Treasury Auctions Next After New Highs for Nasdaq

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 Tuesday, October 6th. The battle between lower oil and strong treasury yields began this week, but stocks seemed to be paying less attention. Where yields go next could depend partly on treasury auctions in coming days, Federal Reserve minutes tomorrow, and next week's inflation data. Investors got a preview of September inflation in the ISM's manufacturing and non-manufacturing data released last week and Monday respectively. Prices paved, the key metric jumped in the Services Report Monday, while headline growth expanded but less than August's pace, possibly a sign that prices might be taking a toll. These reports feed into next week's September Producer Price Index or PPI, and the September Personal Consumption Expenditures or PCE Prices Index later this month, helping the Fed navigate after last month's hike. A Fed update is due Wednesday afternoon with the release of minutes from last month's meeting. The minutes will provide details of policymakers' discussion and could help investors understand the decision and what might make the Fed more or less likely to follow with another hike later this month. Chances of an October hike sank appreciably to around 24 percent by late Monday from 70 percent a week ago, thanks to Friday's soft jobs data and a light August PCE. However, Treasury yields only seemed to climb, rebounding quickly from Friday's jobs report-related dive and forging new 24-year highs Monday above 5.33 percent for the 10-year note. Yields partly reflect pricey oil, but that relationship appears to be decoupling. Crude dropped almost 2 percent Monday on signs of improving flows out of the Gulf and Europe's decision to release diesel supplies.

Rising yields, which seem to help mega cap stocks lately as investors look for strong earnings growth, the blunt rising borrowing costs reflect many factors. One is strong economic growth. The US government raised its final second quarter gross domestic product or GDP estimate to 2.2 percent on a seasonally adjusted annual basis last week from 1.5 percent. The Atlanta Fed updates its GDP Now indicator tomorrow, with third quarter growth now seen at 3.7 percent. Other factors include rising overseas yields, heavy corporate debt issuance, and rising US and international deficits. Treasury auctions this week, including a three-year note today and a ten-year note tomorrow, could provide insight into US debt demand. Results will be available each afternoon. A few well-received auctions last month did nothing to slow the yield rally, and a more recent set sought lethargic demand. Another challenge for treasuries is declining foreign interest in US debt, possibly due to rising yields overseas and surging US deficits. China's holdings of US treasuries recently fell to the lowest level since 2008, according to government data.

In a metric that might work against the yield rally, the US dollar index reached its highest point since early last year Monday above 102 This came as the euro weakened on concerns over French debt and pressure on that country's banking system. A snap election in Spain hurt the euro as well. Theoretically, a rising dollar tends to cool yields, so that relationship is worth tracking. Investors await monthly revenue numbers this week from Taiwan Semiconductor Manufacturing, typically issued early each month from the world's largest chip manufacturer. Another corporate item to track is any potential pre-earnings guidance changes from major firms, which sometimes pop up in the last days before earnings season unofficially begins. Facts at Peg's 3rd quarter S&P 500 earnings growth at 29.5%, down from close to 50% in the 2nd quarter, but well above historic norms. Infotech earnings growth is seen at 65%, while 7 of 11 S&P 500 sectors are seen with annual earnings growth of 14% or less. Cyclical sectors like discretionary and financials march near the rear.

While most investors think of earnings season starting with next Tuesday's big bank results, PepsiCo and Delta Airlines later this week offer insight into consumers grappling with high gas prices and borrowing costs. Airlines may be shielded to a degree because their demand tends to come from better off consumers enjoying stock portfolio growth and by strong corporate earnings underpinning business travel. Still, expensive oil has transport stocks under pressure. The Dow Jones transportation average is down nearly 20% from its April peak.

Staples firms are also struggling down about 4% over the last three months. At PepsiCo, chip sales, in this case, corn chips, not semiconductor chips, suffered in the second quarter as consumers tightened their belts due to gas costs, the company said then in a report that disappointed Wall Street. On Wall Street Monday, major indexes hummed right along despite hotter yields. The Nasdaq closed at all-time highs, and even the small cap Russell 2000 index, hurt by rates recently made up ground. Still, major indexes saw pressure in the final hour and finished off their intraday peaks, a common theme lately. Materials led the way on gains in copper and silver, helped by strong demand possibly driven by the AI build-out. That showed up in industrials and energy too. Companies like Nucor, Cleveland Cliffs, Alcoa and Constellation Energy emerged from the gate quickly. Ten of 11 S&P sectors rose. Tech shares climbed but finished well behind the lead pack, as the PHLX Semiconductor Index or SOX posted just 0.2 percent gains. This was despite NVIDIA setting new all-time highs. Last week's strong micron results appeared to have investors bullish ahead of earnings season after a tough September, and the SOX is up almost 20 percent from late July lows. Market breadth hasn't recovered much, however, still showing top-happiness. While the S&P 500 Index sits near all-time highs, fewer than half of its members were above the 200-day moving averages as of Friday. This disparity is also evident from a sector view. Decliners outpaced advanceors last week by a one-and-a-half-to-one margin. Checking other individual performers Monday, Cerebris rose 9 percent following a post by OpenAI CEO Sam Altman who called Cerebris a close partner. This came after a research firm said OpenAI was using NVIDIA chips, not Cerebris hardware, in its latest AI model, Barron's reported. SpaceX gained another 7 percent after several successful rocket launches and as Morgan Stanley maintained its overweight rating. Lennar slipped almost 7 percent and other home builders also fell on rising yields. Autodesk rose 4 percent on news that French firm Schneider Electric was buying Autodesk rival PTC for $22.6 billion, according to Reuters. The valuation of the deal was considered low due to worries about AI's impact on software companies. Schneider builds equipment used in data centers. PTC shares jumped 34 percent and software general did well. Vistra rose 3 percent after the US. Department of Energy approved a $4 billion federal loan package that will help the company upgrade three nuclear plants, Yahoo Finance reported. And Intel slid nearly 3 percent, hurt by Tesla CEO Elon Musk's announcement that he's had discussions with Intel's rival chipmaker, Taiwan Semiconductor Manufacturing, about a collaboration on a chip project in Texas. Taiwan Semiconductor shares rose 2.7 percent.