A week likely to be dominated by the outlook for interest rates looks set for a positive start despite losses in the US after strong jobs data sharpened the risk of more rate hikes.
Wall Street’s main indices lost between 0.38 and 1.59 per cent as trading updates from heavyweights Amazon and Alphabet disappointed.
A surge in the US dollar hammered commodity prices. Iron ore, oil and industrial metals all declined. The Australian dollar fell back towards 69 US cents.
The S&P/ASX 200 was set to open 12 points or 0.16 per cent higher, according to futures action, as exporters benefit from a weaker dollar. The Australian benchmark rallied 0.62 per cent on Friday to a nine-month closing high and a fifth straight winning week.
The Reserve Bank meets tomorrow and is expected to raise benchmark rates by at least 25 basis points.
US stocks trimmed weekly gains as stronger-than-expected jobs data dampened hopes of a rates pause. A well-received update from Apple helped offset declines in Amazon, Alphabet and Ford.
The S&P 500 dropped 43 points or 1.04 per cent. The Dow Jones Industrial Average lost 128 points or 0.38 per cent. The Nasdaq Composite shed 194 points or 1.59 per cent.
A blowout January jobs report muddied the outlook for interest rates, just as the market was growing comfortable with the notion official rates were near a top. The economy created 517,000 jobs, smashing expectations for an increase of around 187,000. The unemployment rate fell to 3.4 per cent, its lowest in more than half a century.
Kristina Hooper, chief global market strategist at Invesco, said the report was “an incredible surprise and it raises a lot of questions about what the Fed is going to do next.”
“What I think is causing some of the volatility is markets trying to make sense of how the Fed will perceive this,” she added.
A separate report on the services sector also underscored the resilience of the US economy against recent rate hikes. The Institute for Supply Management’s services index bounced to 55.2 per cent last month after contracting to 49.6 in December. Readings above 50 indicate expanding activity.
The US dollar index surged more than 1.2 per cent as forex traders bet interest rates might have to go higher to contain inflation than the market had priced. The yield on ten-year US treasuries surged more than 12 points, back above 3.5 per cent.
Amazon dived 8.43 per cent after reporting its least-profitable quarter since 2014. Google parent Alphabet lost 2.75 per cent as ad spending dropped last quarter. A positive iPhone sales outlooked helped Apple rise 2.44 per cent despite a decline in revenue.
Friday’s setback trimmed the S&P 500’s gain for the week to 1.62 per cent. The Nasdaq Composite put on 3.9 per cent.
A momentum-driven S&P/ASX 200 looks set for a positive start despite headwinds from Wall Street and commodity markets. A weaker dollar should aid exporters.
The Aussie was smashed down almost a cent and a half on Friday night as the shifting US rates outlook overshadowed domestic prospects. The Australian unit slumped from above 70.5 US cents to 69.05 US cents this morning.
Broad losses on Friday pulled all 11 US sectors lower. Consumer discretionary and communication services fell hardest as earnings disappointments from Amazon and Alphabet weighed. The session’s best, or least-worst, performers were financials -0.1 per cent and energy -0.23 per cent.
The ASX 200 rallied to within 1 per cent of a record on Friday. The Australian benchmark gained 0.85 per cent during a fifth straight weekly advance as investors showed few nerves ahead of this week’s rates decision.
This year’s powerful rally may face its toughest test yet when the Reserve Bank meets tomorrow to set the new cash rate target. With inflation running hot at the end of 2022, debate is likely to settle on whether to raise by 25 or 50 basis points.
“Following a higher-than-expected inflation print last [month] that saw the annual rate of headline inflation accelerate to 7.8% from 7.3% and core inflation to 6.9% from 6.1%, the market is now almost entirely priced for a 25bp hike, with the door open for a larger 40bp or 50bp rate hike,” Tony Sycamore, market analyst at IG, said.
“The most likely outcome on Tuesday is that the RBA acknowledges it discussed a 50bp rate hike but delivers a 25bp rate. It will likely note that it ‘expects to increase interest rates further in the period ahead’ alluding to another 25bp rate hike in March which would take the cash rate to 3.60%,” he added.
