After Surprising CPI Surge, Wall Street Awaits PPI

Keith Lansford (0:05)

Welcome to the Schwab Market Update Podcast, where we prepare you for each trading day with a recap of recent news and a look at what's ahead.

I'm Keith Landsford, and here is Schwab's early look at the markets for Thursday, October 15th. A possible October Federal Reserve rate hike jumped back into the picture yesterday on Hot Consumer Price Index, or CPI, data. Today's Producer Price Index, or PPI, could either reinforce concerns or cool them. Investors remain worried that persistent high energy costs could bleed into the core number that excludes food and energy. Those concerns showed up in Wall Street's performance yesterday, especially on the growth side, where higher yields can be oppressive. Tech was already lower even before the CPI unpleasantness, raising questions about whether buy the dip will resurface. Chip stocks fell another 4% Wednesday and entered correction territory with the PHLX Semiconductor Index, or SOX, down more than 10% from its recent high recorded just a week ago. Memory chip weakness that hit the market early this week on Chinese competition fears spread beyond that into other AI-related stocks, as rising inflation signaled by CPI-fueled concerns about debt many companies are taking on to build data centers. AI infrastructure names losing the most ground Wednesday included CoreWeave, Arm Holdings, Marvell Technology, Lumentum, Oracle and Super Microcomputer, all down about 6% or more. Worst hit was CoreWeave down double digits in yesterday's tech tank.

Chances of a rate hike later this month reached 35% late Wednesday up from 20% earlier this week according to the CME FedWatch tool. After the September CPI report showed a surprise 0.3% jump in core prices excluding food and energy. Analysts had expected an improvement to 0.2% from August's 0.3%.

Higher costs for services including shelter, airfares, and medical care kept core inflation simmering. Annual CPI numbers were no better. Headline CPI of 3.7% outpaced expectations of 3.6%, while core annual CPI of 2.6% topped 2.5% expectations. The August increases were 3.4% and 2.4% respectively, meaning the numbers are going the opposite way with the Fed wants. Core Services CPI rose 0.4% for the month. The September Core CPI print came in a bit hot, said Colin Martin at a fixed income research and strategy at the Schwab Center for Financial Research that marks the second straight 0.3% monthly increase, bringing up the three-month annualized rate of change to 3.4%. The Fed's goal is 2%.

For PPI due at 8:30 a.m. Eastern time today, analysts expect headline monthly growth of 0.5% and Core of 0.3%, both unchanged from August. Annual PPI growth is seen at 5.3% down from 5.4% in August, while Core annual PPI is expected at 4.4% down from August's 4.6%.

PPI measures wholesale prices, which can often influence what consumers pay down the road. Rising fuel costs have lifted the price of transporting goods as well as services items like airplane tickets. All of this could factor into September personal consumption expenditures or PCE prices the Fed's favorite inflation reports do later this month. The PPI report is different from CPI in part because CPI puts a higher weighting on shelter costs. That suggests the shelter element driving core CPI higher may play less of a role in today's PPI report. These weight differences put focus on PCE, which arrives October 29th. That's a day after the next Fed decision. Short-term Treasury yields jumped on CPI with a two-year Treasury note yield initially rising more than 10 basis points to 4.89 percent. Short-term yields are closely linked to Fed policy expectations, and rate hike odds for this month immediately surged after the report while stocks ran into selling. However, yields eased across the curve over the course of the day to just above 10 basis points. The trend has been unchanged for most Treasury notes, even though no fresh rate-related news crossed the wire and oil stayed 1 percent higher. This could suggest strong Treasury buying interest near current depressed levels, though one day isn't a trend. Also, investors could have been waiting to make decisions until after PPI and perhaps eyed the Fed's beige book that showed little indication of a heating economy. Housing data so far this week also has been soft. Fed Chairman Kevin Warsh participates in a discussion with the International Monetary Fund Managing Director late tonight, and it's unclear if he'll touch on policy. Still, investors might want to check headlines first thing tomorrow morning to see if Warsh made any market-moving comments. Another item on today's early deck is September retail sales at 8:30 a.m. Eastern time, almost lost in the shuffle amid so much inflation data. A sharp slowdown is expected to 0.3% monthly growth from 1.2% in August, according to briefing.com. The August surge partly reflected higher gasoline prices that month, but also strong consumer spending even away from gas stations. Core sales in August, excluding autos, gas, and a few other metrics, rose 1.4%.