Full Plate: Lots To Digest As Investors Process Stronger-than-Expected PPI, Mixed Retail Sales

(Thursday market open) A host of fresh economic data early Thursday showed the U.S. consumer and labor market remain in relatively good health, but wholesale inflation is ticking up a bit more than expected. The calculus isn’t likely to affect next week’s interest-rate decision by the Federal Reserve, but it could have an impact on the Fed’s November meeting.

The headline Producer Price Index (PPI) for August rose a stronger-than-expected 0.7%. Analysts had estimated 0.6%. The increase was mostly driven by rising gas prices, and core PPI, which strips out food and energy, rose just 0.2%—in line with Wall Street’s expectations and down from a revised 0.4% climb in July.

Retail Sales for August and weekly initial jobless claims looked robust, and the European Central Bank (ECB) raised rates even as China instituted further stimulus. It’s a busy morning, and U.S. stock indexes initially maintained overnight gains following the data. The U.S. 10-year Treasury note yield also looked stable.

On Wall Street yesterday, the S&P 500® Index (SPX) clawed back some of Tuesday’s losses and got back into the green for the week despite a warmer-than-expected August monthly core Consumer Price Index (CPI) reading. The defensive utilities sector led gains, but “risk-on” sectors like consumer discretionary, communication services, and tech followed closely.

The 10-year Treasury note yield remained below 4.3% after an early peek above that level, possibly helping growth sectors. Watch the 4.3% mark, which appeared to be an inflection point yesterday for stocks. And crude oil is knocking on the door of $90 per barrel.

Morning rush

• The 10-year Treasury note yield (TNX) is up 2 basis points at 4.27%, not changed much from before PPI.
• The U.S. Dollar Index ($DXY) jumped back above 105.
• Cboe Volatility Index® (VIX) futures eased to 13.35, near recent lows.
• WTI Crude Oil (/CL) climbed to a new 10-month high of $89.96 per barrel.

Just in

The higher-than-expected headline PPI number might play into expectations for the Fed’s November meeting, though so far there’s no sign of headline inflation leaking into the core rate. Still, chances of a November increase in rates remain below 40%, futures trading suggests.

Today’s Retail Sales data came in firmer than expected with a 0.6% rise, following a downwardly revised 0.5% increase in July. The increase was also 0.6% with autos not included. In one sign of possible weakness, however, a “control group” that excludes auto sales, food services, gas, and building materials saw sales rise just 0.1% in August. This figure plays into the government’s Gross Domestic Product (GDP) calculation.

Initial unemployment claims for the most recent week came in at 220,000, below expectations but slightly above last week’s seven-month low.

Earlier this week, analysts expected the European Central Bank (ECB) to pause rate hikes. But today the ECB increased rates by 25 basis points, making it the 10th consecutive rate hike. In its statement, the ECB said that though inflation is falling, it still expected it to remain too high for too long. The ECB predicts 5.6% Eurozone inflation this year followed by 3.2% in 2024. Those are upward revisions to its previous estimates, mainly due to higher energy prices.

However, the ECB indicated in its statement that it may be done raising rates: “Key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.”

China’s central bank was also active today, announcing that the reserve requirement for banks will drop by 25 basis points tomorrow. This is another stimulus measure that follows several other steps the Chinese government has taken in the last few months to boost its economy.

What to watch

Data tomorrow can’t compete with the inflation and Retail Sales that captured attention yesterday and today. Still, several reports could be worth a glance prior to heading out for the weekend.

Industrial Production and Capacity Utilization for August is due at 8:30 a.m. ET tomorrow and analysts expect a pullback in production growth to 0.2% from July’s 1%, according to Briefing.com consensus. In terms of utilization, hot temperatures might have caused utilities to raise their output, but the manufacturing component of utilization is more relevant to the long-term economic picture. It rose to 77.8% in July from 77.5% in June, still below levels seen last spring. Another rise in capacity utilization might be viewed as bullish for industrial stocks, especially following a better- than-expected August Institute for Supply Management (ISM) Manufacturing Index reading last week.

Consumer check: Friday also brings the preliminary Consumer Sentiment report from the University of Michigan for September, with headline consensus seen at 69.4. That’s down just a touch from 69.5 in August and above levels generally seen earlier this year. The August final report saw inflation expectations rise to 3.5% from 3.4% in July, and September’s inflation data could reflect the impact of higher gas prices.

