Stocks set for a red start as investors brace for RBA

The Australian sharemarket is tipped for a negative start to the week after US stocks closed sharply lower on Friday.

Stock in New York fell on Friday after amid concerns about the Fed’s hawkishness despite the US unemployment rate edging up to 3.7 per cent. Picture: Spencer Platt/Getty

The Australian sharemarket is set to start in the red this week after US stocks closed sharply lower on Friday and as investors brace for a crucial Reserve Bank meeting that is tipped to see the cash rate rise a further half a per cent.

SPI futures are pointing to a decline of 0.2 per cent on Monday following weak leads from the US, where all three bourses finished more than 1 per cent lower on Friday as an escalating energy crisis in Europe and continued hawkishness from the Federal Reserve outweighed a jobs report that saw payroll growth slow slightly and the US unemployment rate edge up to 3.7 per cent.

A weaker iron ore price will weigh on the local sharemarket but the oil majors should provide a degree of support, CommSec chief economist Craig James said.

“More companies are also going ex dividend this week, so trading without the benefit of their dividend. And Fortescue will go ex-dividend on Monday, so that will be another effect that will weigh a little bit in terms of our market,” he said.

The Friday losses in the US, sparked by Russian energy giant Gazprom delaying the reopening of gas flows to Europe through the NordStream 1 gas pipeline, as well as expectations that the jobs report would not hold the Fed back from its rate rise path, brought the S&P 500’s weekly decline to 3.3 per cent, while the Dow Jones Industrial Average lost 3 per cent and the tech-heavy Nasdaq Composite retreated 4.2 per cent.

It was the third week of declines for US stocks amid widespread recession fears and challenges for sharemarket returns.

“As the US share market got overbought and hit resistance at its 200-day moving average, shares then became vulnerable to ongoing central bank hawkishness and recession risks and so have pulled back,” AMP chief economist Shane Oliver said of the recent weakness.

The August jobs data will not likely see the US Federal Reserve tame its hawkishness, he warned.

“The good news for the Fed is that payroll growth slowed to 315,000, labour force participation rose which drove a rise in unemployment to 3.7 per cent and wages growth moderated.

“Against this, jobs growth is still strong, wages growth is still high at 5.2 per cent year-on-year and other data shows continuing strength in job openings and still low jobless claims. All of which is likely to keep the Fed hawkish for now.”

Adding a further note of caution, Dr Oliver said that while the uptick in unemployment was driven by increased workers, this “is consistent with what is often seen prior to recessions”.

Recent weakness in US markets also comes ahead of what is typically the most challenged time of year for returns: September has historically been the worst month of the year for both US and Australian sharemarkets.

On the domestic front, all eyes will be on the RBA on Tuesday, when the central bank holds its monthly rate-setting meeting.

The RBA is widely expected to pull the trigger on another 0.5 per cent hike, taking the taking the cash rate to 2.35 per cent as it does “what is necessary” to get inflation back to target.

Investors will be watching closely for any sign of a slowdown in its upward path, Dr Oliver said.

“The RBA’s rate guidance will probably remain hawkish, signalling further tightening ahead. But given its recent comments that it is “not on a pre-set path” and that it is aiming to return inflation to target “while keeping the economy on an even keel”, Governor Lowe may signal in the post-meeting statement or in a speech on Thursday … a possible slowing in the pace of hikes ahead, given the increasing downside risks for the economy.”

US markets will be closed on Monday for the Labor Day holiday.