ASX set to retreat as Wall Street rally runs out of puff

“The Fed wants inflation data to come down and it’s not going to retract its claws until that happens,” Young said. “Pretty quickly the narrative is going to shift to, ‘will the Fed go too far?‘”

Still, some on Wall Street are seeing signs for at least temporary optimism. Oil prices have come off their highs, though US crude rose 5.1 per cent on Monday. A key report released last week also indicated expectations are easing for inflation among households. That could prevent a more vicious cycle from taking root and ease the pressure on the Federal Reserve.

Expectations have come down for how aggressively the Federal Reserve will raise interest rates at its meeting next week. Traders are now betting on a roughly one-in-three chance for a monster hike of a full percentage point, with the majority favouring a 0.75 percentage point increase. As recently as Thursday, the heavy bet was on a hike of a full point.

Economists at Goldman Sachs are among those forecasting a 0.75-point increase, which would match last month’s hike, instead of a more aggressive one. They cited in particular the softening of inflation expectations after Chair Jerome Powell said last month that the Fed pays close attention to them.

Across the Atlantic Ocean later this week, investors expect the European Central Bank on Thursday to raise interest rates for the first time in 11 years to combat inflation. Many investors expect an increase of 0.25 percentage points, “but more is not unthinkable,” economists wrote in a BofA Global Research report.

Interest rates are one of the two main levers that set prices for stocks. The other is corporate profits, which are under threat given high inflation and slowdowns in parts of the economy. For the moment, at least, analysts are still forecasting continued growth.

Earnings season kicked off last week, and banks have dominated the early part of the schedule for reporting how much they earned from April through June.

Goldman Sachs was among the latest to report, and it rallied 2.5 per cent after its profit and revenue were better than analysts expected. Synchrony Financial rose 0.3 per cent after it likewise topped forecasts for profit and revenue.

Bank of America closed essentially flat after it fell short of analysts’ profit expectations. Despite all the worries about a possible recession, Bank of America said its customers’ spending and deposits remain strong.

In markets overseas, Hong Kong’s Hang Seng index surged 2.7 per cent after Chinese media reported that some stalled real estate projects had resumed construction after buyers threatened to stop their mortgage payments. Stocks in Shanghai added 1.6 per cent.

Stocks also rose across much of the rest of Asia and Europe, with Germany’s DAX returning 0.7 per cent.

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In the bond market, the yield on the 10-year Treasury rose to 2.98 per cent from 2.96 per cent late Friday. The two-year yield, which rose to 3.17 per cent, is still above the 10-year yield. Some investors see that as an ominous sign that could presage a recession in a year or two.

Underscoring worries about a recession have been recent reports showing slowdowns in parts of the economy because of the Fed’s rate hikes.

The housing market in particular has felt the effect of more expensive mortgage rates. A measure of sentiment among home builders released Monday weakened more than economists expected and sank to its lowest level in more than two years.