CPI Looms After Soft Start to Week as Oil Climbs

**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 Lansford, and here is Schwab's Early Look at the Markets for Wednesday, August 12th. This week's pivotal data arrives at 8:30 a.m. Eastern Time, the government unveils July's Consumer Price Index, or CPI. Analysts expect a relatively cool report, so the market might not react well if CPI shows inflation exceeding estimates. Expectations are for a move lower relative to the prior month, but risk is to the upside and could change rate hike expectations, said Lizanne Saunders, Chief Investment Strategist at the Schwab Center for Financial Research. Consensus is for a 0.1% headline rise in July, with Core CPI up 0.2% month over month. Core extracts food and energy. On an annual basis, analysts expect 3.4% headline inflation and 2.5% Core, down from 3.5% and 2.6% a month earlier. The Core number is arguably more important since it strips out volatile energy prices. There's concern, however, that expensive gas could be filtering into other elements tracked by the report, hurting consumers, just as jobs growth appears to be lagging. Headline CPI fell 0.4% in June, but that reflected sliding gas prices at the time. In June's report, food, furniture and recreation prices rose monthly, while car insurance, apparel and medical care costs declined, the US. Bureau of Labor Statistics said. Approaching CPI, chances of a 25 basis point hike next month were exactly 50% after falling to around 40% late Friday, according to the CME FedWatch tool. Last week's soft jobs report and downward revisions to previous jobs growth could make the Fed somewhat wary about raising rates, though a hotter-than-expected CPI could put more pressure on policymakers to make a move in September, especially with midterm elections approaching in November and any further moves before then possibly caught up in political season. CPI proceeds Thursday morning's producer price index, or PPI, and parts of both reports filter into the personal consumption expenditures, or PCE price index, the Fed's favored inflation meter due later this month. CPI measures wholesale prices and it rose steeply earlier this year. This raises worries that some of those higher prices might be getting passed along to consumers, something CPI might shed light on. Consensus is for a 0.1% monthly rise in headline PPI and a 0.3% increase in core, according to briefing.com. The June numbers were negative 0.3% and positive 0.2% respectively, with total PPI up 5.5% year over year, suggesting wholesalers continue to grapple with high prices and might have passed them along to consumers. A 3-year Treasury Note Auction on Tuesday generated strong demand, briefing.com noted, but yields stayed at pre-auction levels to finish the day, down about 1 to 2 basis points across the curve in quiet action ahead of CPI. Today brings a 10-year Treasury Note Auction, followed tomorrow by an offering of 30-year bonds. Slower demand might raise concerns about higher borrowing costs, with yields already scraping long-term peaks. The recent move by Japan to protect the yen raises concerns that Tokyo might sell Treasuries to cover yen purchases. The yen has fallen again after rising slightly early last week when the US helped Japan buy yen in a rare move. Intervention by the US to support the yen has elevated concerns about the unwinding of carry trades, but also broader concerns about other central banks' holdings of Treasuries putting more upward pressure on yields, Saunders said. The carry trade refers to Japanese purchases of US assets including stocks and Treasuries. A feared unwinding of that two years ago put US stocks in a short tailspin.
On the earnings front, CoreWeave and SuperMicroComputer reported late Tuesday providing new perspective on the AI infrastructure market. Shares of CoreWeave initially jumped in post-market action on strong revenue growth. SuperMicroComputer also gained a quick 8% after the close as earnings per share topped estimates and the company raised guidance. Lumentum, an optics and laser maker, also offered a strong earnings print, but the stock barely moved initially.
Later today, features results from Cisco with AI trends likely under a microscope. Consensus is for earnings of $1.17 per share. On Tuesday, Wall Street backed into the CPI report to mark the fourth weaker close in the last five days for the S&P 500 index. Gold prices inched up but silver fell. The dollar finished flat. No progress came on the Iran front Tuesday and headlines said the US targeted a Panama-flagged vessel that tried to push through the naval blockade. US crude edged 1.6% higher to above $83 a barrel after falling toward $75 last week. There were bright spots Tuesday, including industrials and financials both ending higher. Private equity firms led a rally in financials, a sector that's risen 10 weeks in a row. An 11th would be a record, CNBC noted. Shares of KKR, Blue Owl Capital and Apollo Global Management rose. Small cap stocks bucked the downward trend Tuesday as the Russell 2000 posted 0.4% gains, a slight easing of treasury yields likely helped. All this comes with volatility muted as the SIBO VIX Fear Index remained below 16 Tuesday even with stocks trending lower. This could imply disconnect as participants don't appear eager to pay for protection. Just four of 11 S&P 500 sectors finished green Tuesday, led by defensive utilities and by oil-driven energy. Volume remains below normal but was relatively strong on the rally last week, a positive technical sign. This week's struggles came on lower than average volume, possibly a sign that there's not so much conviction heading lower. The Schwab Trading Activity Index or STACs edged up to 59.8 in July from 59.12 in June, the highest reading since early 2022 Clients remained net buyers with dip buying still a feature. Stocks on the move Tuesday included Alphabet falling 3.6% despite lack of any major news. Shares have been volatile lately and last week's sharp rally got sold as a key AI executive left the company. The communication services sector fell 2% Tuesday, mainly dragged by Alphabet.