ASX set to edge lower after Wall Street’s quiet finish to week

The Fed has already hiked its federal funds rate to a range of 5 per cent to 5.25 per cent, up from virtually zero early last year. High rates undercut inflation by slowing the economy and putting downward pressure on prices for stocks and other kinds of investments.

The expectation is still for the Fed to raise rates one more time at its next meeting in two weeks. But traders are largely betting on that being the final hike of the cycle.

Treasury yields rose Friday, paring some of their sharp tumble from earlier this week caused by traders paring bets for Fed rate hikes later this year.

The 10-year Treasury yield rose to 3.82 per cent from 3.77 per cent late Thursday. But it’s still well below the 3.98 per cent it sat at late Tuesday, before the inflation reports were released. The 10-year yield helps set rates for mortgages and other important loans.

The two-year Treasury yield more closely tracks expectations for Fed action, and it’s at 4.73 per cent, down from 4.89 per cent late Tuesday.

Yields rose after a report on Friday suggested consumers are feeling much better about the economy thanks to slower inflation and a still-solid job market. A preliminary reading on a University of Michigan survey showed consumer sentiment at its highest level since September 2021, though lower-income consumers weren’t feeling as positive.

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Solid spending by US consumers has been one of the main pillars keeping the economy out of a recession. They’ve kept spending despite high interest rates as employers have continued to hire more workers.

The survey also suggested consumers aren’t raising their expectations for upcoming inflation much. The Federal Reserve has been adamant about wanting to avoid a vicious cycle where expectations for high inflation drive behavior that only worsens it.

The big recent gains for stocks on Wall Street have some critics cautioning investors not to get carried away by hopes for what’s called a “soft landing,” where high inflation can be vanquished without a painful recession.

“US data has undoubtedly been encouraging, and the Federal Reserve’s likelihood of staging a soft landing improves with every data point demonstrating resilient growth and falling inflation,” said Solita Marcelli, chief investment officer Americas for UBS Global Wealth Management.

But she said she still prefers safer, high-quality bonds over stocks in part because stock prices have climbed so quickly and set the bar higher for performance in the second half of the year. She also said growth for the US economy could still fall close to zero later this year, even as inflation eases.

Hopes for an easier Fed also helped stocks worldwide to strengthen this week, though markets abroad were mixed on Friday.

AP

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