ASX extends losses after stronger-than expected jobs report

Toll road developer Atlas Arteria (down 2.7 per cent) and IDP Education (down 2.3 per cent) and Aristocrat Leisure (down 2 per cent) were among the biggest large-cap decliners. Heavyweights BHP (down 0.9 per cent) and Fortescue (down 1.8 per cent) also fell.

The lowdown:

Tony Sycamore, market analyst at IG Australia, said Thursday’s hotter-than-expected jobs data meant attention would be brought back to the Reserve Bank’s next meeting.

“While US economic data in recent weeks have shown signs of moderation and raised hopes that the Federal Reserve may be close to ending its rate-hiking cycle, today’s Australian employment data brings the RBA’s May board meeting back into play,” Sycamore said.

The bourse followed US stocks lower on Thursday after minutes from the Federal Reserve’s last meeting showed the central bank forecast a “mild recession”.

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However, the Australian Bureau of Statistics then reported on Thursday morning the nation created 72,200 full-time jobs last month, taking total full-time employment to a record 9.7 million. Sycamore said that if inflation data released on April 26 showed similar strength, the Reserve Bank may resume rate rises – “a thought that saw consumer-facing stocks slump”.

On Wall Street, the S&P 500 closed 0.4 per cent lower after bouncing between small gains and losses. The Dow Jones Industrial Average dropped 0.1 per cent, while the Nasdaq composite fell 0.9 per cent.

“[Economic] data has been very mixed, so investors are overacting to any positive or negative hint of Fed rate hike policy,” said Greg Bassuk, chief executive officer of AXS Investments in New York. “Volatility will continue, investors will have to buckle their seatbelts.”

‘Volatility will continue, investors will have to buckle their seatbelts.’

AXS Investments CEO Greg Bassuk

The main focus on Wall Street for more than a year has been high inflation and how much painful medicine the Federal Reserve will have to dole out to contain it. A report late last night showed that prices at the consumer level were 5 per cent higher last month than a year earlier.

That’s still well above the Federal Reserve’s comfort level, and some underlying trends within the data were also concerning. That weighed down financial markets. But on the upside for investors, the overall inflation number was still better than the 5.2 per cent that economists expected. It also marked a continued slowdown from inflation’s peak last summer.

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Traders are still largely betting the Fed will raise short-term interest rates by another quarter of a percentage point at its next meeting, according to data from CME Group. They briefly in the morning shaded some bets toward the possibility that the Fed will merely hold rates steady in May, something it has not done for more than a year.

“The Fed has every reason to take a pause and only a handful of reasons not to,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments.

Minutes from the Fed’s March meeting showed its policymakers scaled back their expectations for rate rises this year after a series of bank collapses roiled markets last month, and stressed they would remain vigilant for the potential of a credit crunch resulting from the banking crisis to further slow the US economy.

Before Silicon Valley Bank failed March 10 and Signature Bank failed March 12, sending jitters across the global banking system, Fed officials had been contemplating making several more rate moves in 2023 to bring stubbornly inflation back under control. But officials adjusted their views after the shock to the banking system, the minutes made clear.

The Fed lifted rates at the March meeting, but only by a quarter point, and officials forecast just one more rate increase this year. Jerome Powell, the Fed chair, made it clear during his news conference after the meeting that whether and how much officials adjusted policy going forward would hinge on what happened both to credit conditions and incoming economic data.

High rates can undercut inflation, but only by bluntly slowing the entire economy. That raises the risk of a recession later on, while hurting prices for stocks, bonds and other investments in the meantime. The Fed has already raised rates at a furious pace over the last year, enough that it’s hurt pockets of the economy and created strains within the banking system.

That has many investors and economists expecting at least a shallow, short recession to hit the economy later this year. If banks pull back on lending as a result of all the troubles in their industry, it could tighten the vise even further on the economy.

The bond market has been showing more nervousness about a potential recession, and traders have built bets that the Fed will have to cut interest rates later this year in order to prop up the economy.

Yields fell Wednesday immediately after the inflation report, but pared their losses later in the trading session. The 10-year Treasury yield fell to 3.42 per cent from 3.43 per cent late Tuesday. It helps set rates for mortgages and other important loans.

The two-year Treasury yield, which moves more on expectations for the Fed, slipped to 3.98 per cent from 4.03 per cent.

The US stock market, meanwhile, has been showing comparatively less fear. It’s still up for the year so far, in part on hopes the Fed can pull off the balancing act of slowing the economy just enough to suffocate inflation but not so much as to cause a severe recession that undercuts corporate profits.

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Companies later this week will begin telling investors just how much profit they made during the first three months of the year. Expectations are low, with analysts forecasting the worst drop in S&P 500 earnings per share since the pandemic was crushing the economy in 2020. But many analysts also expect this to mark the bottom, with forecasts calling for a return to growth later this year.

American Airlines Group lost 9.7 per cent after it gave a forecast for its first-quarter profit that fell short of some analysts’ expectations. It said it expected to report stronger results than it had earlier forecast, but that still wasn’t high enough to meet many analysts’ estimates for earnings per share.

It had the largest loss within the S&P 500 and helped drag down other airline stocks. United Airlines Holdings slid 6.7 per cent, Southwest Airlines lost 2.3 per cent and Delta Air Lines shed 2.6 per cent.

Tweet of the day:

Quote of the day:

“In alcohol, as well as food, we expect a shift to more at home, and less out of home, consumption, given the lower cost of at home consumption,” said UBS retail analyst Shaun Cousins as Australia’s retail sector braces for a jolt from changes in consumer spending.

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