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The share market was poised to open lower after US stocks sank as disappointing inflation data failed to soften the outlook for higher rates.

ASX futures fell 35 points or 0.5 per cent, indicating a resumption of the selling that has dragged the index down more than 4 per cent since Friday.

A rebound on commodity markets may cushion the energy and materials sectors. Iron ore, crude and metals rallied amid signs of falling Covid infections in China.  

Wall Street

The Dow Jones Industrial Average declined for a fifth night after data showed inflation cooled last month by less than economists expected. Stocks finished at session lows amid speculation the report would not divert the Federal Reserve from a series of sharp rate increases this year.

The Dow slumped 327 points or 1.02 per cent to its lowest close of the year and longest losing run since 2020. The S&P 500 shed 66 points or 1.65 per cent. The Nasdaq Composite lost 373 points or 3.18 per cent.

While the headline inflation rate eased to 8.3 per cent year on year from 8.5 per cent, it remained closer to 40-year highs than economists anticipated. The median consensus was for a drop to 8.1 per cent, according to a Dow Jones survey.

Core inflation (minus volatile food and energy prices) also disappointed. The Fed’s preferred measure showed prices were 6.2 per cent higher year on year, versus expectations for a 6 per cent increase.  

“There was not enough of a positive surprise to underpin the market,” Quincy Krosby, chief equity strategist at LPL Financial, said.

“This is a market still trying to come to grips with whether the Fed is going to be able to rein in inflation early on.”

Analysts said stubbornly high inflation made it increasingly challenging for the Fed to bring consumer prices under control without tipping the economy into recession.

“The Fed is walking this fine line between pushing the economy into recession, and pushing down inflation,” Melissa Brown, managing director of applied research at Qontigo, told Investing.com. “I think that that line has gotten finer.”

Rate-sensitive Big Tech led the selling as bond yields briefly spiked, then sank. Apple plunged 5.18 per cent, Tesla 8.25 per cent, Netflix 6.35 per cent and Meta Platforms 4.51 per cent.

The energy and materials sectors resisted the selling as Chinese progress on the latest Covid outbreak triggered a recovery on commodity markets (more below).

Australian outlook

A disappointing night session for traders hoping the US April consumer price index (CPI) would mark a turning point in the battle against inflation – and the current market weakness. Wall Street attempted a rally before ultimately succumbing to the selling pressure that has dragged the S&P 500 down 18 per cent from its peak.

“There was a lot of expectation that CPI would soften enough to provide confidence that inflation had peaked. Those expectations were not fulfilled,” City Index senior market analyst Matt Simpson said.  

 “US inflation in April indeed was softer than March, just not as soft as expected… Ultimately, we don’t think it changes anything,” he added.

“What traders were clearly hoping for was a decisive signal that inflation has peaked, and they didn’t get it.”

The S&P/ASX 200 looks likely to follow Wall Street lower, but there should be winners within the selling. US sector action indicated a divided market.

The three sectors dominated by Big Tech (tech, communication services, consumer discretionary) were pummelled, losing between 1.5 and 3.6 per cent. However, energy, materials and utilities defied the downtrend. The energy sector bounced 1.37 per cent, utilities 0.77 per cent and materials a slim 0.03 per cent.

BHP and Rio Tinto rebounded strongly in UK trade before broader market weakness capped their gains in US trade. BHP‘s UK stock climbed 3.67 per cent. The miner’s US-traded depositary receipts edged up 0.4 per cent. Similarly, Rio Tinto gained 3.76 per cent in the UK and 0.49 per cent in the US.

The banks loom as a possible headwind. US financials fell 1 per cent. Industrials dropped 0.93 per cent.

The 7000 level should provide technical support for the ASX 200 if the selling gains momentum. The index has has tested that level twice this week and recovered.

The Australian benchmark yesterday swung from a 59-point opening loss to a gain of 13.5 points or 0.2 per cent after buyers entered around the 7000 level. That appetite may be tested again today.

On the economic calendar, the Melbourne Institute’s monthly survey of consumer inflation expectations was scheduled for release at 11 am AEST.

AGM season brings meetings today for shareholders in Tabcorp, Ampol, Sigma Health and Waypoint REIT.

IPOs: the listing of Bellavista  Resources has been pushed back to May 25.

The dollar edged up 0.05 per cent this morning to 69.36 US cents.

Commodities

Iron ore bounced more than 5 per cent on the Dalian Commodity Exchange after Shanghai announced half of the port city was clear of Covid. Buying interest was also encouraged by reports of increased activity in the steel-producing province of Tangshan.

“The impact on areas such as Tangshan is easing, and raw materials’ transportation has resumed,” analysts with Haitong Futures wrote.

The most-traded contract on the DCE briefly surged 6.6 per cent before closing 5.3 per cent ahead at 821 yuan a tonne. The spot price for ore landed in China bounced US$3.93 or 3 per cent to US$134.20 a tonne.

Energy traders piled back into oil amid expectations for a pick-up in Chinese demand. Brent crude settled US$5.05 or 4.9 per cent ahead at US$107.51 a barrel. The US benchmark jumped 6 per cent to US$105.71.

Copper and most industrial metals also rebounded. Benchmark copper on the London Metal Exchange rose 1.3 per cent to US$9,358.75 a tonne. Aluminium improved 0.9 per cent, lead 0.2 per cent, zinc 2.1 per cent and tin 0.7 per cent. Nickel declined 2.1 per cent.

Gold recovered from a three-month low as the US inflation report encouraged hedging. Metal for June delivery settled US$12.70 or 0.7 per cent higher at US$1,853.70 an ounce. The NYSE Arca Gold Bugs Index dipped 0.25 per cent.

“Today’s inflation report proves that Fed Chair Powell made a mistake last week when he removed the option of a 75-basis point rate hike at the next policy meeting,” Edward Moya, senior market analyst at Oanda, wrote.

“The overall takeaway for much of Wall Street however is that the Fed is still poised to deliver consecutive half-point rate increases at the June and July FOMC meetings.”

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