ASX poised to drop as Wall Street rally falters

U.S. stocks are mixed Monday in New York as Wall Street continues to debate whether the economy will manage to stave off a recession amid rising interest rates and high inflation.

The S&P 500 is up 0.3% in late trading, the Dow Jones down 0.1% and the Nasdaq up 0.2%. The Australian equity market is expected to slide, with futures at 5:13 a.m. AEST showing a decline of 15 points, or 0.2%, at the open. The Reserve Bank meets Tuesday afternoon and is expected to raise interest rates again.

Wall Street started the session with solid gains, but they ran out of steam.Credit:Bloomberg

Stocks started the day with bigger gains, and the S&P 500 rose 1.5%, with the Nasdaq briefly up almost 2%. But they pulled back as Treasury yields continued to climb, putting downward pressure on stocks. When safe bonds pay more interest, investors are generally less willing to pay high prices for stocks, which are riskier.

The 10-year Treasury yield rose back above 3% to 3.03%, from 2.95% on Friday night. It is approaching its levels of early and mid-May, when it hit its highest level since 2018 as the Federal Reserve expected an aggressive interest rate hike to rein in the worst inflation since decades.

Such moves will slow the economy by design, and investors are trying to guess ahead of time whether the Fed will act so aggressively or so quickly that it will cause a recession.

Goldman Sachs economists said in a research report that they still see the Fed and its chairman, Jerome Powell, on track to successfully cross the line and stage what is called a “soft landing” for the economy. It was more encouraging than some of the warnings that hung around the markets last week, including one from JPMorgan Chase CEO Jamie Dimon who said he was preparing for an economic “hurricane”.

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The number of job vacancies has started to decline, which could reduce some of the pressure pushing wages and inflation higher. The world’s tangled supply chains have also improved, although Goldman Sachs economists led by Jan Hatzius still see a 35% risk of a US recession over the next two years.

“To say that markets are likely to remain constrained is often a cliché, but we think it currently has more content than normal because Chairman Powell is so focused on the role of financial conditions in securing a soft landing,” Hatzius wrote.

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