ASX set to open higher as tech shares boost Wall Street

Stocks are rising on Monday, as Wall Street grows more convinced the Federal Reserve is set to turn the screws on the economy less aggressively and as earnings reporting season ramps up.

The S&P 500 was 1.5 per cent higher in early-afternoon trade, led by tech companies in a widespread rally. The Dow Jones was up 1 per cent and the tech-heavy Nasdaq composite was 2.1 per cent higher. The Australian sharemarket is set for a positive start, with futures at 5.08am AEDT pointing to a rise of 19 points, or 0.3 per cent, at the open. The ASX added 0.1 per cent on Monday.

Markets have been churning for weeks with sharp swings in both directions. On one hand, they’ve benefited from hopes that the nation’s high inflation will continue to cool and get the Federal Reserve to loosen up on its blizzard of hikes to interest rates. On the opposite end, they’ve taken hits on worries about a possible recession because of rate hikes already pushed through by the Fed.

Monday’s gains come on the heels of a strong Friday, when stocks rallied on comments from a Fed official seen as a signal that it would raise rates by just 0.25 percentage points next week. That would be a downshift from last month’s 0.50 point increase and from four straight earlier hikes of 0.75 points.

Higher rates intentionally slow the economy by making it more expensive for businesses and households to borrow, so a step down would mean less added pressure. The Fed has already pulled its key overnight rate up to a range of 4.25 per cent to 4.5 per cent from virtually zero early last year, and traders are now betting on a nearly 99 per cent probability that the Fed will raise rates by just a quarter point on February 1, according to CME Group.

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The bigger question is how much further the Fed goes from there, and how long it will wait before it cuts interest rates. Such cuts can act like steroids for markets, and Wall Street is hoping they could arrive in the back half of this year. The Fed, meanwhile, has been adamant that it plans on holding rates high at least until 2024.

The yield on the two-year Treasury, which tends to track expectations for Fed movement, rose to 4.21 per cent from 4.18 per cent late on Friday. The 10-year yield, which helps set rates for mortgages and other important loans, rose to 3.51 per cent from 3.48 per cent.

More recently, concerns have also been rising on Wall Street about the strength of profits at companies because of the slowing economy and higher expenses. That’s key because profits are one of the main levers that set stock prices.