CPI Ahead: Hot Reading Could Lift Rate Hike Odds

0:05Welcome 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 Colette O 'Claire, and here is Schwab's early look at the markets for Friday, September 11th. Today's eagerly awaited August Consumer Price Index, or CPI, is the last key data before next week's Federal Reserve meeting and will likely determine action on Wall Street Friday bearing unexpected developments. Heading into the 8.30 a.m. Eastern Time report, analysts expect a 0.4 percent headline monthly reading and 0.2 % core, excluding food and energy, according to Briefing.com.

0:50Those compare with 0.1 % and 0.2%, respectively, in July. The wild card may be the core annual CPI reading, seen now at 2.4%. That would be the lowest in several years. However, CPI is heavily weighted toward shelter costs, something less weighted in the Personal Consumption Expenditures, or PCE, price index that the Fed tracks closely. A low CPI may be somewhat discounted if shelter costs play a big part. A hot CPI following Thursday's Warm Producer Price Index, or PPI, report might well pave the way to a Fed rate hike next week for the first time since 2023. The Fed makes its decision this coming Wednesday.

1:36Hot could be in the eye of the beholder, however, the Wall Street Journal pointed out, how the Fed decides to round numbers in the CPI could be a deciding factor. A core reading of 0.26 percent rounded up to 0.3 percent versus 0.24 percent rounded down to 0.2 percent can make a difference determining if the report sends a hawkish or dovish message. Treasury yields also revisited 2023 this week, climbing above 4.9 percent for the 10-year yield Thursday for the first time since late that year. Though headline PPI of 0.4 percent met expectations for monthly wholesale price increases and core PPI excluding food and energy of 0.2 percent was slightly better than the 0.3 percent expected, some components that play into the PCE looked hot, something the Fed is likely to take into account.

2:36In addition, the government upwardly revised July's PPI readings. A 30-year Treasury auction saw strong demand, however, capping a week of firm buying at several auctions, Briefing.com noted. Metrics including airfare, transportation, and warehousing were firmer in PPI. After PPI, chances of a rate hike next week climbed to 71 percent by late Thursday, according to the CME FedWatch tool. That compares with 49 percent a week ago. Overall, PPI of 0.4 percent was in line with expectations, but still likely too hot for the Fed's liking, said Cooper Howard, director of fixed income research and strategy at the Schwab Center for Financial Research, or SCIFR.

3:23CPI will be the more important report, but I don't think this squashes the idea of a hike in the near future. Though U.S. crude popped above$100 per barrel Thursday for the first time since May, as the war showed no signs of ending, the market's negative response after PPI appeared mainly due to rate hike worries, not crude. The two-year Treasury note yield that's highly sensitive to near-term Fed policy jumped seven basis points soon after the PPI report, hinting that market participants didn't feel the data offered enough to soothe hawks at the central bank. Three policymakers voted to raise rates in late July, in from the current range of 3.5 percent to 3.75 percent.

4:10The European Central Bank raised rates 25 basis points Thursday, responding to energy-driven inflation. Higher rates in Europe and likely Japan next week can push U.S. Treasury yields up even without a Fed rate hike. In other data Thursday, the Atlanta Fed's GDP Now metric paid third-quarter gross domestic product growth at 4.4 percent, down from the previous 4.7 percent estimate. Weekly initial jobless claims of 206 ,000 stayed near the low end of the recent range. Oracle and Adobe reported after Thursday's close. Oracle's results easily beat consensus on strong cloud growth, sending shares up more than 7 % initially in post-market trading.

4:59Guidance appeared to be near the middle of analysts' range. Adobe beat on the bottom line and revenue matched consensus. Guidance also was as expected. Shares initially retreated slightly. The initial strength from Oracle might bode well for tech today, though as of the deadline for this podcast, the company hadn't held its earnings call. Next week is dominated by the Fed meeting. Earnings are as light as they get, with hardly any S &P 500 firms reporting. Wall Street suffering continued Thursday, pushing major indexes down for a fourth straight session. The story didn't change much, though the PPI innards didn't help as they pointed toward a firm PCE.

5:46So far, September has kept its reputation as a weak month historically. The S &P 500 index is down 1.2 percent since August 31. Crude oil is up 17 percent. However, things would have to get truly ugly to match the March equity sell-off. Two of 11 S &P 500 sectors managed higher finishes Thursday, up from one on Wednesday. This time, the two green shoots were Staples and Communication Services, with Staples possibly getting a bid from defensive positioning by some investors. The material sector fared worst as metals prices fell on Rehich odds while Infotech pulled back amid chip weakness. Breath has continued to deteriorate, said Lizanne Saunders, chief investment strategist at Skiffer.

6:37The percentage of S &P 500 stocks outperforming the index itself over the past month is down to 22 % from 67 % earlier this year. Just 5 % of S &P 500 stocks trade at four-week highs and just 1 % at 52-week highs. Technically, the S &P 500 index closed near its 50-day moving average of 7 ,590. Before Thursday, it last traded under the 50-day moving average in late July. A drop below for several days can sometimes suggest a loss of momentum and lead to additional selling. Checking individual movers Thursday, Apple climbed 3.5 percent after introducing a folding iPhone that will be more expensive than the current product.

7:30Some analysts said the price hike wasn't as high as they expected, raising margin concerns. JPMorgan Chase said Apple's fall product launch was largely in line with expectations. Chip and AI-related stocks mostly fell, possibly a sign of investor caution. However, in a barometer of chip demand, Taiwan Semiconductor Manufacturing posted a 53 percent annual rise in August revenue to a record high and the company said it's struggling to keep up with demand, Bloomberg reported. American Eagle Outfitters fell 14 percent on disappointing quarterly results and a margin outlook that missed consensus expectations.

8:14Freeport-McMoran plunged almost 7 percent and other mining stocks were also weak as copper prices toppled more than 5%. Copper recently hit record highs on concerns over supply woes, but fell after China's August imports of the metal hit six-year lows for the month, and the Trump administration said today it would delay tariffs. Gold prices fell 2 % Thursday as rate hike odds jumped. Chip stocks generally descended Thursday, including a 2 % drop for NVIDIA, despite Taiwan Semiconductor manufacturing reporting 53 percent annual revenue growth for August. Rising yields and a lead researcher at Anthropic warning of the dangers of AI kept semiconductors under a cloud.

9:01The Philadelphia Semiconductor Index is down more than 20 percent from its June peak, a decline defined as a bear market. Consumer stocks retreated Thursday in response to higher treasury yields. Some of the victims included department stores, cruise lines, apparel stores, and home builders. Macy's fell 5 percent despite a strong quarter as the company's third-quarter earnings guidance came in below consensus. The Dow Jones Industrial Average crumbled 316.56 points, or 0.60 percent Thursday, to 52 ,064.10 and is down 2.5 percent since Friday. The S &P 500 Index lost 44.66 points, or 0.58%, to 7 ,591.70.

9:54And the Nasdaq Composite gave back 171.61 points, or 0.65%, to 26 ,081.72. This has been the Schwab Market Update Podcast. To stay informed, visit schwab.com slash market update or follow for free in your favorite podcasting app. And if you like what you've heard, please consider leaving us a rating or review. It really helps new listeners find the show. Join us for another update Monday.

10:33For important disclosures, see the show notes and schwab.com slash market update podcast.