The S&P/ASX 200 Index (ASX: XJO) closed out the last two days of April in good form.
The benchmark index closed up 0.8% on Monday and up 0.4% yesterday to exit the month at 7,664.1 points.
May, however, is starting out with a sizeable slide.
In morning trade on Wednesday, the ASX 200 is down 1.4%.
This comes following heavy selling in United States markets yesterday (overnight Aussie time).
By the time the smoke cleared the S&P 500 Index (SP: .INX) was down 1.6%. And the tech-laden Nasdaq Composite Index (NASDAQ: .IXIC) ended the day down 2.0%.
We're seeing a similar trend here in Australia, with the more interest rate sensitive S&P/ASX All Technology Index (ASX: XTX) down 1.5% at the time of writing.
Here's what's going on.
Image source: Getty Images
Why is the ASX 200 under pressure today?
There are no fresh domestic concerns for investors to be selling there ASX 200 stocks today.
And certainly, the long-term investment case for most of those 200 companies hasn't soured overnight.
The selling pressure, rather, is being driven by headwinds blowing out of the US. The same headwinds that saw the S&P 500 and Nasdaq close sharply lower.
And once more this stems from what could be seen as good news for the world's top economy.
Namely, that wages are growing strongly.
According to the Bureau of Labor Statistics US labour costs increased by 1.2% in the March quarter after rising by 0.9% in the December quarter.
That was higher than any forecasts in a Bloomberg survey of economists.
While that's good news for many US workers, it's also likely to help further entrench inflation.
Which in turn increases the odds of higher interest rates for longer, with rates in the US already at 20-year highs.
The Fed announces its next rate decision overnight here in Australia. That's all but certain to see no change. Though the tone Powell sets could have a material impact on the markets tomorrow.
The jitters pressuring international and ASX 200 stocks relate to the timing and pace of future rate cuts.
According to Robert Sockin, senior global economist at Citigroup Inc (quoted by Bloomberg), "This is a challenging print for the Fed. Coming in at 1.2 is just evidence that the inflation data, the wage growth data, is moving in the wrong direction to be consistent with their target."
Bloomberg economist Estelle Ou added:
Landing just as FOMC members start their two-day policy meeting, the Employment Cost Index will further erode their confidence that inflation is declining toward the 2% target — setting the stage for a relatively hawkish stance in the May 1 decision and news conference.
But not everyone believes the data out of the US are bad news for international and ASX 200 stocks.
HSBC strategist Max Kettner points out that higher yields reflect strong economic growth, which should provide growth opportunities for many businesses.
"If the Fed's cuts turn out to be more like the recalibration in the mid-1990s and 2019, it may not necessarily be bad news for risk assets," Kettner said.
