Stocks to fall as market frets over US recession

The local bourse is poised to open sharply lower on Monday as investors worry about the state of the global economy.

SYDNEY, AUSTRALIA: NewsWire Photos: MARCH 18 2024: A general view of the digital boards at the ASX in Sydney. Picture: NCA NewsWire/ Gaye Gerard

The Australian Securities Exchange is poised to open sharply lower on Monday as investors worry about the state of the global economy amid signs the US may now have to accelerate rate cuts to arrest a slide in unemployment and avoid a recession.

Central banks are grappling with how to tame inflation without igniting a recession, and analysts said data released on Friday had heightened concerns about the fragility of the world’s largest economy and the possible contagion impact.

Data showed the US unemployment rate jumped to near a three-year high of 4.3 per cent in July amid a significant slowdown in hiring, fuelling a slump across Wall Street stockmarkets as traders sold frantically amid fears a deteriorating labour market is sending the US towards a recession.

The Federal Reserve has indicated it will begin cutting interest rates at its next meeting in September, and traders have now begun to increase bets of an oversized 50 basis point cut in a bid to put a lid on job losses.

The risk of a recession in the US looms large over the mood in the Australian market, with futures indicating the ASX 200 will open sharply lower on Monday, but AMP chief economist Shane Oliver said the main driver of the market this week will be the Reserve Bank of Australia when it announces its interest rate decision on Tuesday.

Local data last week showed price rises had not been as bad as feared though inflation continues to run well above the central bank’s 2-3 per cent target.

“The monthly CPI indicator yet again gave a bad steer and June quarter inflation rose but only in line with RBA expectations and not enough to justify another rate hike.” said Dr Oliver.

“So we expect the RBA to leave rates on hold at its meeting on Tuesday and reiterate that its “not ruling anything in or out”, albeit with a continued use of relatively cautious language as it is still waiting “to be confident that inflation is moving sustainably towards the target range”.

The RBA is widely thought to be reluctant to raise rates amid what it deems a narrow path to a soft landing, and signs of a cooling US economy will give it cover to keep monetary policy on hold.

The prospect of a cooling global market is particularly pertinent for the resources-based Australian economy, as demand for commodities falls during periods of lower output.

Australian inflation is already expected to cool, and some analysts expect it could hit the RBA target band by the end of the year – though a weakening US economy could push the bank to cut rates sooner than expected.

Traders have now fully priced in one interest rate cut by February 2025, though Dr Oliver and others have said the RBA could move in November.

Falling interest rates will be a welcome relief to Australian retailers, which have seen sales tumble as household disposable income falters as they struggle to keep pace with the cost of living and 13 interest rates rises over the past few years.

A moderation of interest rates would also be a boost to the federal Labor government, which has seen its standing with voters decline amid the squeeze on household incomes.

European markets also closed sharply in the red on Friday, with the Amsterdam bourse down more than 3 per cent, Frankfurt off 2.3 per cent, Paris 1.6 per cent and London 1.3 per cent.

Tokyo led losses is Asia, with the Nikkei 225 index tanking 5.8 per cent – its biggest drop since the start of the Covid pandemic four years ago – owing to a stronger yen, which hits Japan’s key export sector.

Hong Kong, Seoul and Taipei all fell sharply, with losses also in the Shanghai, Mumbai and Singapore markets.

Last Wednesday’s decision by the Bank of Japan to hike interest rates for only the second time in 17 years – with talk of another to come – strengthened the yen to its highest since March.

The US dollar weakened against the pound and the euro as traders bet the weaker US jobs data would translate into Federal Reserve rate cuts.

Originally published as Stocks to fall as market frets over US recession