ASX set to fall as Wall Street dives; First Republic Bank plunges

The heart of earnings reporting season is arriving, and more heavy hitters are coming after trading closes for the day.

Microsoft and Google’s parent company, Alphabet, are both on the schedule. Because they’re two of the biggest companies on Wall Street by market value, their stock movements carry extra weight on the S&P 500 and other market indexes.

Broad stock indexes had so far been making only modest moves this earnings reporting season. The S&P 500 barely budged last week and ticked up just 0.1 per cent on Monday. But volatility strategists at Barclays said the calm was unlikely to last for the long term.

The economy is under stress from high interest rates meant to get inflation under control. High rates can do that, but only by putting the brakes on the entire economy and hurting investment prices. Big chunks of the economy outside the job market have already begun to slow or contract.

With so much uncertainty about whether inflation can return to the Federal Reserve’s target without causing a recession, “we remain sceptical that markets are out of the woods,” Barclays strategists led by Stefano Pascale said in a report. They also pointed to “the risk of something breaking” in the financial system because of high rates.

A report on Tuesday showed that confidence among consumers fell more sharply in April than expected, down to its lowest level since July. That’s a discouraging signal when consumer spending makes up the biggest part of the US economy.

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A second report was more encouraging, saying sales of new homes rose by more than expected. The housing industry has been under pressure because higher mortgage rates are squeezing buyers.

On Thursday, the US will give its first estimate of how much the economy grew during the first three months of the year. Economists expect to see growth cooled to a 1.9 per cent annual rate, down from 2.6 per cent at the end of 2022.

Much of the slowdown is due to Fed’s flurry of hikes to interest rates over the last year. The Federal Reserve meets next week, and much of Wall Street expects it to raise interest rates at least one more time before pausing.

Beyond higher interest rates, Wall Street is also worried that the struggles of the US banking industry could tighten the brakes even further on the economy. First Republic said its deposits have stabilised since late March, but it’s still working to cut expenses. If it and other banks pull back on lending, it could lead to lower growth across the economy.

In the bond market, the yield on the 10-year Treasury fell to 3.39 per cent from 3.50 per cent late Monday. It helps set rates for mortgages and other important loans.

The two-year yield, which moves more on expectations for Fed action, fell to 3.95 per cent from 4.11 per cent.

In markets overseas, stock indexes closed mostly lower in Europe and were mixed across Asia overnight.