Stocks Crumble After Higher-Than-Expected Reading on September Consumer Prices

(Thursday Market Open) Well, that wasn’t helpful.

Consumer prices surged again in September, the Department of Labor said Thursday, rising 0.4% and topping Wall Street’s average estimates for a 0.2% gain. Price growth also accelerated from 0.1% in August.

Stock index futures tanked on the news, falling dramatically as hopes for a cool-off in prices vanished in the autumn winds.

This came one day after investors digested a hot September Producer Price Index (PPI). Today’s Consumer Price Index (CPI) did absolutely nothing to ease concerns.

The CPI showed big gains in service-related prices like transportation and medical care. Cars, shelter and utilities also rose sharply. This was slightly offset by a big drop in gasoline prices. Meanwhile, the so-called “core” CPI, which strips out food and energy, rose 0.6%, the same as in August and above expectations of 0.4%.

Year-over-year inflation barely slipped to 8.2%, from 8.3% in August. We’re seeing some pretty big numbers here, and minutes from the September Federal Open Market Committee (FOMC) meeting signaled the Fed is ready to go above and beyond—and even to restrictive levels—with rates to get prices to come down. Seeing CPI come in above estimates isn’t good for the market.

As stocks crumbled on the CPI news, expectations firmed for a 75-basis point rate hike at the FOMC’s next meeting in early November. The CME FedWatch Tool now signals a 94% chance of a 75-basis-point rate hike, up from 75% a week ago and 50% a month ago. There’s even a small contingent of trades betting on a 100-basis point increase in November. It could be interesting to see if that starts ticking higher in the days ahead.

The hot CPI was also disappointing considering that the New York Fed reported lower consumer inflation expectations earlier this week. That report might have created some hopes in the market for a softer CPI report. Now those hopes are getting dashed.

In a “bad news is good news” type of report, initial jobless claims Thursday of 228,000 were above the consensus view of 220,000. But it’s doubtful many investors are looking at that weekly report, considering the overwhelming impact of the CPI number. It looks like new two-year lows could be on their way for stock indexes, and the question is whether indexes will fall for a seventh-straight session today.

Potential Market Movers

Today marks the first mega-earnings day for the third quarter, featuring results from Walgreens Boots Alliance WBA, Taiwan Semiconductor TSM, Domino’s Pizza DPZ, BlackRock BLK, and Delta Air Lines DAL.

WBA’s revenue and guidance matched Wall Street’s consensus and earnings per share beat consensus by $0.03. Shares surged 4% in the hours ahead of the opening bell. BLK also beat analysts’ expectations and saw shares rise slightly.

DAL’s earnings per share were slightly were lower than analysts had expected, but revenue beat expectations and shares rallied 4% early Thursday as the company forecast strong Q4 travel demand. International travel looks strong overall right now, implying that high inflation hasn’t curbed demand. This could be good news for the European economy. 

TSM shares also rose after the chip company issued firm guidance and beat Wall Street’s earnings estimates. However, TSM said it plans to reduce capital spending, a cautious sign as TSM and other semiconductor firms deal with challenging fundamentals in the semiconductor industry. Executives said in the call that they expect the industry to decline in 2023. Inflation, COVID-19-related demand worries in China, and rising interest rates are among the headwinds.

Tomorrow morning is what many consider the official start of earnings season as the big banks step up to the plate. Companies expected to report tomorrow include JPMorgan Chase JPM, Morgan Stanley MS, Wells Fargo WFC, and Citigroup C. Their narrative is likely to set the tone for the rest of Q3 earnings season.

September Retail Sales and early October Michigan Consumer Sentiment also due early Friday (see more below). We’re in for a busy end to the week.

The Cboe Volatility Index®(VIX) edged above 34 at times yesterday but eased below that by the close and then slid further in the overnight hours, falling below 32. It jumped again after the CPI report. Also known as the fear index, the VIX is still at levels normally seen as elevated, potentially signaling choppy markets ahead.

WTI Crude Oil (/CL) and the energy sector came under pressure this week. WTI Crude dropped below $87 per barrel late yesterday after climbing to $92 per barrel after last week’s OPEC+ news. A much bigger-than-expected buildup of U.S. crude oil stocks last week weighed on the commodity Wednesday. Still, it doesn’t seem likely /CL would completely fall apart any time soon, considering the geopolitical situation. The wildcard is if the economy slips into recession.

Mixed Message from FOMC Minutes

Minutes from the September Federal Open Market Committee (FOMC) meeting released yesterday appeared to provide some mild market support.

Though the minutes were hawkish overall, with the Fed committed to more rate hikes, investors apparently focused on a passage that read, “Several participants noted that, particularly in the current highly uncertain global economic and financial environment, it would be important to calibrate the pace of further policy tightening with the aim of mitigating the risk of significant adverse effects on the economic outlook.”

If that happened, it’d represent the sort of “pause” that the “Fed pivot” crowd was excited about early last week. Still, it’s probably a mistake to get too excited about those words. After all, the supposed “light at the end of the tunnel” that some investors used as an excuse to drive up the market last Monday and Tuesday turned out to be a freight train coming their way instead. The market has fallen six consecutive sessions since then.

Here’s the problem: We keep getting data showing the Fed’s attempt to slow inflation hasn’t made significant progress. That was evident in today’s CPI report, yesterday’s stronger-than-expected Producer Price Index (PPI) data and in last week’s Nonfarm Payrolls Report.

However, that doesn’t mean there’s been no impact from Fed policy. Look at housing, for instance.

