By Jessica Yun
The Australian sharemarket has opened flat after a lacklustre performance on Wall Street overnight, during which stocks swung through shaky trading after the latest inflation update across the US, only to end up roughly where they started.
The S&P/ASX 200 slid 2.2 points to 7355.2 at 10.20am (AEST) as energy, materials and utilities stocks dragged down the bourse.
It’ll be another busy day on the markets: retailers Baby Bunting, Nick Scali, News Corp and REA Group are all revealing their results today.
Overnight, the S&P 500 edged up by less than 0.1 per cent. It was just the second winning day for the index in the last eight, but it had been up 1.3 per cent in the morning before wobbling between small gains and losses.
The Dow Jones gained 0.2 per cent after giving up most of a strong morning gain. The Nasdaq composite added 0.1 per cent. The Australian sharemarket is set to open lower, with futures at 6.59am AEST pointing to a slide of 20 points, or 0.3 per cent, at the open. The ASX added 0.3 per cent on Thursday.
Thursday’s highly anticipated report showed US consumers paid prices that were 3.2 per cent higher in July than a year earlier. That’s a touch milder than the 3.3 per cent inflation rate economists expected to see and down sharply from last summer’s peak above 9 per cent. Beneath the surface, underlying trends for inflation were also within expectations.
The readings bolstered hopes among investors that the Federal Reserve’s campaign to grind down inflation is progressing and that maybe it could even be done hiking interest rates. High rates undercut inflation by slowing the entire economy and hurting investment prices, which raise the risk of a recession.
Such hopes helped the S&P 500 rally a big 19.5 per cent through the first seven months of the year, though critics say Wall Street latched too quickly and forcefully onto a belief that inflation is continuing to cool, the economy will avoid a recession and the Fed has already hiked rates for the final time this cycle.
The Fed has said it will make upcoming decisions on rates based on what data reports say, particularly those on inflation and the job market. Its main rate is already at its highest level in more than two decades.
Thursday’s report likely gives the Fed a reason to hold rates steady at its next meeting in September, before it gets more economic data in the runup to the following meeting that ends November 1, according to Gargi Chaudhuri, head of iShares Investment Strategy, Americas.
“Separating the signal from the noise, most of the components of inflation are heading in the right direction,” said Brian Jacobsen, chief economist at Annex Wealth Management. He said if the trends continue, it will be tough to justify another hike to interest rates.
Another report on inflation is looming on Friday, which will show how bad inflation was in July at the wholesale level. Then, more reports on inflation and one more on overall hiring for August will arrive before the Fed’s next meeting that ends September 20.
Treasury yields held relatively steady in the bond market after a report showed slightly more workers applied for unemployment benefits last week than expected. The number remains low compared with history, signalling the job market remains remarkably resilient despite much higher interest rates.
Fed officials would likely welcome some softening of the job market, which they would see as removing upward pressure on inflation.
The weekly data on unemployment claims, though, have given head fakes in the past about the trajectory of the job market, said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office. That could mean the cuts to interest rates that investors really desire may be further off than hoped.
“The Fed may leave interest rates unchanged next month, but they’re not about to start cutting them,” Loewengart said.
Hikes to interest rates also take a notoriously long time to take effect, and the Fed’s past increases are likely still making their way through the system. If the last bit to get inflation down to the Fed’s target of 2 per cent is as tough as some economists expect, that could make things dicier than a swiftly rising stock market would seem to suggest.
Big US companies, meanwhile, continue to report mostly better profits for the spring than analysts expected. That’s usually the case, and analysts had particularly low expectations coming into this reporting season. Higher costs for workers and other expenses are broadly eating into profit margins.
The Walt Disney Co. rose 4.9 per cent after saying it would raise prices for some of its streaming services in hopes of boosting profitability. The entertainment giant reported stronger profit for the spring than analysts expected but weaker revenue.
Capri Holdings, which owns the Michael Kors, Versace and Jimmy Choo brands, soared 55.7 per cent as Big Fashion continues to consolidate.
Tapestry, the company behind luxury handbag and accessories retailer Coach, said it was buying the company for roughly $US8.5 billion ($13 billion). The deal would put it in better position to take on big European rivals, such as LVMH. Tapestry fell 15.9 per cent.
In the bond market, Treasury yields rose in the afternoon following an auction by the U.S. government of 30-year Treasury bonds. Yields have been generally rising recently amid concerns about heavy borrowing by the federal government. Those higher yields add pressure on the stock market.
The yield on the 10-year Treasury rose to 4.09 per cent from 4.01 per cent late Wednesday. It helps set rates for mortgages and other important loans.
The two-year Treasury yield, which moves more on expectations for the Fed, ticked up to 4.81 per cent from 4.80 per cent. In stock markets abroad, indexes were mostly higher in Europe and Asia.
Stocks in China held relatively steady after US President Joe Biden signed an order to block and regulate high-tech US-based investments going toward China.
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