Stocks pivoted early Thursday after PPI data suggested U.S. wholesale prices cooled slightly last month. This follows yesterday's hot consumer price report that slammed stocks and sent Treasury yields spinning much higher. Tomorrow brings the unofficial start of earnings season as three major banks report.
Both headline and core PPI rose 0.2%, versus analysts’ expectations of 0.3% and 0.2%, respectively
Three of the biggest U.S. banks report early Friday after strong quarter for shares
Consumer sentiment data Friday could be dampened by rising gas prices
(Thursday market open) U.S. wholesale prices cooled slightly last month in contrast to hot consumer prices, according to the government’s March Producer Price Index (PPI) report Thursday. Major U.S. indexes pivoted from early losses ahead of the open as investors digested the data, which wasn’t as straightforward as the initial headlines indicated.
Both headline and core PPI rose 0.2%, versus analysts’ expectations of 0.3% and 0.2%, respectively. The 0.2% rise in PPI was the lowest monthly growth since December and down from 0.6% in February. However, on a year-over-year basis, core PPI growth of 2.4% in March was above the consensus 2.3% estimate. Headline PPI rose 2.1% in March, the most since April 2023.
The PPI report came one day after U.S. stocks plunged and Treasury yields skyrocketed on a stronger-than-expected March Consumer Price Index (CPI) showing monthly gains of 0.4% for headline and core CPI, above analysts’ expectations for the third month in a row. The CPI data pushed down probabilities of a June Federal Reserve rate cut below 20%, from above 50% prior to the CPI release.
Treasury yields initially moved little on the news, as the 10-year yield stayed well above 4.5% at five-month highs.
“The slightly cooler than expected PPI readings should bode well for PCE,” said Cooper Howard, a director of fixed income strategy at the Schwab Center for Financial Research. He was referring to the Personal Consumption Expenditures (PCE) prices report due later this month, the Fed’s favored inflation meter.
As the market grapples with inflation data, investors prepare for earnings season. JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) all report Friday morning. One thing to watch is whether they put aside more money to protect against possible bad debt and how the current rate structure affects their businesses. For more color, check this Schwab sector preview.
Futures based on the S&P 500® index (SPX) rose 0.06% shortly before the close of overnight trading and futures based on the Nasdaq-100® (NDX) climbed 0.2%. Futures based on the Dow Jones Industrial Average® ($DJI) increased 0.04%.
March PPI showed the trend toward services-fueled inflation continued, rising 0.3%. Rising financial services costs played a role
“Services were the main culprit for the gains,” Schwab’s Howard said.
Goods inflation actually fell 0.1% in March after a 1.2% rise the previous month. However, the drop in goods costs was fueled by lower gasoline prices, which have been on the rise more recently. Other price declines occurred for chicken eggs, fresh fruit, and carbon steel scrap.
Producer prices are what companies pay on the wholesale market. Often, wholesale prices help determine how much people ultimately pay for products, but it can take time to translate. Producer price growth has generally tracked below consumer price growth recently, leading to hopes that eventually they could help cool off CPI.
Besides PPI, this morning brought fresh weekly Jobless Claims data fell to 211,000 from 218,000 the prior week, still near historic lows and indicating a healthy labor market. Continuing claims of 1.817 million rose from 1.789 million the previous week.
Also, the European Central Bank (ECB) met today. Analysts are focused more on the ECB’s June meeting, with expectations rising for a possible rate cut at that time. Probably to no one’s surprise, the ECB held the line on rates this morning. In its statement, the ECB noted that inflation has continued to fall and most measures of underlying inflation are easing.
Speaking of central banks, the Fed’s March meeting minutes released late yesterday dampened investor spirits, reflecting officials’ concerns that inflation isn’t moving quickly enough toward the Fed’s 2% target.
For the year, investors appear to be gathering around the idea of one or possibly two Fed rate cuts potentially starting in July, according to the CME FedWatch Tool. The year began with the market anticipating six to seven. Increasingly popular is the notion that the Fed will follow its 1994–1995 rate cut playbook, trimming interest rates once or twice in a “nip and tuck” adjustment. With the Fed’s favored Personal Consumption Expenditures (PCE) prices core inflation reading below 4%, central bankers could still make the argument that the Fed’s current target range of 5.25% to 5.5% looks a bit high for circumstances.
Fewer rate cuts aren’t what investors entered the year hoping for, but a robust U.S. economy appears to make the Fed’s target range somewhat palatable from a market perspective. Even with yesterday’s 1% sell-off, major indexes aren’t far from recent all-time highs.
“The door for a June rate cut is closing fast, and the median projection of three cuts this year from the March dot plot now seems unrealistic,” said Collin Martin, a director of fixed income strategy at the Schwab Center for Financial Research. “The higher for longer theme by the Fed means all Treasury yields may remain higher for longer as well.”
Data-wise, we’re past most of this week’s key numbers, though University of Michigan preliminary April Consumer Sentiment comes in after the open tomorrow. It wouldn’t be surprising to see sentiment clipped by higher gas prices, which recently reached a national average of $3.60 per gallon, according to government data.
