CPI Data Generates Calm Initial Reaction, But Some Troubling Trends Under The Surface

(Thursday market open) An eagerly awaited report on U.S. consumer inflation didn’t appear too frightening early Thursday, and major indexes initially appeared unhindered as the October rally rolled on.

The September Consumer Price Index (CPI) rose 0.4%, compared with Wall Street’s average estimate of 0.3% but down from 0.6% in August. Core CPI, which strips out food and energy, rose 0.3%, in line with expectations and the same as in August.

“The data seem unlikely to derail the equity rebound we’re having,” says Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research.

Major indexes headed into CPI on a four-session win streak, the longest since late August. Stocks finished on a high note Wednesday, with the S&P 500® Index (SPX) approaching technical resistance near the 100-day simple moving average just above 4,400.

The recent move reflects a steep drop in the U.S. 10-year Treasury note yield to below 4.6% from above 4.8% as conflict in the Middle East drove a flight to perceived safety in fixed income. Also, recent speeches from Federal Reserve officials hinted at hesitance to raise rates.

“The bar for another rate hike appears to be high, which is helping push intermediate to long-term bond yields lower,” says Kathy Jones, chief fixed income strategist at Schwab.

After falling in August and September, the SPX is up 1.6% so far in October.

“October has been an up month in six of the last nine years, including the last two years,” notes Randy Frederick.

He adds that 21 S&P 500 companies have reported Q3 earnings through mid-week, with average earnings per share growth of 4.9% and average revenue growth of 4.5%. Those are both well above Wall Street’s expectations and far better than final Q2 numbers. It’s still early, though.

Morning rush

• The 10-year Treasury note yield (TNX) climbed 1 basis point to 4.6% after the CPI data.
• The U.S. Dollar Index ($DXY) rose slightly to 106.07.
• Cboe Volatility Index® (VIX) futures slipped to 15.95.
• WTI Crude Oil (/CL) rose to $84.83 per barrel.

Just in

Today’s CPI showed annual headline inflation up 3.7%, versus the expected 3.6% and equal to 3.7% in August. Core annual CPI growth of 4.1% was in line with analysts’ consensus and down from 4.3% the prior month.

Gas, shelter, and transportation services costs drove most of the rise in CPI last month, and airlines may be passing along higher fuel costs to customers.

Also, shelter costs reaccelerated from last month and are taking longer to come down than many had expected.

On the positive side, core annual inflation has now come down in 12 consecutive months. However, monthly data show some reacceleration in core inflation growth and may give a better sense of the trend.

Also less positive was a 0.6% rise in the closely watched core CPI services excluding housing—the highest in a year for that category.

The Fed’s inflation goal is 2% year-over-year.

Weekly Initial Jobless Claims remained near recent nine-month lows at 209,000—the same as the previous week but slightly below average analyst expectations. The recent trend toward softness in claims points to a labor market that likely remains strong despite the Fed’s rate hikes.

September’s China inflation and import/export numbers are due out late Thursday U.S. time, and could have an impact on overnight trading. Analysts expect China to avoid deflationary numbers in September.

Stocks in spotlight

Several major companies report today, and JPMorgan Chase JPM, Citigroup C, and Wells Fargo WFC report tomorrow morning.

Separate ways: Delta DAL and Walgreens Boots Alliance WBA went opposite directions this morning in premarket trading after each reported earnings. Delta shares took off, rising 2%, while struggling shares of Walgreens descended.

Delta reported quarterly earnings per share and revenue that both beat Wall Street’s expectations, and its Q4 guidance was in line with Wall Street’s expectations. In a CNBC interview, Delta’s CEO said booking levels remain strong and business travel is reviving.

Around the corner at Walgreens, the company missed analysts’ earnings expectations but beat estimates on revenue. Guidance came in below Wall Street’s range as the company expects more challenges including a higher tax rate and less contribution from COVID-19 sales.

Opening the vaults: Tomorrow offers a monster morning of earnings as three massive U.S. banks report. The focus this quarter for all banks, big and small alike, will probably center around credit quality and loan volume as banks continue to struggle with a high interest rate environment and emerge from last spring’s industry turmoil.

“Loan loss provisions, revenue growth, and lending standards are key to watch,” says Kevin Gordon, senior investment strategist at Schwab.

Loan loss provisions are funds banks put aside in case loans go bad, and they detract from earnings. They’ve been a near-constant drag on bank results since banks began adding to them during the pandemic.

