ASX set to slide as markets retreat on fading rate cut hopes

Wall Street is slipping after stronger-than-expected data on the economy weakened hopes that easier interest rates will arrive soon.

The S&P 500 was 0.8 per cent lower in afternoon trading and on track for a second straight drop after closing out its 10th winning week in the last 11. The Dow Jones was down 0.3 per cent and the Nasdaq composite was 1.1 per cent lower. The Australian sharemarket is set to fall, with futures at 4.57am AEDT pointing to a loss of 34 points, or 0.5 per cent, at the open.

Rising yields in the bond market were once again putting downward pressure on stocks. Yields climbed after a report showed sales at US retailers were stronger last month than economists expected. While that’s good news for an economy that’s defied predictions for a recession, it could also keep upward pressure on inflation.

That in turn could push the Federal Reserve to wait longer than traders expect to begin cutting interest rates after jacking them drastically higher over the last two years. Lower rates would relax the pressure on the economy and financial system, while also goosing prices for investments.

The yield on the 10-year Treasury jumped immediately after the retail-sales report and climbed to 4.09 per cent from 4.06 per cent late Tuesday and from 3.85 per cent a few weeks ago. Higher yields can crimp profits for companies, while also making investors less willing to pay high prices for stocks.

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Higher yields hurt all kinds of investments, and high-growth stocks tend to be some of the hardest hit. Drops of about 1 per cent or more for Tesla, Nvidia, Apple and Amazon were some of the heaviest weights on the S&P 500. The smaller stocks in the Russell 2000 index also slumped more than the rest of the market, down 1.1 per cent.

The Dow Jones, meanwhile, has less of an emphasis on tech and high-growth companies. That helped limit its losses relative to the rest of the market.

The yield on the two-year Treasury, which more closely tracks expectations for the Fed, also jumped. It climbed to 4.36 per cent from 4.22 per cent late Tuesday as traders trimmed their expectations for the Fed’s first rate cut to arrive in March. Traders are now betting on a 53 per cent probability of that, down from a shade more than 70 per cent a month earlier, according to data from CME Group.