But the six days of selling that followed last week’s Monday and Tuesday rally is more evidence that whenever the market gets a little pop of optimism, Fed speakers keep saying they’re strongly committed to more rate hikes. That’s what yesterday’s minutes showed. This is something the Fed is committed to, and the market is finally coming around to that notion. And that’s why we’re trading down at these levels.

Reviewing the Market Minutes

The benchmark S&P 500® (SPX) posted its sixth-straight day of declines yesterday, dropping to another two-year low below 3,600. That big round number looked like a place where the market might make a stand, and the SPX spent part of the session yesterday above it. The rally attempt gave up the ghost late in the session, and it feels like buying support just isn’t that strong at these levels.

Also, there appeared to be hesitancy to take new positions ahead of today’s CPI data, especially after yesterday’s PPI report came in hotter than expected.

The Dow Jones Industrial Average® ($DJI) fell 28.34 points, or 0.10%, to close at 29,110.85. The SPX dropped 0.33%, falling to 3,577.03, the Nasdaq-100® (NDX) fell less than 0.1%, and the Russell 2000® (RUT) lost 0.3%.

The bright spot yesterday continued to be in the food and beverage industry, where shares of PepsiCo (PEP) climbed 4% following earnings results above expectations and, perhaps more importantly, after offering stronger guidance.

Three Things to Watch

Retail Roundup: Tomorrow will be the “big banks” day on the earnings calendar, but for economic data, it’s consumer day with incoming readings on September Retail Sales and early October Michigan Consumer Sentiment. Both of these reports on Friday could play into—what else?—expectations for the Fed’s next move. Wall Street consensus expects September Retail Sales to be up 0.2% month over month, a slowdown from 0.3% in August, according to Trading Economics. In August, falling gas prices helped stretch consumer pockets to spend more, leading to large gains in categories like automobiles, “miscellaneous store” sales, food and drinking places, among other things. Gas prices remained relatively low in September, and unemployment was also near historic lows, so it wouldn’t be surprising if tomorrow’s Retail Sales show similar trends. Remember that retail sales aren’t adjusted for inflation, so some gains could simply reflect higher prices, especially in the year-over-year comparison. That’s why month-to-month is a better way to follow this report.

Inflation Hint Ahead: There’s been a string of reports showing strong consumer confidence, which isn’t surprising when you look at the healthy jobs market. Tomorrow’s University of Michigan Consumer Sentiment data for early October is likely to show that trend is continuing. Trading Economics offered a headline estimate of 59, up just a touch from 58.6 in September’s final reading. In this report, the numbers are often less important than the commentary from the report’s chief economist, which gives a nice summary of where consumers stand on various issues, including inflation expectations.

Earlier this week, a report from the New York Federal Reserve showed inflation expectations falling, so it could be interesting to see if the Consumer Sentiment report also reflects that. In its final September report, the Consumer Sentiment survey said the median expected year-ahead inflation rate declined to 4.7%, the lowest reading since September 2021. And at 2.7%, last month’s median long-run inflation expectations fell below the 2.9 to 3.1% range for the first time since July 2021. It’d be market-supportive to see this trend continue tomorrow.

Take This Job…and Keep It: Earlier this week, JPMorgan Chase (JPM) CEO Jamie Dimon told CNBC he believes a recession is likely soon. He’s not the only one. A recent survey from Principal Financial found that 65% of businesses surveyed anticipate a recession in the next six months, and 63% report having already been negatively impacted by inflation. And yet, more employers have turned to increasing prices (64%) and reducing operating expenses (62%) than those who have reduced or stopped hiring (42%). In fact, 55% of businesses said they will not reduce salaries if hit with a recession, and 47% said they will not reduce benefits.

While it’s just one survey, it resonates with the recent September Nonfarm Payrolls Report from the Department of Labor showing historically low unemployment. So why are organizations less likely to lay off employees even if a recession strikes? “Organizations have fought so hard for every hire,” said Amy Friedrich, president of U.S. insurance solutions at Principal. “And employee loyalty is incredibly important right now—and probably always should have been. Instead, they’re looking at other ways to cut costs.”

Notable Calendar Items

Oct. 14: September Retail Sales, October Michigan Consumer Sentiment (early), August Business Inventories, and earnings from Citigroup (C), JPMorgan Chase (JPM), Wells Fargo & Co. (WFC), Morgan Stanley (MS), PNC Financial (PNC), U.S. Bancorp (USB), and UnitedHealth (UNH)

Oct. 17: October Empire State Manufacturing and earnings from Bank of America (BAC)

Oct. 18: September Industrial Production, September Capacity Utilization, and earnings from Goldman Sachs (GS), Johnson & Johnson (JNJ), Lockheed Martin (LMT), United Airlines (UAL), and Netflix (NFLX)

Oct. 19: September Housing Starts and Building Permits and earnings from Abbott Labs (ABT), Procter & Gamble (PG), Biogen (BIIB), Travelers (TRV), Tesla (TSLA), and Las Vegas Sands (LVS)

Oct. 20: September Existing Home Sales, Philadelphia Fed Index, and earnings from Alaska Air (ALK), American Airlines (AAL), AT&T (T), Dow (DOW), Whirlpool (WHR), and CSX (CSX)

Oct. 21: Earnings from American Express (AXP), Schlumberger (SLB), Nokia (NOK), Blackstone (BK), and Verizon (VZ)

Oct. 24: Earnings from Royal Philips (PHG) and Northwest Bancshares (NWBI)

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

 

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