I'm Colette Auclair, and here is Schwab's early look at the markets for Friday, October 16:
Treasury yields declined dramatically late this week despite mounting inflation. The decline from 24-year highs in the 10-year note yield fueled a comeback Thursday on Wall Street powered by rate-sensitive cyclical sectors like financials and industrials, though defensive health care led. AI continued to struggle.
Today lacks the data and earnings punch of the last few sessions, and Monday is also quiet, giving investors a chance to contemplate an eventful week and watch geopolitical developments. Crude oil remains near recent highs amid clashes overseas, a major factor behind the inflation worries.
Typically, the type of inflation in this week's September Consumer Price Index (CPI) and Producer Price Index (PPI) would kick yields into higher gear on worries of Federal Reserve rate hikes and overheating economic growth. This time around, though, investors seemed to gravitate toward perceived "safety," buying Treasuries and stocks in more defensive sectors amid market and geopolitical turmoil.
AI and chip-related stocks continued to struggle late this week, however, as investors reassessed whether heavily indebted data center, software, and semiconductor companies can turn today’s enormous capital spending into tomorrow’s profits. Last week's report of slower revenue growth at OpenAI and worries about cheaper memory chip competition from China dogged the chip market recently.
PPI showed troubling signs of higher energy costs seeping into the broader economy, something that might trouble the Fed as it tries to keep inflation expectations anchored amid the gas price blowout. Core PPI surged 0.7% monthly excluding food and energy, well above expectations of 0.3% and the most dramatic rise in four years.
Monthly headline PPI, which includes energy, soared 1.3%. A sizzling 6.3% annual rise in the headline number compared with expectations of 5.3%. Core annual PPI of 5% compared with expectations of 4.4% and is running at a 5.11% annual pace over the past three months.
"Energy continues to be the main culprit," said Cooper Howard, director of fixed income research and strategy at the Schwab Center for Financial Research (SCFR). "A risk is that higher diesel and energy prices begin to bleed into other categories, and PPI suggests that's the case. For the Fed, this report, combined with CPI, raises the odds of a rate hike in October. We expect two more hikes this cycle depending on the pace and breadth of inflation."
As of late Thursday, however, chances of a Fed rate hike later this month fell to 27% from 33% a day earlier, according to the CME FedWatch Tool. For the full year, odds of at least one more rate hike were 89%.
Both CPI and PPI could factor into the September Personal Consumption Expenditures (PCE) prices report, the Fed's favored inflation meter, due later this month. For PPI metrics that map over to PCE, airfares were the standout, increasing 5% month over month.
The Fed got more news of a hot economy Thursday as September retail sales growth of 0.8% easily outpaced expectations of 0.3%.
This backed what bank executives said on earnings calls earlier this week about a strong business and consumer climate, plentiful loan demand, and little in the way of credit worries.
Several Fed speakers said this week they support more hikes, but the question is whether that happens at the October 28 meeting or in December.
All of which raises the question why Treasury yields suffered their biggest decline since June on Thursday, falling to the lowest level since September 23 for the 10-year note.
This could reflect investors seeking perceived "safety" in Treasuries amid rising geopolitical tension between Russia and Ukraine and in the Middle East. The coming U.S. mid-term election might also be a factor. However, the dive in yields is only a little more than 24 hours old, so it's early to draw conclusions or state that the long yield rally is over.
The swing from a peak 10-year yield near 5.33% to a low of 5.05% over 24 hours also suggests investors are balancing renewed Fed risk against concern that tighter financial conditions and an AI-credit unwind could eventually weaken growth.
The latest Atlanta Fed GDPNow estimate for third quarter gross domestic product (GDP) growth is 3.6%. That's unchanged from earlier this month.
The defensive rotation in stocks is clear: Healthcare gained more than 1.8% Thursday as technology fell 0.5%. Broader participation hasn't collapsed, but mega-cap technology weakness has an outsized index impact. Investors might want to watch credit conditions, Treasury yields, Fed guidance, and semiconductor stabilization rather than chasing either the selloff or the defensive trade.
It's unclear if this week's dramatic sell-off in chips that sent the PHLX Semiconductor Index (SOX) into correction down 10% from recent highs is part of a longer-term trend or simply short-term anxiety. It's clear either way that chip stocks have gained no ground since their June peak, though the SOX remains up for the year.
Outlooks recently from chip makers looked robust, and Deutsche Bank maintained its buy rating on data center builder CoreWeave Thursday, saying there's no company-specific reason to justify the sell-off that sent CoreWeave shares down 15% Wednesday. Anthropic, the AI giant gearing for its expected initial public offering, saw quarterly revenue jump 45% sequentially to nearly $17 billion, the Wall Street Journal reported.
Earnings accelerate next week with Tesla, Meta, and Netflix. The last of those is down 40% so far this year and announced 1,000 job cuts earlier this week.
Items to watch today include import and export prices, industrial production, and Treasury International Capital flows that track foreign investment in U.S. assets.
In trading Thursday, major indexes recovered from PPI-related early weakness to finish higher across the board except for the tech-dominated Nasdaq 100. Small caps had the biggest gains as yields turned lower.
Eight of 11 S&P 500 sectors climbed Thursday, and breadth improved. By late in the session, 42% of S&P 500 stocks traded above their 50-day moving average. Health care, materials, financials, and consumer discretionary led. Info tech and energy lagged.
The Cboe Volatility Index (VIX) popped to 17.50 early yesterday as institutional investors appeared to buy downside protection. Anything approaching 20 could indicate broader worries. VIX ended the day back below 16.50.
Technically, a level to watch in the S&P 500 Index is the 50-day moving average of 7,706, which held again Thursday after an early test.
Among individual movers Thursday, Dell, which fell 11% Wednesday, dropped another 8%. The weakness came after Barclays cited AI demand concerns, suggesting recent strength for Dell and its competitors reflect higher memory costs more than dramatic enterprise AI demand. Competitor Hewlett Packard also fell sharply.
Some of the hardest-hit AI and chip stocks Wednesday bounced back Thursday. These included CoreWeave, Arm Holdings, Oracle, and Micron. Still, the SOX index fell almost 1% and stayed in correction territory down 10% from recent peaks. Western Digital, Lumentum, and Intel remained under pressure, while Nvidia is down about 10% from recent highs.
Software companies generally looked strong late this week, again tracking the opposite way of chips.
Nike jumped more than 5%, one of many consumer names getting a lift as investors rotated out of the AI market. There was no major news involving the company, which has suffered dramatic share declines this year.
Walmart climbed 1.5% on an upgrade by Deutsche Bank to buy from hold. The analyst said the current inflationary environment should reinforce Walmart's value proposition and drive share gains.
Rocket Lab dropped 6.7% after announcing it's pushing back the first launch in its Neutron launch vehicle development program to 2027.
Home building stocks Lennar and KB Home climbed 5% and 3%, respectively, as yields fell.
The Dow Jones Industrial Average® ($DJI) surged 556.21 points (+1.08%) Thursday to 52,177.69; the S&P 500 Index ($SPX) edged up 25.12 points (+0.33%) to 7,744.06, and the Nasdaq Composite® ($COMP) climbed 20.16 points (+0.08%) to 26,713.03.