Mixed Reception: Stocks, Bonds Pivot After Warm CPI Data Fail to Confirm Worst-Case Scenarios

Our chief market strategist breaks down the day's top business stories and offers insight on how they might impact your trading and investing.

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Key Takeaways

  • CPI data a little hotter than expected, but not off the charts and markets show only small response

  • Crude climbs above $89 per barrel, a new 10-month high, but U.S. supplies grew last week
  • Investors brace for Thursday’s PPI, Retail Sales, and earnings from Adobe and Lennar

(Wednesday market open) Stocks wavered and Treasury yields approached recent long-term highs early Wednesday as investors digested a slightly hotter-than-expected August Consumer Price Index (CPI) report.

August CPI rose 0.6%, in line with expectations from Wall Street, but core CPI of 0.3% outpaced the average 0.2% estimate for the month. Year-over-year core prices rose 4.3%, in line with expectations, but headline CPI climbed 3.7% in August versus the 3.6% average estimate.

Most of the CPI gains were energy-centered, which shouldn’t be a shock. Still, there’s some relief in seeing that, at least for now, higher energy costs haven’t seeped into other parts of the economy.

Treasury yields, which initially jumped on the data, pulled back slightly a few minutes later. The 10-year Treasury yield is knocking on the door of recent multi-year highs up near 4.36%, and that could be a drag on stocks if the advance continues.

Morning rush

  • The 10-year Treasury note yield (TNX) rose four basis points to 4.31% shortly after the release of CPI data.
  • The U.S. Dollar Index ($DXY) steadied at 104.63.
  • Cboe Volatility Index® (VIX) futures eased slightly to 14.09.
  • WTI Crude Oil (/CL) hit a new 10-month high above $89 per barrel this morning.

Just in

Digging a bit deeper into the CPI, there are some troubling signs of advancing inflation. The so-called “super-core” CPI, which measures core services extracting housing costs, rose 0.4% in August after a 0.2% increase in July and a flat June.

“This confirms a reacceleration,” says Kevin Gordon, senior investment strategist at the Schwab Center for Financial Research.

Still, stocks popped back from their initial weak response to the report, perhaps because the data didn’t indicate any sign of inflation running away and most of the rise was energy-related, as expected. There’d been worries that headline inflation might rise 4% or more year-over-year, and that didn’t happen. The fact that headline CPI didn’t go up near 0.8% (like the Cleveland Fed’s model was expecting) was positive. 

“The aggregate of the CPI reports are close enough to expectations that the net impact on the market today will be fairly negligible,” says Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research.

What to watch

Data parade: The hits just keep on coming. Following today’s CPI data, Thursday morning brings the August Producer Price Index (PPI) and August Retail Sales. Producer prices track wholesale costs paid by companies and can trickle into what consumers pay for the final product over time.

As we saw heading into CPI, analysts expect rising energy costs to pump up headline PPI while core PPI, which removes energy and food, is expected to grow less. In fact, analysts surveyed by Trading Economics expect core PPI to have risen just 2.2% in August, very close to the Federal Reserve’s 2% goal.

Expectations for PPI, according to Trading Economics:

  • August headline PPI: +0.4%, versus +0.3% in July.
  • August core PPI: +0.2%, versus 0.3% in July.
  • August annual headline PPI: +1.3% versus 0.8% in July.
  • August annual core PPI: +2.2% versus 2.4% in July.

Retail tracker: Consumers continued to flex their muscles the last few weeks, according to several bank executives on CNBC this week who shared generally robust views of consumer spending. This could bode well for August Retail Sales, due out tomorrow at 8:30 a.m. ET. Rising gas prices in August might also give the report a boost, but generally that’s not a positive thing. When people pay more for gas, they often cut back on other things. For instance, CNBC reported yesterday that searches on OpenTable, a restaurant reservation app, fell recently, perhaps signaling that people are eating out less.

Analysts expect Retail Sales to rise 0.2% in August, down from 0.7% in July, per Trading Economics. The July reading likely reflected a boost from Amazon’s (AMZN) Prime Day, as non-store retailers saw a nearly 2% month-over-month rise in sales that month—a hard act to follow.

But wait, there’s more: Weekly initial jobless claims, also due out before tomorrow’s open, may merit a glance after coming in at 216,000 last week, the lowest since late January. Consensus is for 226,000 this time around, according to Briefing.com, still below the recent average.

ECB up next: The Fed doesn’t meet until next week, but the European Central Bank is on the clock starting today, with a rate decision expected by tomorrow morning U.S. time. Though the ECB has raised rates at nine straight meetings, this one could be the streak-breaker, analysts say. The market expects a pause, but that doesn’t necessarily mean the ECB is done as inflation continues to simmer.

