ASX set to fall as inflation fears send Wall Street to its worst week of the year

But it can also feed into upward pressure on inflation, and Wall Street worries it could push the Fed to raise rates even higher and keep them there even longer than it otherwise would.

“It puts the final nail in the coffin in the shift we’ve seen the last several weeks where the market has come around to what the Fed has been saying for a while: rates above 5 per cent and there for longer,” said Ross Mayfield, investment strategy analyst at Baird.

After earlier doubting that the Fed would raise its key overnight rate as high as it was saying, and believing that it may even cut rates later this year, traders are increasing bets on the Fed’s rate rising to at least 5.25 per cent and staying that high through the end of the year.

It’s currently in a range of 4.50 per cent to 4.75 per cent, and it was at virtually zero a year ago.

High rates and inflation increase the risk of a recession down the line, even if the most important part of the economy has been resilient.

“The consumer is hanging in there, but the consensus seems to be there’s a lot of trading down” by shoppers to less-expensive items, Mayfield said. “If you’re looking out a year and banking on the consumer sector to hang in there, every extra month it becomes a dicier proposition.”

He expects the economy’s growth to fall below its long-term trend if not fall into a minor recession, though he’s not anticipating a worst-case downturn.

Expectations for a firmer Fed have caused yields in the Treasury market to shoot higher this month, and they climbed further Friday.

The yield on the 10-year Treasury rose to 3.94 per cent from 3.89 per cent late Thursday. It helps set rates for mortgages and other important loans. The two-year yield, which moves more on expectations for the Fed, rose to 4.79 per cent from 4.71 per cent and is near its highest level since 2007.

Tech and high-growth stocks once again took the brunt of the pressure. Investments seen as the most expensive, riskiest or making their investors wait the longest for big growth are among the most vulnerable to higher rates.

Microsoft, Apple Amazon and Tesla all fell at least 1.8 per cent and were the heaviest weights on the S&P 500 because their immense size gives them more sway on the index.

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Software company Autodesk fell to the largest loss in the index, down 12.9 per cent despite reporting stronger profit and revenue for the latest quarter than expected. Analysts said investors were disappointed with its forecasts for upcoming results.

Boeing lost 4.8 per cent after it stopped deliveries of its 787 passenger jet because of questions around a supplier’s analysis of a part near the front of the plane.

All told, the S&P 500 fell 42.28 points to 3,970.04. The Dow dropped 336.99 to 32,816.92, and the Nasdaq fell 195.46 to 11,394.94.

Stock markets abroad also mostly fell, with a 1.8 per cent drop for France’s main index and 1.7 per cent fall in Hong Kong.

Japan’s Nikkei 225 was an outlier, rising 1.3 per cent. The nominee to head the country’s central bank, economist Kazuo Ueda, told lawmakers he favours keeping Japan’s benchmark interest rate near zero to ensure stable growth. That’s despite Japan reporting its core consumer price index, excluding volatile fresh foods, rose the most in 41 years in January.

AP

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