Cool Prices, Hot Sales: Encouraging Inflation Data Buoys Stocks, But Yields Rise on Strong Retail Report

Inflation cooled on the wholesale side in October, helped by falling gas prices, but retail sales remained hotter than expected. This could mean consumers stayed healthy amid low unemployment. Treasury yields got an initial bounce from the retail sales data.
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Key Takeaways

  • October wholesale prices fall sharply due to cheaper gas, while retail sales remained lively

  • Target shares leap 14% in premarket, best day in four years, after beating earnings estimates

  • Biden to meet Xi later today with possible ramifications for trade in semiconductors, aviation

(Wednesday market open) Today’s data painted a mixed picture, with wholesale prices falling more than expected in October but retail sales surpassing Wall Street’s forecasts. Stocks initially held on to overnight gains following the numbers, but Treasuries fell and yields rose after Tuesday’s rally.

The October Producer Price Index (PPI) slid 0.5% month-over-month, versus expectations for a 0.1% increase. Core PPI, which strips out food and energy, was flat from September compared with the consensus for a 0.3% increase. On an annual basis, core PPI rose 2.9%, compared with 3% in September.

Retail sales fell 0.1% in October, surpassing expectations for a 0.3% drop. In addition, September’s number got an upward revision, all of which suggests consumers remained enthusiastic as autumn began.

“It looks like the Treasury market is reacting more to the retail sales data,” says Collin Martin, a director of fixed income strategy at the Schwab Center for Financial Research. “The retail sales control group, which feeds directly into GDP calculations, met expectations with a 0.2% rise, although September’s reading was revised up by a tenth of a percent.”

Morning rush

  • The 10-year Treasury note yield (TNX) rose 5 basis points to 4.5%.
  • The U.S. Dollar Index ($DXY) is steady at 104.2.
  • Cboe Volatility Index® (VIX) futures are nearly steady at 14.2.
  • WTI Crude Oil (/CL) fell 1% to $77.57 per barrel.

Just in

Retail Sales data this morning may have a bigger impact on the market than PPI, Schwab’s Collin Martin says. Excluding autos, they grew 0.1%, meaning sales of many everyday goods kept rising following a sizzling summer for consumers. This could reflect the healthy labor market with unemployment near historic lows.

At the same time, inflation appears to be in check, judging from PPI. The headline drop of 0.5% was dramatically lower than analysts had expected and likely reflects falling gas prices. It was the biggest monthly decline since April 2020 at the height of the COVID-19 pandemic.

CPI redux: The October Consumer Price Index (CPI) was flat month-over-month, while core CPI rose 0.2%. Analysts had expected 0.1% for headline and 0.3% for core. Core CPI of 4% annually was the lowest in more than two years and down from 4.1% in September.

Sometimes analysts describe an economic report as “Goldilocks,” meaning everything was just right. The entire market felt that way yesterday after CPI. Major stock indexes hit two-month highs, Treasury yields cooled substantially, the dollar weakened, and crude oil didn’t climb enough to raise major concerns.

Leading sectors yesterday included areas considered particularly rate-sensitive, including utilities, real estate, and the small-cap Russell 2000 (RUT), all of which wilted earlier this fall when Treasury yields touched 16-year highs.

“It feels like the technical break below 4.5% in the 10-year Treasury note yield reignited interest in rate- sensitive sectors that were thrown out previously,” says Nathan Peterson, director of derivatives analysis at Schwab. “Additionally, the RUT, the most rate-sensitive index among the majors, was the biggest gainer on Tuesday.”

“The CPI report seems to have flipped the market conversation from ‘if’ we get a rate cut to ‘when,’” says Joe Mazzola, director of trading and education at Schwab.

CME futures dial in a nearly 90% probability that rates will be lower next June than they are now, and it predicts strong chances of rates falling 100 basis points or more from current levels by the end of 2024. Still, investors have been too bullish on rate-trimming ideas in the recent past.

Another nugget of positive news occurred after the market closed yesterday when the House of Representatives passed a bill that would keep the government open past the holiday season. The Senate still must vote on the measure, but overcoming the first hurdle might take some volatility out of the picture.

What to Watch

Tête-à-tête: President Biden is scheduled to meet today with Chinese President Xi Jinping in San Francisco, and trade could be on the agenda. Reports that China might commit to buying planes from Boeing (BA) surfaced ahead of the meeting, and other trade-related headlines can’t be ruled out. Semiconductors are another topic of possible discussion considering trade restrictions have been a sticking point between the two countries.

Data monitor: We’re not out of the woods of economic data this week despite the host of numbers yesterday and today. Thursday morning brings weekly Initial Jobless Claims, a good way to take the labor market’s pulse. Analysts expect a middle-of-the-road 220,000, says, up from 217,000 the previous week and from recent eight-month lows near 200,000. Any sudden spike might fuel recession fears, especially when viewed against yesterday’s benign CPI reading and last week’s bearish consumer sentiment report.

Stocks in spotlight

Target (TGT) investors haven’t had much to cheer about this year, but today they might be feeling some holiday spirit. Shares catapulted 14% in premarket trading—the stock’s best daily performance in four years—after the retailer reported earnings per share exceeding analysts’ expectations. Revenue fell just short of the average Wall Street estimate, but same-store sales dropped less than expected. Guidance was in line with expectations. During Q3, Target saw declines in discretionary categories partially offset by continued growth in what the firm called “frequency” categories, most notably beauty products.