Stocks in Spotlight

Strike countdown: Ford (F), General Motors (GM), and Stellantis (STLA), the parent company of Jeep, face expiration of their contracts with the United Auto Workers (UAW) Thursday. Major work stoppages that put thousands of employees on the sidelines generally aren’t positive for the economy, so lack of progress could weigh on investor sentiment. According to recent media reports, the UAW plans to implement targeted strikes at certain plants against the Detroit automakers if tentative contracts are not reached. That plan could change based on the path of negotiations, but it seems to point to less chance of a massive, crippling strike and might be somewhat welcome news for investors.

Airlines sink: Shares of American Airlines (AAL) dove early Wednesday after the company lowered its earnings guidance in part to reflect rising fuel costs. Shares of Spirit Airlines (SAVE) also fell as the company cut its revenue forecast. It wouldn’t be surprising to see the bad news seep into the rest of the airline sector, as this is strong evidence that rising fuel prices are starting to squeeze profitability. Seeing American fall along with Spirit underscores that this isn’t just a domestic demand issue, as American has a strong international presence.

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 95%, according to the CME FedWatch Tool. That’s up from 94% yesterday. The tool pegs the probability of rates being higher after the November meeting at around 42%, about even with yesterday.

If you’re worried about rising crude oil prices and their possible impact on inflation and Fed policy, you’re not alone. The good news is that the CME futures market remains in mild backwardation, meaning prices become cheaper farther out on the calendar. That’s normal this time of year as the lower-demand season approaches.

Talking technicals: The VIX, sometimes called the market’s “fear index,” reflects very little anxiety of a major downside move over the next 30 days, notes Schwab’s Randy Frederick. The current level of VIX means the implied move of the SPX is a narrow 32 points per day, and the average actual moves over the past six weeks have been 26 points a day. The dog days of summer extended into autumn this year on Wall Street.

Continental grippe: With the ECB holding its meeting this week, now’s a good time to check on the broader European economy. Is it back in recession? Possibly, but European stocks don’t seem to reflect that, Schwab’s Chief Global Investment Strategist Jeffrey Kleintop writes in his latest article.

CHART OF THE DAY: SMOOTH SAILING: The S&P 500 Index (SPX—candlesticks) has traded at between 4,400 and 4,600 over the last two months, without much testing of the top or bottom of that rather narrow range. The lack of drama could reflect a rather low level of recent volatility, as seen in the Cboe Volatility Index (VIX—purple line). Other than a brief up-tick in August, it’s mostly traded below its long-term average and continues to indicate a narrow range for the SPX. Data sources: S&P Dow Jones Indices, Cboe. Chart source: thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Gas pains: The ECB might have an eye on energy prices as it gathers this week with winter approaching and the continent facing another cold season with limited imports of Russian natural gas. Natural gas prices have been relatively low all summer, but a fall spike like the one last year wouldn’t be a surprise. The question is whether the ECB might need to be extra careful moving the rate needle in case of falling energy supplies potentially pushing down European economic growth. At the same time, the ECB must be aware that rising energy prices could trigger additional inflation. Talk about threading the needle.

Shutdown murmurs: Congress is back with a looming deadline in less than three weeks to pass bills to fund government programs by October 1. Failure could cause government operations to shut, but it’s possible a “continuing resolution” might be engineered to keep the doors open at least until later this fall. The SPX has risen the last five shutdowns, says Michael Townsend, managing director, Legislative and Regulatory Affairs at Schwab, but “a shutdown that lasts a few weeks, as opposed to a few days, could start to impact the broader economy.”

Reversal of fortune: This year’s trading pattern turned upside down Tuesday. Instead of the “mega-caps” pulling the S&P 500® Index (SPX) higher while the other 490-odd members of the SPX languished, the mega-caps struggled but the rest of the market spent much of the day outperforming their larger brethren. Things did even out by the end of the session, but investors got a sense of how things might look if big-tech’s troubles continue. It could mean the SPX gets pulled down simply by the weight of that handful of names, skewing impressions of how the broader market is performing. Most sectors finished Tuesday either higher or clustered near unchanged, but the SPX fell nearly 0.6%, dragged by tech’s nearly 2% slide. That’s why just glancing at major index performance can be misleading.


Sept. 14: August Producer Price Index (PPI), August Retail Sales, and expected earnings from Adobe (ADBE) and Lennar (LEN).

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).


Key Takeaways

  • CPI data a little hotter than expected, but not off the charts and markets show only small response

  • Crude climbs above $89 per barrel, a new 10-month high, but U.S. supplies grew last week
  • Investors brace for Thursday’s PPI, Retail Sales, and earnings from Adobe and Lennar

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