Equities Shrug Off Hot CPI on Cool PPI: Oct. 11, 2024

Stocks are extending their winning streak to a fifth-consecutive week as benign economic data and positive earnings reports from financial institutions bolster investor sentiment. News of the Producer Price Index and UMich’s Consumer Sentiment arriving beneath expectations offset some of the sourness from yesterday’s hot Consumer Price Index report. Fixed income is a different story though, ladies and gentlemen, with bonds on track for their third-straight week of losses due to concerns that persistent deficit spending could generate a fresh inflationary impulse. Rates traders are indeed bumping up volatility levels, term premiums and price pressure projections as a result.

Wholesale Prices Stabilize

The Producer Price Index (PPI) was flat in September and down by 0.2% from the preceding month’s result while also being south of the median analyst projection of 0.1%. On a year-over-year (y/y) basis, the index advanced 1.8% compared to 1.9% in August and the expected 1.6% rate. Meanwhile, the month-over-month (m/m) Core PPI, which excludes volatile food and energy, rose 0.2%, in-line with estimates and 0.1% lighter than the prior period. For the y/y figure, it climbed 2.8%, exceeding the forecast and the previous month’s pace by 0.1% and 0.2%, respectively.

Within the headline PPI, overall goods declined 0.2% m/m compared to no change in August, but the softness was driven primarily by energy sinking 2.7% and more specifically, gasoline retreating 5.6%. The foods component, however, climbed 1.0%. Within this category, processed poultry jumped 8.8%. Wholesalers also charged more for electric power and motor vehicles.

The services industry continued to demonstrate sticky inflation but slackened 0.2% from the 0.4% m/m gain in August. Transportation and warehousing led with a 0.3% hike followed by a 0.2% escalation for trade. Other services saw charges rise 0.1% during the period.

Inflation and Election Uncertainty Ding Sentiment

After climbing in September to its highest level since the spring, the University of Michigan Survey of Consumer Sentiment weakened this month, with respondents citing persistently higher prices and uncertainty about the upcoming presidential election as headwinds to optimism. The university reported a score of 68.9, a descent from last month’s 70.1 reading and below the anticipated 70.8 result. Within the report, the current economic conditions gauge and consumer expectations category weakened from 63.3 to 62.7 and 74.4 to 72.9, respectively. Inflation expectations were mixed with the one-year outlook up from 2.7% to 2.9% while the five-year outlook moderated from 3.1% to 3.0%.

On a positive note, negative views of high mortgage rates sunk to the lowest level in 15 months and conditions for buying durable goods improved, but more than half of respondents believe financing is still too expensive. Only 31% of consumers expect unemployment to head north in the coming year, a 10-month low.

JPMorgan Chase’s Dimon Issues Sober Warning

Consumers aren’t alone in expressing economic concerns, with JPMorgan Chase CEO Jamie Dimon telling investors this morning that “Conditions are treacherous and getting worse.” Dimon, who has previously warned that growing Middle East hostilities, US-Chinese tensions, the Russia-Ukraine war and Iran’s nuclear capabilities are serious threats to the economy, said significant human suffering and geopolitics don’t bode well for the near term. This morning, he also cited large fiscal deficits, infrastructure needs and other challenges as economic headwinds.

Bifurcated Action Across Equities & Bonds 

The dichotomy between bond and stock investors continues to widen with equities reaching another fresh all-time high this morning. All major indices are loftier on the session with the Russell 2000, Dow Jones Industrial, S&P 500 and Nasdaq 100 benchmarks gaining 1.5%, 0.7%, 0.6% and 0.2%. Sectoral breadth is positive with all segments up on the session except for consumer discretionary, which is being hampered by Tesla shares losing a sharp 7.6%. Leading to the upside are materials, communication services and energy; they’re higher by 0.9%, 0.7% and 0.5%. In fixed income, currency and commodity land, bonds are slightly bearish, the dollar is near its flatline and commodities are gaining across the board. The 2- and 10-year Treasury maturities are changing hands at 3.97% and 4.09%, 1 and 3 basis points (bps) heavier on the session. Meanwhile, the greenback is appreciating relative to the franc, yen and Canadian tender while it depreciates versus the euro, pound sterling, yuan and its Aussie counterpart. In commodities, silver, gold, copper and crude oil are up 1.3%, 1%, 0.6% and 0.2%, but lumber is down 0.7% as the real estate sector freezes up with mortgage rates well above 6%. WTI crude oil is trading at $75.42 per barrel ahead of Beijing’s fiscal stimulus announcement tomorrow as well as continued geopolitical uncertainty in the Middle East.

Forecast Trader Investors Expect Split Congress

As we inch closer to the November 5 election and investors navigate uncertainties, IBKR Forecast Trader participants are predicting a split Congress. In fact, our contenders expect that the Democrats will take control of the House of Representatives while Republicans are likely to win a Senate majority, with probabilities across both contracts at 62% and 84%. Odds of the presidential election are shifting towards the GOP, however, with Harris and Trump now evenly split at 50%. Vice President Harris’s lead has contracted, moving from 52% on Wednesday, 51% yesterday, and to a coin-flip today. Finally, next week’s economic data coincides with geopolitical developments in the Middle East and China’s fiscal stimulus efforts. Furthermore, the calendar features stateside unemployment claims, retail sales, building permits and homebuilder sentiment as well as plenty of central bank speakers from the Fed, Bank of England and the European Central Bank. 

Source: ForecastEx

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