Stocks in Spotlight

Adobe ADBE presents its earnings results this afternoon. Last time out, it raised guidance—and shares recently set a new 2023 high. However, they took a beating Tuesday as a weak outlook from Oracle ORCL torched tech. Adobe’s main product is software used in business applications, so its earnings can be a barometer of broader corporate health. It’s also among the growing list of companies possibly benefiting from artificial intelligence (AI), so that aspect is likely to get a close look. Still, Oracle’s steep drop after a mostly in-line earnings report could signal caution. Investors keep punishing tech companies that don’t deliver what they consider to be rock-solid forecasts.

Clock (and UAW) strikes at midnight: Ford F, General Motors GM, and Stellantis STLA, the parent company of Jeep, face expiration of their contracts with the United Auto Workers (UAW) just before midnight tonight. The UAW plans to implement targeted strikes at certain plants against the Detroit automakers if tentative contracts are not reached. If the strike begins, it’s likely to have a psychological impact on the broader market, but maybe not an immediate economic one. There was no progress in negotiations overnight, media reports say.

Home cooking: Though key housing data aren’t due until August Housing Starts and Building Permits next Tuesday, results from homebuilder Lennar LEN late Thursday could lend insight. Weekly mortgage applications recently hit lows last seen during the first Clinton administration as high rates kept many from moving. Still, new home sales had a sparking July, rising 4.4% from the month before and 31.5% year-over-year. That suggests healthy times for both Lennar and competitor KB Home KBH, scheduled to report next week. And homebuilding stocks are generally holding up well, notes Schwab Senior Investment Strategist Kevin Gordon.

Eye on the Fed

As of this morning, the probability that the Federal Open Market Committee (FOMC) will maintain current rates after its September 19–20 meeting is 97%, according to the CME FedWatch Tool. The tool pegs the probability of rates being higher after the November meeting at around 38%. 

Thinking cap

Ideas to mull as you trade or invest

Monitor the monitors: It’s the time of the quarter when Wall Street analysts and companies tend to adjust earnings estimates ahead of reporting season. Their accumulated thinking gets picked up each Friday in FactSet’s weekly round-up. Last week, FactSet pegged Q3 S&P 500 earnings growth at 0.5% year-over-year, up from flat on June 30. A couple of highly correlated macroeconomic metrics could affect analysts’ thinking with earnings a month out. They include the benchmark 10-year Treasury note yield and the ISM’s monthly read on U.S. manufacturing. “If the former can stabilize or retreat off their highs and/or the uptick in ISM-Manufacturing has legs, estimates should firm up,” writes Liz Ann Sonders, chief investment strategist at Schwab.

Changing times? The services realm of the economy has thrived over the last year, but American Airlines’ guidance cut yesterday was a shot across the bow ahead of earnings season not just for the company, but for services in general. The rising cost of energy, tighter credit, and the resumption of student loan repayments all could threaten restaurants, airlines, hotels, casinos, and other consumer-oriented businesses. Data this week showed signs of restaurant demand falling, for instance. “The pre-announcement season is coming up and with the global service sector deteriorating sharply there could be some bad news from the formerly healthy service sector as it relates to the quarterly results,” says Jeffrey Kleintop, chief global investment strategist at Schwab. Darden Restaurants (DRI) reports late next week and might offer some perspective on dining out.

Shiny object: The biggest initial public offering (IPO) in several years is expected to begin trading today as shares of semiconductor chip designer Arm Holdings debut. Investors might want to take extra care jumping in, as they would with any IPO. Despite all the hype, these investments are far from sure things. The 10 biggest U.S. IPOs of the last four years are down an average of 47% from the closing price on their first day of trading, Reuters reported earlier this week, citing London Stock Exchange Group (LSEG) data. That said, an improving IPO market might aid the fortunes of large U.S. investment banks, whose shares have suffered lately from the lack of such activity amid elevated inflation and interest rates.

Calendar

Sept. 15: August Import and Export Prices, September Empire State Manufacturing, August Industrial Production, and Preliminary September University of Michigan Consumer Sentiment.

Sept. 18: No major earnings or economic data.

Sept. 19: August Housing Starts and Building Permits and expected earnings from AutoZone (AZO).

Sept. 20: FOMC decision and expected earnings from General Mills (GIS), KB Home (KBH), and FedEx (FDX).

Sept. 21: August Existing Home Sales, August Leading Indicators, and expected earnings from Darden Restaurants (DRI).

 

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

 

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