ASX set for gains as Wall Street rises

Stocks are ticking higher on Wall Street on Tuesday ahead of what many investors hope will be one of the Federal Reserve’s last economy-shaking hikes to interest rates for a while.

The S&P 500 was 0.8 per cent higher in early afternoon trade and on pace to close out its third winning month in the last four. The Dow Jones was up 63 points, or 0.5 per cent and the Nasdaq composite was 1.1 per cent higher. The Australian sharemarket is set for gains with futures at 5.02am AEDT pointing to a gain of 24 points, or 0.3 per cent, at the open. The ASX lost 0.2 per cent on Tuesday.

Markets got a boost after a report showed that growth for US workers’ pay and benefits slowed during the end of 2022. While that’s frustrating for people trying to keep up with soaring prices for eggs and other groceries, markets see it as an encouraging sign of easing pressure on inflation.

With the pace of inflation cooling since the summer, virtually all of Wall Street expects the Federal Reserve on Wednesday to announce its smallest increase to interest rates since March, at 0.25 percentage points. That would be the latest stepdown after it pushed through four straight increases of 0.75 points and then a hike of 0.50 points.

Such moves try to stamp out inflation by intentionally slowing the economy and dragging down on prices for stocks and other investments. The worry is that too-high rates would cause a severe recession and drop-off in corporate profits.

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Such worries, combined with hopes for an easier Fed, have led to sharp swings in markets recently. They’ve hit not only day-to-day but also hour-to-hour. Analysts say much of this past month’s gains has been more about improving sentiment among investors than any big improvement in the economy or profits.

With seemingly everyone on the same page about what the Fed will do on Wednesday, the big question is what comes afterwards. The Fed has so far pledged to keep rates higher for longer to ensure inflation is truly defeated. Markets, meanwhile, are holding out hope that just one more small increase is on the way and that cuts to rates could follow late in the year.

Other reports on the economy Tuesday came in lower than expected, which could give the Federal Reserve leeway to be less harsh on rates. A measure of confidence among consumers weakened in January, when economists were expecting it to stay flat. And a measure of business activity in the Midwest showed more weakness than expected for January.