ASX set to fall sharply as Wall Street keeps sliding

European markets were lower and Asian markets closed mixed Wednesday.

Stocks got off to a solid start in early August, continuing a July rally. Investors were encouraged to see that signs that inflation, while still high, was leveling off. That fuelled optimism on Wall Street that the Federal Reserve might be able to ease back on raising interest rates, its main weapon in its fight to bring inflation down. Those gains followed a weak first half of the year where the S&P 500 dropped 20 per cent from its most recent high and entered a bear market.

That optimism faded by mid-August as the central bank signalled it would keep raising rates as long as necessary to tame the hottest inflation in four decades. On Friday, Federal Reserve Chairman Jerome Powell underscored the Fed’s intention in a speech at the central bank’s annual symposium.

Wall Street is worried that the Fed could hit the brakes too hard on an already slowing economy and veer it into a recession. Higher interest rates also hurt investment prices, especially for pricier stocks like technology companies.

Traders are now trying to get a better sense of how far and how quickly the Fed’s rate hikes will go, beginning with the central bank’s upcoming interest rate policy meeting September 20-21. The Fed has already raised interest rates four times this year and is expected to raise short-term rates by another 0.75 percentage points at its September meeting, according to CME Group.

Investors have been closely watching economic data for any additional signs that the economy is slowing down or that inflation may be cooling or at least holding at its current level. Businesses and consumers have been hit hard by rising prices on everything from food to clothing, but recent declines in gasoline prices have provided some relief.

Strong U.S. employment data have helped fuel expectations of more interest rate hikes. The Labor Department reported Tuesday there were two jobs for every unemployed person in July, giving ammunition to Fed officials who argue the economy can tolerate more rate hikes to tame inflation that is at multi-decade highs.

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On Wednesday, payroll processor ADP said its latest monthly survey of hiring by private US companies showed payrolls increased by 132,000, well below the 275,000 economists expected, according to FactSet. The company also said wage growth was in line with recent monthly snapshots.

“The downward trend in hiring recently suggests that the economy and job market are slowing, a worrying sign for investors, especially after Powell’s commentary last week that the Fed will maintain course with aggressive hikes to combat inflation,” said Peter Essele, head of portfolio management for Commonwealth Financial Network. “If the current trend of softening economic reports continues, September could be a rocky month for investors, reaffirming its position as the worst calendar month for markets historically.”

The ADP survey comes ahead of employment reports from the Labor Department this week: applications for unemployment benefits on Thursday and the August jobs report Friday. Analysts expect both to show a robust labor market.

In Europe, markets fell after a report showed inflation in countries using the euro hit another record in August as energy prices soared, largely because of Russia’s war in Ukraine. Annual inflation in the eurozone’s 19 countries rose to 9.1 per cent, up from 8.9 per cent in July, according to the European Union statistics agency Eurostat.

Inflation is at the highest levels since record-keeping for the euro began in 1997. The latest figures add pressure on European Central Bank officials to continue raising interest rates, which can tame inflation, but also stifle economic growth.

AP

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