“Given some of the mega-cap banks have been weakening, the focus now shifts to what executives say regarding their outlook for lending standards,” Gordon added. “It would make sense to see more tightening since that’s what the Senior Loan Officer Opinion Survey (SLOOS) on bank lending has been telling us.” That survey, out four times a year from the Fed, tracks banks’ willingness to lend.

Eye on the Fed

Early today, the probability that the FOMC will raise its benchmark funds rate from its current 5.25% to 5.50% target range following its October 31–November 1 meeting was 7%, according to the CME FedWatch Tool. Odds that rates could be a quarter-point higher coming out of the December 12–13 meeting were about 30%.

Minutes from the last Federal Open Market Committee (FOMC) meeting suggest policymakers are patiently waiting for inflation to falter before lowering rates. They also showed a majority agreeing that one more rate hike this year would be appropriate. To some extent, however, the minutes were dated. They reflected discussions in mid-September just before the steep rally in Treasury yields that some Fed officials now say helped slow the economy and might make additional rate hikes less necessary. The market bakes in just a 33% chance of another rate increase, down from roughly 50-50 earlier this month.

Thinking cap

Ideas to mull as you trade or invest

Middle East and markets: So far, market reaction to the Israel-Hamas war has been muted. But in the long run, what does this crisis mean for the markets and investors? Jeffrey Kleintop, Schwab’s chief global investment strategist, explains the consequences in his latest article. “Conflicts may flare up, but tend to not make investors bearish, outside of a recessionary global economy,” Kleintop writes. “During periods of even modest economic growth, the global market’s response to perceived threats has tended to be short-lived.”

Deeper breadth: A rising tide supposedly lifts all boats, but that isn’t true on Wall Street so far this year. As of mid-week, about 26% of S&P 500 stocks traded above their respective 50-day simple moving averages, according to Bloomberg. That was up from just 9% a couple weeks ago, but still down from more than 60% back in July. Even July’s peak looked tepid historically, since in strong past bull markets the percentage often hit 80% or even 90% as strength permeated through most sectors. That wasn’t how things looked at the peak of the 2023 rally, and it speaks to the outsize impact of the so-called “Magnificent 7” mega-cap stocks, which throw their weight around enough to have a massive influence on the overall SPX. For this fledgling improvement in breadth to impress, it likely needs to spread to the rest of the market, not just tech and communication services behemoths.

Narrowing curve: Over the last few weeks, the U.S. 2-year Treasury note yield has surrendered some of its sharp premium to the 10-year Treasury note yield, mainly because of the longer-term yield rising. The premium topped 100 basis points over the summer but was below 40 basis points as of mid-week, and dropped under 30 at one point. Typically, this isn’t how an inverted yield curve (where short-term yields top long-term ones) ends. Inversions usually fade as interest rate-sensitive short-term yields fall on ideas that the Fed might reduce rates due to recession. The sharp rally in 10-year yields over the last month reflects numerous metrics, including ideas that the Fed could hold rates higher for longer as the U.S. economy continues to hum. Higher long-term rates sound bearish for stocks. (This sort of inversion unwinding is called a “bear steepener.”) On the plus side, however, the Fed leans toward keeping rates high partly due to economic vigor that has the Atlanta Fed’s GDP Now indicator pointing toward 5% Gross Domestic Product (GDP) growth in Q3. Solid GDP growth tends to help earnings, and improved earnings tend to help stocks.  

Calendar

Oct. 13: University of Michigan Preliminary October Consumer Sentiment, and expected earnings from JPMorgan Chase (JPM), Citigroup (C), Wells Fargo (WFC), United Health (UNH), and BlackRock (BLK).

Oct. 16: October Empire State Manufacturing.

Oct. 17: September Retail Sales, September Industrial Production, September Capacity Utilization, and expected earnings from Lockheed Martin (LMT), Goldman Sachs (GS) Johnson & Johnson (JNJ) and United Airlines (UAL).

Oct. 18: September Housing Starts and Building Permits, and expected earnings from Abbott Labs (ABT), Morgan Stanley (MS), Procter & Gamble (PG), Travelers (TRV), Netflix (NFLX), and Tesla (TSLA).

Oct. 19: Initial Jobless Claims, September Existing Home Sales, September Leading Economic Indicators, and expected earnings from American Airlines (AAL), AT&T (T), Philip Morris (PM), Union Pacific (UNP), and CSX (CSX).

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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