Before then, we have inflation (11 am AEDT) and retail sales (11.30 am) data today. Trade and weekly consumer confidence figures are due tomorrow. The RBA releases its quarterly Monetary Policy Statement on Friday.
The economic calendar in the US is lighter this week. Highlights include trade figures on Tuesday, weekly unemployment claims on Thursday and consumer sentiment on Friday.
Fed Chair Powell’s participation in a moderated discussion at the Economic Club of Washington DC on Tuesday night looms as a potential market-moving event. Other Fed policymakers speak on Wednesday and Friday.
The domestic interim reporting season steps up a gear this week. Market heavyweights reporting this week include Macquarie Group, Transurban, News Corp and AGL.
Among the larger names reporting today are Argo, Nick Scali, Praemium and Dexus Convenience Retail. The schedule for the rest of the week includes: Macquarie Group, Transurban, Cettire and Centuria Capital (Tuesday); Amcor, Boral, Suncorp, BWP Trust, Dexus Industria, Alliance Aviation, Australian Unity Office Fund, IDP Education and Mincor (Wednesday); AGL Energy, Downer EDI, Mirvac, Megaport, Arena REIT and Charter Hall Long WALE REIT (Thursday); and News Corp and REA (Friday).
United Malt holds its AGM on Friday.
IPOs: none scheduled this week as the 2022 drought continues.
Gold slumped back under US$1,900 an ounce, settling at the weakest level in three weeks as surges in the US dollar and treasury yields dulled demand for alternative stores of wealth.
Investors booked profits after a January jobs surge sharpened the risk of more interest rate hikes in the US. The yellow metal has rebounded strongly this year in expectation that rates were near a top.
Gold for April delivery settled US$54.20 or 2.8 per cent lower at US$1,876.60 an ounce. The NYSE Arca Gold Bugs Index plunged 4.14 per cent.
Oil suffered a losing week as a relentless rise in US inventories raised demand questions while traders wait to see how quickly Chinese demand rebounds. US stockpiles have increased by 32 million barrels since the start of the year.
“Stocks normally decline at this time of the year. The U.S. oil market was amply supplied in January, in other words,” Carsten Fritsch, strategist at Commerzbank, said.
Brent crude settled US$2.23 or 2.7 per cent weaker at US$79.94 a barrel. The decline extended the international benchmark’s loss for the week to 7.5 per cent.
Iron ore fell for a third session in China amid concerns about a regulatory crackdown on speculation and price manipulation. Chinese authorities pledged to act after a strong rebound in prices this year.
“Iron ore is facing pressure from price control, so pay attention to policy risks,” Sinosteel analysts wrote.
The most-active May contract on China’s Dalian Commodity Exchange hit a two-week low before paring its loss to 0.4 per cent at 853.50 yuan (US$126.52) a tonne. Ore prices were off 1.2 per cent for the week at the end of daytime trade on Friday. Singapore prices logged their first weekly decline of 2023.
BHP‘s US-traded depositary receipts wilted 0.7 per cent. Earlier, the miner’s UK listing gained 1.05 per cent. Rio Tinto retreated 0.59 per cent in the US after advancing 1.06 per cent in the UK.
Copper dropped back under US$9,000 a tonne as a rising greenback made dollar-denominated commodity prices more expensive for buyers using other currencies. Benchmark copper on the London Metal Exchange dropped 0.8 per cent to US$8,980.50 a tonne.
Other industrial metals also suffered solid falls. Aluminium gave up 1.82 per cent, nickel 3.95 per cent, lead 1.57 per cent, zinc 4.17 per cent and tin 3.4 per cent.
Battery metal miners were also felled by the strengthening US dollar. The Global X Lithium & Battery Tech ETF declined 2.48 per cent on the New York Stock Exchange to a second straight loss. The VanEck Rare Earth/Strategic Metals ETF slumped 3.56 per cent.