ASX set to fall, Wall Street slumps as inflation gets worse

Worries about worsening inflation are weighing on Wall Street and pulling the US stock market further from its record.

The S&P 500 dropped 1.1 per cent and was on track for a fifth loss in the six days since setting its all-time high. The Dow Jones Industrial Average was down 171 points, or 0.3 per cent, and the Nasdaq composite was 1.6 per cent lower.

The Australian sharemarket is set to decline, with futures pointing to a fall of 33 points, or 0.4 per cent, at the open. The ASX lost 0.6 per cent on Wednesday. The Australian dollar was weaker at US69.66¢.

US stocks felt pressure from rising yields in the bond market, where worries grew after a report said US consumers had to pay prices for fuel, food and other costs of living last month that were 3.7 per cent higher overall than a year earlier. That means inflation accelerated from its 3.4 per cent rate in August and was worse than the 3.6 per cent that economists expected.

Inflation has remained more painful than anyone would like since the economy launched out of the crevasse created by the COVID-19 pandemic. It’s breathed in new life recently because of jumps in fuel prices caused by the war with Iran, and the price for a barrel of Brent crude added 1 per cent Wednesday to $US106.71.

That has built on signals that the US economy is still growing, longstanding worries about fast-rising debt loads for governments and other factors to send yields to their highest levels in years or even decades in bond markets worldwide.

The centrepiece of the US bond market, the 10-year Treasury, saw its yield rise to 5.23 per cent from less than 5.17 per cent just before the inflation report’s release. During the morning, it briefly jumped above 5.32 per cent and pulled back toward its highest level since 2002.

Yields on shorter-term Treasurys had even bigger leaps as traders raised their expectations for coming hikes to interest rates by the Federal Reserve.

The Fed last month raised the interest rate that it controls, which affects very short-term loans, for the first time in three years in hopes of reining in inflation. Higher rates do that by making it more expensive for everyone to borrow money and slowing the overall economy.

Traders now see a 39 per cent chance that the Fed will raise the federal funds rate at its next meeting in two weeks, up from the 22 per cent probability seen just a day earlier, according to data from CME Group.

“The consumer price index was a little hotter than expected, but not scorching hot,” said Brian Jacobsen, chief economic strategist at Annex Wealth Management. “It was just hot enough to keep traders on edge.”

Part of what’s keeping inflation high is that Americans broadly are continuing to spend, which in turn encourages businesses to keep raising prices for their own products and services. As Americans become more “price-sensitive” and the economy benefits from greater productivity by workers, Vanguard Senior Economist Adam Schickling said inflation should slow, but “patience will be required.”

Higher yields in the bond market push downward on prices for stocks, and the main way companies can offset that is by delivering bigger profits. That’s exactly what analysts are expecting, and it’s how the S&P 500 has been able to set records despite the many challenges weighing on Wall Street.

BlackRock rose 0.1 per cent after the investment company reported stronger profit and revenue for the summer than analysts expected. Customers poured a net $US205 billion ($294 billion) into BlackRock’s funds, including iShares exchange-traded funds, from July through September to bring its total assets under management to $us15.5 trillion. BlackRock makes money by charging fees on those dollars.

But the high expectations for profit growth also mean companies will likely get punished if they fall short of targets, which is what several other financial companies did Wednesday morning.

Bank of America dropped 6 per cent after reporting weaker profit and revenue for the third quarter than analysts expected. The profit would have fallen short even after ignoring the $US1.2 billion in fines that the US Treasury Department announced late ON Tuesday for alleged violations of anti-money laundering and sanctions laws.

State Street sank 6.2 per cent after reporting weaker revenue for the latest quarter than analysts expected, even though its profit was slightly above their forecasts.

The higher yields in the bond market, meanwhile, hurt some stocks in particular because of their effect on the cost to borrow money.

Homebuilders are finding potential customers turned off by mortgage rates at their highest level in nearly three years. Their stocks sank further on Wednesday, including drops of 2.8 per cent for Lennar, 3 per cent for PulteGroup and 2.5 per cent for D.R. Horton.

In stock markets abroad, indexes ticked higher in Europe following a weaker finish in Asia. Indexes rose 0.6 per cent in Paris and fell 0.9 per cent in Shanghai for two of the world’s bigger moves.

AP

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