Fed Minutes, 10-Year Auction Next After New Highs

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, October 7 With earnings and data sparse again today, attention turns toward minutes from the last Federal Reserve meeting and a 10-year Treasury Note Auction, both this afternoon. Morning could see the market blown around by winds from oil and yields, similar to action earlier this week. Major indexes trade at or near all-time highs, despite Treasury yields swimming near two-decade peaks. The yield rally partly reflects oil, but that looks secondary for the moment, as crude traded near one-month lows Tuesday on improved exports out of the Middle East and product releases by Europe. That doesn't mean oil is out of the woods, and prices did rise yesterday on reports of Iranian attacks on ships in the Strait. With crude increasingly decoupling from oil, yields reflect heavy corporate borrowing, rate hikes and rising government debt globally. A $58 billion three-year Treasury Note auction Tuesday saw decent domestic demand, but soft interest from international buyers, briefing.com noted. The Treasury Market calmed even before that on support from a rebound in French bonds and an early decline in crude prices. Equities appeared to benefit as yields dropped about four basis points across the curve Tuesday. Today's 10-year Note auction, with results due before the close, could have even more impact with its focus on long-term yields and possible term premium demand. Term premium is the extra compensation often provided by longer-term notes in return for investors taking extended risk. Although higher yields result in near-term negative price performance, they have historically been a positive for longer-term bond investors, said Cooper Howard, Director of Fixed Income Research and Strategy at the Schwab Center for Financial Research.

Minutes from last month's Fed meeting arrive at 2 p.m. Eastern time. They could help investors understand the rate hike decision and what might make the Fed more or less likely to repeat that later this month. The hike vote was unanimous, but discussion in the minutes could hint at how eager some policymakers were to tighten the screws more. The Fed's summary of economic projections included a dot plot of where policymakers expect rates to be by the end of the year, and the average was 4.1 percent, implying one more hike. That said, four policymakers expected two more hikes this year, only two saw no more in 2026 Chances of an October hike were 19 percent late Tuesday, according to the CME FedWatch tool. The recent dramatic yield rally appeared to spook the corporate credit market, with high yield spreads generally rising. If persistent, this can drag corporate profit growth. The credit situation, if it worsens, could hurt smaller firms, something banks might discuss when they report next week. Big banks approach next week with the sector under pressure. Most are seen reporting annual earnings and revenue gains, though it could also be interesting to check loan loss provisions to see if they're bulking up safety measures as yields climb. I'll be looking for any signs of credit stress in banks' forward guidance, said Alex Coffey, Senior Trading and Derivative Strategist at Schwab. PepsiCo reports tomorrow morning, followed by Delta Airlines on Friday. Both face pressure from lofty crude, though airlines might benefit from potential strong demand trends sparked by better-off consumers and surging business travel. Data was thinned Tuesday, but included an update of the Atlanta Fed's GDP Now estimate for the third quarter gross domestic product, or GDP. The estimate stayed at 3.7 percent. Most analysts see third quarter GDP rising between 2 and 3 percent on a seasonally adjusted annual basis. Tomorrow morning brings weekly initial jobless claims with briefing.com consensus at a low 200,000. University of Michigan preliminary consumer sentiment data arrives early Friday.

On Wall Street, major indexes finished broadly higher Tuesday with the Small Cap Russell 2000 bucking the trend and declining. The S&P 500 index hit a new peak for the first time in nearly two months and posted its first close above 7,800, helped by a broadening rally embracing most sectors as earnings excitement built. For the second straight session, 10 of 11 S&P sectors rose. Health care lagged on biotech weakness while utilities led. The AI built out is raising demand for energy including on the nuclear side. Cyclical sectors like financials and discretionary showed life despite yields. If yields on the 10-year resume their upward bias and notch fresh cycle highs again, this could keep a lid on stocks that as long as the 10-year just stabilizes and oil prices stabilize, this is good enough for the bulls at least from a trading perspective, said Nathan Peterson, Director of Derivative Research and Strategy at the Schwab Center for Financial Research. Schwab clients grew modestly more bullish in September, but favored diversified exposure over individual stocks. The Schwab Trading Activity Index or Stacks rose 2.47% to 58.92, reversing August's 3.85% decline. Exchange traded fund buying broadened, options activity remained constructive, and clients generally bought pullbacks while trimming recent winners. Checking individual performers Tuesday, Constellation Energy climbed 12% after signing a large deal with Alphabet's Google to provide 3,590 megawatts of power, including a nuclear energy component, Reuters reported. Advanced microdevices rose almost 3% as Citigroup raised its price target to $800 from $575 per share and kept its buy rating. Citigroup hiked its central processing unit's total addressable market in 2030 to $300 billion, following the launch of several AI agents. Vistra, another power firm, rose nearly 11%.