ASX set to slide as Wall Street dips ahead of debt ceiling talks

The better-than-feared results have given some support to Wall Street when many other worries are weighing on it.

Key among them is what will happen to the US banking system, which is under stress following three high-profile bank failures since March. Hurt by much higher interest rates, smaller and mid-sized banks are scrambling to reassure everyone that their deposits are stable and that they aren’t at risk of a sudden exodus of customers.

After finding some stability in the two prior days, stocks of regional banks under the heaviest scrutiny by Wall Street fell again Tuesday. PacWest Bancorp dropped 2.2 per cent, and Western Alliance Bancorp fell 3.3 per cent.

The next big milestone for the market will be Wednesday’s report on inflation at the consumer level. Inflation has come down from its peak last summer, but it’s remaining stubbornly high. That’s raised uncertainty about what the Federal Reserve’s next move will be.

The central bank has already yanked its benchmark interest rates to a range of 5 per cent to 5.25 per cent, up from from virtually zero early last year. High rates can undercut inflation, but only by smothering the economy and hurting investment prices bluntly.

Many investors are preparing for a recession to hit later this year because of much higher rates, as well as the potential for banks to pull back on lending because of the industry’s troubles. Even though the job market has remained resilient and the unemployment rate is remarkably low, other areas of the economy have shown more weakness like manufacturing.

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“It seems that although they have more data and information than anybody, the Fed seems myopically focused on the inflation rate and unemployment rate rather than looking at the big picture,” Allspring’s Patel said. “What does the person on the street see? I think they see a lot more things to be concerned about than the Fed.”

She is hopeful that stocks can have positive returns this year, but she’s quick to say that’s not an expectation.

“I want to be optimistic, but when you look at the facts, you have to temper that quite a bit,” she said.

Worries about a recession and expectations for possible cuts in rates by the Fed have caused yields to pull back since early March.

Also looming over the market is a June 1 deadline. That’s when the US government could potentially run out of cash to pay its bills unless Congress allows it to borrow more. The widespread expectations is for Congress to come to a deal before that deadline because the alternative would be severe damage to the economy and financial markets.

But each day that passes without a deal threatens to raise concerns. President Joe Biden will meet with leaders from Congress after US stock markets close for trading on Tuesday.

Worries about weakening demand sent crude oil slipping. Stocks also dropped in Shanghai, down 2.1 per cent, after a report showed that imports to China slumped sharply last month.

In the bond market, the 10-year Treasury yield rose to 3.52 per cent from 3.51 per cent late Monday. The two-year Treasury yield, which moves more on expectations for the Fed, rose to 4.03 per cent from 4.00 per cent late on Monday.