high inflation. High rates work by slowing the overall economy and hurting prices for investments.

But it’s still just one data point, which followed several months of encouraging trends where inflation eased, said Chris Larkin, managing director, trading and investing, at E-Trade from Morgan Stanley.

“Until proven otherwise, the longer-term cooling inflation trend is still in place,” he said. “The Fed had already made clear that rate cuts weren’t going to happen as soon as many people wanted them to. Today was simply a reminder of why they were inclined to wait.”

Still, the reaction across Wall Street was immediate and negative.

Yields jumped in the bond market as traders built up expectations that the Fed will keep interest rates high for longer. The yield on the 10-year Treasury rose to 4.27 per cent from 4.18 per cent late Tuesday.

The two-year Treasury yield, which moves more on expectations for the Fed, leaped to 4.60 per cent from 4.47 per cent.

Even after the surprising inflation report, the likeliest outcome is still for the economy to manage a perfect landing and avoid a painful recession while waiting for inflation to cool, said Alexandra Wilson-Elizondo, co-chief investment officer of the multi-asset solutions business in Goldman Sachs Asset Management.

But she said there is still risk that conditions could swing to one of two extremes: Either the economy falls into a recession under the weight of high interest rates, or inflation reaccelerates because of how much stock prices have already climbed and Treasury yields have already fallen on expectations for coming cuts to rates.

The forced recalibration by traders for rate cuts is actually bringing Wall Street’s expectations closer to what the Federal Reserve has outlined. Fed officials earlier said they were penciling in three cuts to rates this year, as inflation hopefully cools toward their 2 per cent target from its peak above 9 per cent two summers ago.

Earlier, traders were forecasting as many as six cuts would arrive in 2024, which helped stocks go on a tremendous run since Halloween. The S&P 500 has climbed in 14 of the past 15 weeks. Now, traders are largely betting on three or four cuts this year.

Critics have been warning that stock prices may have climbed too far, too fast given too-optimistic hopes for rate cuts, as well as the risks for a reacceleration in inflation and for a slowdown in the economy. On the upside for markets recently, most companies have been beating analysts’ forecasts for profits in the latest quarter.

However overnight, Moody’s tumbled 7.9 per cent after the credit-rating company reported weaker profit for the latest quarter than Wall Street had forecast. Hasbro fell 1.4 per cent after the toy company reported weaker results for the last three months of 2023 than analysts expected.

On the winning side of Wall Street, JetBlue Airways soared 21.6 per cent after activist investor Carl Icahn disclosed he has built up an ownership stake in the airline and said he sees the stock as undervalued.

In stock markets abroad, indexes fell across Europe. In Asia, markets were closed in China for holidays, but Japan’s Nikkei 225 jumped 2.9 per cent and South Korea’s Kospi gained 1.1 per cent.

AP

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Source: Thanks smh.com