Walmart shares have zigged this year while Target shares zagged, rallying close to 20% and outpacing the broader market as consumers gravitated toward perceived value. Walmart’s latest earnings report debuts first thing Thursday and could set the conversation for stores that report afterward. Analysts’ consensus is for the nation’s largest discount retailer and grocery chain’s earnings to rise less than 1%, with revenues up around 4.2% from a year ago.

Retail watch list: Besides Home Depot, Target, and Walmart, more big retailers report this week, including Gap (GPS) and Macy’s (M) on Thursday. The National Retail Federation (NRF) says that 2023 annual retail sales will rise 4% over 2022 with online and nonstore sales up between 7% and 9%.

“We are continuing to see a disconnect between solid consumer spending and weak consumer confidence,” the NRF said in a press release.

Another key report to watch is Cisco (CSCO) after the close. The networking, cloud, and cybersecurity company is one many watch closely as a barometer of business spending trends. Cisco enjoyed strong growth last spring and early summer, including a double-digit jump in sequential orders. Still, it disappointed with cautious guidance, so it’ll be interesting to see whether that changes today.

Eye on the Fed

Early today, futures trading pegged chances at 99% of the Federal Open Market Committee (FOMC) holding its benchmark funds rate steady following the December 12–13 meeting, according to the CME FedWatch Tool. Chances of rates staying on pause following the FOMC’s January 30–31 meeting are 98%.

Depth charge: Like some advances earlier this year, the market’s current surge hasn’t been defined by strong breadth underneath the surface, say Liz Ann Sonders and Kevin Gordon, chief investment strategist and senior investment strategist at Schwab. Learn more about why strong breadth will be key for a durable and sustained market advance in their latest article.

CHART OF THE DAY: REBOUNDING. While just about everything had a nice day Tuesday following CPI, it’s encouraging for bulls to see that the Dow Jones Transportation Average ($DJT—candlesticks) and the Russell 2000 Index (RUT—purple line) enjoyed rebounds. Both are sensitive to the economic cycle, and small caps are particularly influenced by rates. Data sources: FTSE Russell, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Fly in the honey: Not everything about yesterday’s CPI was bullish, by the way. Most notably, the three-month average core CPI reading ticked up, mainly because it no longer included July’s light monthly rise. “The past three months now include gains of 0.28%, 0.32%, and 0.23% ... July was a gain of 0.16%,” says Kevin Gordon, senior investment strategist at Schwab. The three-month average is now 0.276%, versus 0.253% before Tuesday. Of course, in a couple months that 0.32% from September will go off the books, perhaps causing the three-month average to decline even if the monthly figure is higher than expected. Generally, it’s better to monitor three-month increments, even with core inflation, as any single month could have some sort of discrepancy and the longer string often smooths those out.

As retailers report: While quarterly numbers matter, the tone of big box earnings conference calls arguably matters more, especially with Black Friday and Cyber Monday ahead. Questions to ponder include whether demand for big-ticket items is returning and how much pricing power stores have after several years of inflation. Another watch item is transactions per ticket. People might be coming to stores as much as they used to but buying fewer or cheaper items if they’re worried about unemployment or credit card debt. Student loan payments are another potential factor. Value-oriented chains could benefit if people decide to seek discounts as payments resumed this fall.

Steaks are high: Inflation’s incremental but ongoing retreat this year has been good news for most, but some people may not be turning cartwheels: beef lovers and Tyson Foods (TSN) shareholders. Tyson, the largest U.S. meat processor, reported a net quarterly loss of $450 million and disappointing revenue, in part reflecting struggles in its beef operations. Extended drought in the primary cattle-feeding states of the U.S. Plains has shrunk the nation’s herd near record lows and pushed the prices meatpackers pay for cattle to record highs. Also, beef demand fell as consumers shied away from pricey steaks and chops in favor of cheaper chicken and pork. Tyson estimates its beef operations would break even at best in fiscal 2024, or possibly lose as much as $400 million. For carnivorous consumers, it’s a mixed picture. The CPI for food consumed at home (reflecting grocery store prices) rose just 2.1% in October from a year ago, about half the rate of overall inflation. However, beef and veal prices climbed 8.9%. And with cattle futures for 2024 trading near record highs, it looks like consumers can expect to continue to fork over a premium for next summer’s cookouts.


Nov. 16: October Industrial Production and October Capacity Utilization, and expected earnings from Walmart (WMT), Macy’s (M), Applied Materials (AMAT), and Gap (GPS).

Nov. 17: October Housing Starts and Building Permits.

Nov. 20: October Leading Indicators and expected earnings from Zoom (ZM).

Nov. 21: Expected earnings from Nvidia (NVDA), Dick’s Sporting Goods (DKS), Lowe’s (LOW), Autodesk (ADSK), HP Inc. (HPQ), Medtronic (MDT), Kohl’s (KSS), and October Existing Home Sales.

Nov. 22: October Durable Goods, October Durable Orders, Final November Consumer Sentiment from the University of Michigan, and expected earnings from Deere (DE).

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

Charles Schwab & Co., Inc. (“Schwab”) and TD Ameritrade, Inc., members SIPC are separate but affiliated subsidiaries of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank.


Key Takeaways

  • October wholesale prices fall sharply due to cheaper gas, while retail sales remained lively

  • Target shares leap 14% in premarket, best day in four years, after beating earnings estimates

  • Biden to meet Xi later today with possible ramifications for trade in semiconductors, aviation

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