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Australian stocks were poised to open lower following declines on Wall Street as strong jobs growth dented hopes for a pause in interest rate increases later this year.
ASX futures retreated 32 points or 0.44 per cent, signalling early pressure after last week’s 0.8 per cent advance.
Oil shrugged off an OPEC+ pledge to increase output. Iron ore also advanced. Gold suffered its biggest setback in three weeks. The dollar firmed above 72 US cents.
Wall Street
US stocks slumped as investors interpreted robust employment and wages data as supporting the case for a series of aggressive rate increases. Equity markets have struggled this year amid fears the Federal Reserve risks tipping the economy into recession by hiking too hard to bring down inflation.
The S&P 500 dropped 68 points or 1.63 per cent. The Dow Jones Industrial Average shed 349 points or 1.05 per cent. The Nasdaq Composite lost 304 points or 2.47 per cent.
The US economy added 390,000 new hires last month, topping expectations for an increase of around 325,000. April figures were also revised higher. Average hourly earnings increased by 0.3 per cent, maintaining April’s momentum.
“Numbers this strong would likely reverse any hopes the Fed would consider a pause in rate hikes after the June/July increases, because it would signal the labor market remains very tight,” Tom Essaye, founder of the Sevens Report, said.
The annual increase in average hourly earnings fell from 5.5 per cent in April to 5.2 per cent in May, but would need to fall further to ease inflation.
“It will take a slowdown in annual wage growth to closer to 4% before the Fed can claim it is making significant progress towards its inflation goal,” Michael Pearce, senior economist at Capital Economics, told Reuters.
Cleveland Fed President Loretta Mester said she had yet to see sufficient evidence inflation had peaked. She said she supported increases of 50 basis points at each meeting until inflation cools. Earlier last week, markets were pricing in the possibility of a rate-hike pause at the Fed’s September meeting if economic data showed enough progress on inflation.
“I’m going to come into the September meeting, if I don’t see compelling evidence, I could easily be at 50 basis points in that meeting as well,” she told CNBC.
The US dollar and treasury yields both rallied following the employment report, pressuring growth stocks whose valuations depend most on future earnings. Apple, Tesla, Alphabet and Meta Platforms were among the drags.
Friday’s decline dragged the main indices into negative territory for the week. The Dow dropped 1 per cent to its ninth losing week in ten. The S&P 500 shed 1.2 per cent and the Nasdaq almost 1 per cent.
Australian outlook
A soft start to the week appears likely after Wall Street resumed its run of weekly losses. “Good news is bad news” is the market’s new mantra as every piece of positive economic data adds to the argument for higher rates.
The S&P/ASX 200 has so far weathered the US rates storm fairly well, rising for three straight weeks. Miners have led as the reopening of China lifted the prices of key Australian exports. The ASX materials sector hit a six-week high on Friday.
Commodities and dairy provided last week’s best performers. Beach Energy offered the strongest return with a rise of 11 per cent as crude prices took off. American demand for Australian infant formula lifted the A2 Milk Company 10.2 per cent, BHP, Fortescue Metals and South32 made up the top five with gains of 7.1 – 9.5 per cent.
Lithium miners and growth stocks slumped. A Friday rebound helped Pilbara Minerals pare its loss for the week to 15.8 per cent. Allkem shed 15.3 per cent. Healius, Imugene and Life360 made up the bottom five with falls of at least 10 per cent.
Iron ore and crude prices continued to improve heading into the weekend, softening the outlook for the session ahead. The US energy sector rallied 1.4 per cent on Friday, the only sector to book a gain.
BHP and Rio Tinto retreated in US trade (more below), but may draw support from developments across the weekend. The US Commerce Secretary said the White House was exploring lifting Trump-era tariffs on Chinese imports. Beijing further eased Covid restrictions, announcing the resumption of indoor dining from today.
Friday’s US declines were led by the three rates-sensitive sectors dominated by ‘Big Tech’. Consumer discretionary dropped 2.85 per cent, technology 2.48 per cent and communication services 2.37 per cent.
Back home, interest rates are poised to rise when the Reserve Bank meets tomorrow. The only question is by how much.
“The main uncertainty is whether the RBA lifts the cash rate by 25bp to 0.60% as it did in May. Or a 40bp increase to 0.75%, back to where the cash rate was pre the Covid-19 pandemic and to realign with the 25bp increments it has historically moved the cash rate by,” City Index market analyst Tony Sycamore said.
Two-thirds of economists polled by Bloomberg expect a 25 bps hike. Goldman Sachs tips a bumper 50 bps increase. The rest of the respondents expect a 40 bps hike.
“Economic data since the May meeting has been mixed,” Sycamore said. “While this week’s Q1 2022 GDP was higher than expected at 0.8% QoQ vs 0.7% YoY expected, it was lower than the RBA’s forecast. Wages data was also softer than forecast, coming in at 2.4% YoY vs 2.5% YoY expected.
“Offsetting this is a hawkish lead from other developed market central banks (the global central banker community talk amongst themselves) and red hot Q1 inflation data, which pushed core inflation 70bp above the RBA’s 2-3% target band.”
Also on the economic calendar this week: job ads (11.30 am AEST today); weekly consumer confidence, services sector activity, building approvals (Tuesday); and business confidence (Wednesday).
Economic data is light in the US until Friday night’s consumer price index. A jittery market will seek confirmation inflationary pressures continued to relax last month.
There is little on the corporate calendar this week, aside from a few dividend payments. Tax-loss selling is likely to accelerate as the end of the financial year draws near. In other words, the worst performers across this financial year may have further to fall.
IPOs: this week looks markedly better than last, when a solitary company hit the boards. The ASX lists four potential new listings this week: Uvre Limited (Tuesday); Kingsland Minerals, Southern Palladium (Wednesday); and Cavalier Resources (Friday).
The dollar started a new week on the upswing, rising 0.3 per cent to 72.21 US cents.
Commodities
The relaxation of Covid restrictions in Beijing and Shanghai handed iron ore its best week in three months. The spot price for ore landed in China climbed US$2.20 or 1.5 per cent on Friday to US$144.40 a tonne. For the week, the spot price improved US$10.99 or 8.2 per cent.
“Global shipments are relatively stable and the demand side is improving,” analysts at Galaxy Futures said.
BHP and Rio Tinto pared gains from earlier in the week. BHP‘s US-traded depositary receipts reversed 0.5 per cent. Rio Tinto shed 1.27 per cent in the US. Trade in Britain was suspended for Diamond Jubilee celebrations.
Oil rose as traders bet the OPEC+ oil cartel will be unable to make up for declines in Russian output. Brent crude settled US$2.11 or 1.8 per cent ahead at US$119.72 a barrel. For the week, the international benchmark gained 3.6 per cent.
Gold stumbled as the greenback and treasury yields rose, dulling the appeal of alternative stores of wealth. Metal for August delivery settled US$21.20 or 1.1 per cent lower at US$1,850.40 an ounce. The NYSE Arca Gold Bugs Index fell 2.29 per cent.
Friday’s drop was the yellow metal’s largest since May 12. The decline dragged prices down 0.3 per cent for the week, ending a two-week run of gains.
Copper declined in US trade as a strengthening US dollar made commodities more expensive for holders of other currencies. July copper fell 1.8 per cent to US$4.47 a pound. The London Metal Exchange was closed for a UK public holiday.