Separate ways: Wall Street’s reaction to yesterday’s hot CPI data depends on which sector you watch. Not surprisingly, yield-sensitive areas like utilities, real estate, and home builders suffered heavy selling amid fears borrowing costs could remain higher for longer. Higher rates for longer would potentially hurt the market’s breadth in which cyclical sectors like energy, industrials, and materials made strides in recent months. The improved breadth coincided with a period of lower Treasury yields and hopes for Fed rate cuts often associated with an accelerating economy that would tend to help cyclicals and small caps.
But big tech, including Nvidia (NVDA) and Meta Platforms (META), saw buyers swoop in, perhaps a sign that in difficult times, investors seek shelter in the heavyweights. Higher yields tend to slow economic growth, hurting so-called growth and cyclical stocks. Eli Lilly (LLY), a health stock that’s in the top-10 companies by market capitalization, also gained ground early Wednesday. So did large insurers, which benefit from higher yields on their holdings. Keep an eye on mega caps today to see if this type of defensive action continues.
Constellation Brands (STZ), distributor of Corona beer and other alcoholic beverages, and CarMax (KMX) both reported today, and Constellation shares jumped nearly 3% after the company said its free cash flow exceeded guidance. Beer sales stayed strong as net sales grew 11% in Q4, Constellation said in its release. However, the wine and spirits business remains under pressure and net sales fell 6% in the quarter. “Unfavorable marketplace dynamics continue to pressure volumes,” the company said.
Wednesday in review:
The $DJI sank near a two-month low Wednesday following the CPI data while the 10-year Treasury note yield surged to a five-month high above 4.56%. Interest-rate-sensitive sectors like banks, real estate, and utilities led Wednesday’s decliners. The KBW Regional Bank Index (KRX) tumbled 5% to its lowest point since late November. The small-cap Russell 2000® Index (RUT) lost 2.5%. Energy shares were among the few gainers as WTI Crude Oil (/CL) futures rebounded after three-straight losing sessions.
Talking technicals: From a technical perspective, yesterday’s selling put major indexes on shakier ground. The SPX closed below the 20-day moving average for the second time in a week. It hadn’t closed under that upward trend line on the charts, now near 5,200, since mid-January.
Early today, futures traders saw 97% odds the Federal Open Market Committee (FOMC) will keep rates unchanged following its April 30 to May 1 meeting, based on the CME FedWatch Tool. Chances of a quarter-point rate cut following the FOMC meeting in June are seen at around 18%, rising to roughly 42% for the late-July meeting.
Ideas to mull as you trade or invest
Dollar revisits November: U.S. Treasury note yields hogged the headlines yesterday following CPI, while the dollar’s rally received less notice. The U.S. Dollar Index enjoyed its strongest daily rally of 2024 to close at a new high for the year of 105.17, a nearly five-month peak and at the high end of the long-term range between 100 and 105. The rally briefly sent the dollar to its highest level versus the Japanese yen since 1990. The dollar descended to just above 100 around New Year’s Eve as investors projected six to seven Fed rate cuts. The dollar’s rally since then reflects the Fed’s perceived tighter rate path as the economy stays solid, and could hurt sales for U.S. multinationals that rely on exports for revenue. The positive side is that a stronger dollar often keeps crude oil prices in check, but those are also at five-month highs thanks to geopolitics.
Bank watch: A major element of tomorrow’s and next week’s big bank earnings reports is what executives tell analysts on their calls. Some things to listen for include insight into the following topics:
Getting productive: Yesterday’ sticky U.S. inflation print sent yields soaring and stocks stumbling, but there’s optimism in some quarters that productivity growth could eventually clip inflation’s wings without the economy necessarily having to slow. “I think productivity has already started to show signs of a major growth cycle,” said Dr. Ed Yardeni, president of Yardeni Research, in a Schwab OnInvesting podcast last week. “It started in 2015, actually. We bottomed out at 0.5% at an annual rate … but we’re up around 2%. We had a really good year on productivity last year. And I think we’re going to go up to 3.5% to 4.5% ... I think productivity is going to make a big comeback and we’re going to see the consumers have more real income because that’s what happens you have productivity. It keeps inflation down, everything.”
April 12: University of Michigan preliminary April Sentiment, and expected earnings from JPMorgan Chase (JPM), Wells Fargo (WFC), BlackRock (BLK), and Citigroup (C).
April 15: March Retail Sales and expected earnings from Goldman Sachs (GS).
April 16: March Housing Starts and Building Permits and expected earnings from UnitedHealth (UNH), Johnson & Johnson (JNJ), Morgan Stanley (MS), and Bank of America (BAC).
April 17: Expected earnings from Abbott Labs (ABT), ASML (ASML), Travelers (TVR), U.S. Bancorp (USB), and Alcoa (AA).
April 18: March Existing Home Sales, March Leading Economic Indicators, and expected earnings from Alaska Air (ALK), Marsh McLennan (MMC), and Netflix (NFLX).
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