I'm Colette Auclair, and here is Schwab's early look at the markets for Friday, September 25.
Dismal bond performance continued late this week, offering no relief to investors exhausted by months of steadily rising yields and keeping pressure on stocks. Weak debt auction demand, heavy borrowing, rising oil, and rallies in global bond yields all contributed.
Yields swung higher again Thursday, bringing the benchmark 10-year Treasury note yield to 5.17% by late in the session, within striking distance of 2007's intraday high of just above 5.30%. That level could represent a resistance point to watch today.
Hawkish Fed speak, with seven policymakers now hinting at a second near-term rate hike, played a part in this week's blistering yield rally. New York Fed President John Williams was the latest to weigh in with hawkish words early Thursday.
U.S. crude added another 3% yesterday to top $95 per barrel despite a Reuters report that the U.S. and Iran had discussed a phased reopening of the Strait of Hormuz and an end to the U.S. blockade of Iran.
Separately, NBC News reported that Iran's president said he's willing to make a deal to end the war before the U.S. mid-term election. Oil finished off its highs and stocks rebounded slightly after those reports, but there've been positive headlines before that didn't precede progress.
Rising yields can and often do reflect economic strength, but in this case it's more of a mixed picture. The bond market appears to be sounding concern about rates and prices.
"I think it's saying that the economic backdrop remains relatively firm, inflation is still a concern, and interest rates may need to remain higher than investors previously expected," said Collin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research (SCFR).
The 2-year Treasury note yield is well above the midpoint of the Fed funds rate range, trading near 4.85%. The Fed just raised its target range to 3.75% to 4%. Generally, the two-year Treasury yield is a good representation of where the markets expect the Fed funds rate to be in one year's time.
From an investor's perspective, Fed rate hikes could pull up the yields on short-term investments. The yields on Treasury bills, short-term certificates of deposit, and money market funds have a strong relationship with the fed funds rate.
When yields on these assets rise, they compete with stocks for investor cash, another potential challenge for Wall Street. Certain sectors, notably utilities and staples that offer dividends, tend to lose ground when yields rise because higher yields compete with income they offer investors.
Small-cap stocks also backtracked this week, accompanied by growth areas like tech. Stocks with heavy borrowing needs or earnings growth seen farther out in the future can be more sensitive to rising long-term yields, which may clip profits.
That's why Bloomberg's report Thursday that Oracle cited "force majeure" to potentially postpone payments should a data center it's building not come online on schedule might have spooked tech traders. It reinforces ideas that borrowing put the tech sector under pressure.
Oracle, which fell 3.45% Thursday, borrowed heavily to finance its AI footprint, and it's far from alone among big tech. The company told Reuters that particular data center remains on its schedule.
Yesterday's 7-year Treasury note auction wrapped up the week's slate with a thud as demand looked soft, Briefing.com reported. Foreign demand was particularly disappointing. That followed soft demand for a 5-year note auction Wednesday that also pushed yields higher.
Robust U.S. manufacturing and services data this week raised concern that blistering economic growth could keep inflation elevated. That helps explain the rise in yields across the curve. It also puts more emphasis on data next week including the August Personal Consumption Expenditures (PCE) price index due Wednesday and the ISM Manufacturing PMI for September due Thursday.
As of late Thursday, odds of a rate hike next month stood near 71%, according to the CME FedWatch Tool, up from 55% a week ago. Chances of at least one hike by year-end hit 94%, with around 56% odds of two more hikes this year.
Costco reported late Thursday, with eyes on its membership numbers. Next week brings a little more excitement on the earnings front as Micron and Nike both report.
In data yesterday, new home sales for August easily outpaced expectations at a seasonally adjusted annual rate of 684,000. Analysts had expected 610,000. July sales got revised up to 643,000.
Weekly initial jobless claims fell to 197,000 from 202,000 the prior week, the government said today. Levels remain historically light, raising concerns that the job market might be tightening. A tight labor market can ultimately push wages higher, and layoff levels have been low.
Today brings final September University of Michigan Consumer Sentiment soon after the open. The preliminary reading of 47.8% was historically weak, and Briefing.com consensus is for no change to the final headline today. Inflation expectations are another element to watch, rising to 3.4% for the long term from August's 3.3% in the preliminary report.
On Thursday, major indexes found almost no traction but managed to mostly hold onto Wednesday's closing levels. The broader market barely slipped, and the tech-dominated Nasdaq was slightly green.
Indexes recovered from weaker levels earlier in the session, lifted by hopes for Middle East progress and news that U.S. President Trump and Chinese President Xi were striking a positive tone in their meeting. The countries extended their trade truce for two months, now into January.
Breadth remains weak but five of 11 S&P 500 sectors closed higher Thursday, led by communication services and health care. Strength continued in Alphabet (GOOGL) and Meta Platforms (META), with the Magnificent Seven generally outperforming the broader market over the last few weeks. Still, not all was well in the tech world as chip stocks fell again.
Consumer and transport stocks remained under rate and oil pressure, with UPS and FedEx both down sharply.
The broader market hasn't posted a new high since August, chopping around in a trading range between 7,600 and 7,800 for the S&P 500 Index even as crude and yields advanced.
"Market participants seem to have concluded that higher oil prices are bad, yes, but that they haven't really done anything to deter the U.S. consumer," said Nathan Peterson, director of derivatives research and strategy at SCFR.
The Cboe Volatility Index (VIX), which surged above 16 early Thursday, stepped back to below 15.7 later on, still relatively low.
Checking other individual performers Thursday, Blue Owl Capital, which owns the data center developer cited by Oracle, fell 3.6%.
MGM Resorts fell 11% after a takeover offer was rescinded.
Darden Restaurants dropped 3% despite quarterly earnings coming in near Wall Street's expectations. Sales at outlets open a year or more rose for each of the firm's restaurants and the company reaffirmed prior guidance. Higher costs appeared to hurt shares.
Nebius Group rose 7.4% when Bank of America lifted its forecast for revenue from the company over the 2026-2028 period.
The Dow Jones Industrial Average® ($DJI) lost 161.61 points (-0.31%) Thursday to 51,349.98; the S&P 500 Index ($SPX) slipped 1.90 points (-0.02%) to 7,704.13, and the Nasdaq Composite® ($COMP) rose 3.34 points (+0.01%) to 26,939.37.