ASX set to fall as Fed chair Jerome Powell flags rate-cut delay

Shares in Bank of Queensland rose 5.5 per cent after its first-half results beat expectations. The regional bank lender cut its dividends after its profit for the six months to February 29 fell 33 per cent to $172 million, but that still beat analyst expectations of a 40 per cent tumble.

On Wall Street overnight, US treasury yields climbed to fresh 2024 highs — with those on two-year notes hovering near the 5 per cent mark. Meanwhile, the S&P 500 fell 0.2 per cent to 5051.33, taking this week’s losses so far to 1.4 per cent. The Nasdaq 100 slipped 0.1 per cent, while the Dow Jones Industrial Average edged up 0.2 per cent.

To Jeffrey Roach at LPL Financial, Powell’s comments signal the Fed will likely stay on hold for longer than originally planned.

“I think the outlook for inflation has not deteriorated as much as the bond market seems to think,” said Neil Dutta at Renaissance Macro Research. “All Powell is doing is following the market, taking three months of bad inflation data and assuming it forward.”

Shares of Bank of America sank as charge-off for soured loans topped estimates, while Morgan Stanley climbed as traders delivered solid revenue. UnitedHealth Group led gains in the Dow Jones Industrial Average after its results.

Treasury 10-year yields climbed six basis points to 4.66 per cent. The US dollar rose against all of its developed-market counterparts. The Australian dollar dipped below US64 cents for the first time this year after Powell’s statement.

Powell’s remarks represent a shift in his message following a third straight month in which a key measure of inflation exceeded analyst forecasts. It also shows officials see little urgency to cut rates and suggests that any reductions in 2024 may come relatively late in the year, if at all.

Fed Vice Chair Philip Jefferson said on Tuesday that while there has been considerable progress in lowering inflation, the Fed’s task of sustainably restoring 2 per cent inflation is “not yet done.” His San Francisco counterpart Mary Daly reiterated late on Monday there’s no urgency to adjust interest rates, pointing to solid economic growth, a strong labour market and still-elevated inflation.

After starting the year by pricing in as many as six rate cuts in 2024, or 1.5 percentage points of easing, traders are now doubtful there will even be a half point of reductions. Most Wall Street economists have dialled back forecasts as well, setting up a dour scenario for US yields.

Amid all the anxiety, the widely watched MOVE index, an options-based measure of expected volatility in Treasuries, spiked to the highest since January.

State Street Global Advisors is standing by a contrarian call for the Fed to cut interest rate as soon as June despite a string of hot economic data that has spurred most traders to push back bets to later in the year.

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The asset manager remains convinced the US central bank will start monetary easing well before the US presidential election in November to avoid being seen influencing the result, according to Chief Investment Officer Lori Heinel. The inflation backdrop still supports this move given policy works with a long lag and the quality of recent data prints has been low, she said.

Exposure to stocks is now so high that any weakness is likely to set off a bigger slump once investors start to cut back on their long positions, according to top Wall Street strategists.

Clients pulled a net $US800 million ($1.25 billion) from US stocks in the five-day period through April 12 as the S&P 500 Index slumped for the week, quantitative strategists led by Jill Carey Hall said on Tuesday in a note.

“A stock-market correction is unfolding right now triggered by Middle East tensions, rising bond yields and worries about delayed Fed rate cuts,” said James Demmert at Main Street Research. “Stocks have been due for a pullback for quite some time.”

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Yet BlackRock’s Robert Kapito says the stock market is poised to benefit as investors deploy their outsized holdings of cash.

There’s almost $US9 trillion sitting in money market funds and the same amount in cash alternatives at banks, Kapito, president of the world’s largest asset manager, said at the Asia Pacific Financial and Innovation Symposium in Melbourne on Tuesday.

“Rising bond yields are a sign that the global economy and corporate profits are strong and resilient,” said Demmert at Main Street Research. “While this economic and corporate strength may result in fewer than expected or even no rate cuts for the foreseeable future, that isn’t something that will ruin this new bull market.”