ASX set to rise as cooling inflation, China rate cut boost Wall Street

Raw-material producers and industrial companies had some of the biggest gains in the S&P 500 amid hopes for a resilient economy. Miner Freeport-McMoRan rose 5.3 per cent, and United Airlines climbed 3.7 per cent, for example.

For all the optimism, though, much of Wall Street doesn’t believe the end has arrived yet for rate hikes. Many traders expect the Fed to resume raising rates in July, even if it holds steady this week.

Tuesday’s inflation report showed that overall inflation still too high, as are price gains underneath the surface. The Fed prefers to look at inflation after stripping out food, fuel and housing costs, hoping to get a better view of where the trend is heading. Such “supercore” inflation is still above the Fed’s comfort level.

The worry is that additional hikes by the Fed will mean more pressure on the US banking system when it’s already cracked under higher rates. Bank customers are pulling deposits in search of higher yields at money-market funds. At the same time, higher rates are knocking down the values of bonds that banks bought and other investments they made when rates were low.

Three high-profile US bank failures since March have shaken confidence in the system, causing some banks to toughen lending standards for households and businesses. That puts additional brakes on the economy, raising the risk of a recession.

Zions Bancorp. fell 1.6 per cent after it appeared to cut its forecast for upcoming net interest income in an investor presentation.

Just two weeks remain until the start of the third quarter of the year. That’s notable because many investors came into this year predicting a recession would hit in the third quarter, yet the job market has remained remarkably resilient and propped up the economy.

“Today, the recession has not arrived, and we are witnessing that reckoning in public market equity valuations via the recent rally,” said Alexandra Wilson-Elizondo, deputy chief investment officer of multi asset solutions at Goldman Sachs Asset Management.

But that doesn’t mean the economy is in the clear. “With inflation stubbornly high, we do see the business cycle eventually ending in recession, as the Fed will have to break the back of the labor market to make material progress toward their 2 per cent target” on inflation, she said.

In the bond market, yields initially dropped after the inflation report, but later recovered. The yield on the 10-year Treasury rose to 3.83 per cent from 3.74 per cent late Monday. It helps set rates for mortgages and other important loans.

The two-year yield, which moves more on expectations for the Fed, rose to 4.69 per cent from 4.58 per cent.

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In markets abroad, Hong Kong’s Hang Seng rose 0.6 per cent after China’s central bank lowered its one-week lending rate for the first time since last year. That appeared to reflect official concern about the health of China’s economic recovery after growth in factory and consumer activity weakened.

The support from the world’s second-largest economy helped to push up the price of crude oil, which has struggled over the last year on worries about weaker demand. A barrel of US crude rose $US2.30 to $US69.42. Brent crude, the international standard, gained $US2.45 to $US74.29 per barrel.

AP