CPI Next: Final Key Data Point Before Fed Decision

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.

0:17I'm Keith Lansford, and here is Schwab's early look at the markets for Thursday, September 11th. Investors gear up for today's August Consumer Price Index, or CPI, in a more relaxed mood, optimistic about rate cuts after yesterday's wholesale price report delivered welcome tidings. The Producer Price Index, or PPI, fell 0.1 % in August, compared with expectations for a 0.3 percent rise, and the government lowered its initial 0.9 percent figure for July to 0.7 percent. The report is positive and gives the Fed the go-ahead to cut next week, said Cooper Howard, director of fixed income strategy at the Schwab Center for Financial Research.

1:00Though PPI eased concerns about rising wholesale prices, today's August CPI could cause whiplash if it's out of sync on the high side. Worries about that eased Wednesday due to the light PPI reading. If PPI is soft, it often means less threat of wholesale inflation spilling into consumer inflation. Still, investors might want to be on the lookout because last month no one expected the initial 0.9 % rise in July PPI. Analysts expect 0.3 % headline and core CPI growth compared with 0.2 % and 0.3 % in July. Core doesn't include volatile food and energy prices. A drop in services-related inflation helped overall PPI fall last month, but goods cost pressures remain high.

1:50The services category was weighed down by the sharpest slide in final demand trade services since July of 2024, which affects margins received by wholesalers and retailers, or the difference between a trader's purchasing cost of a good and the price that the trader charges the final buyer. PPI has recently been noisy, likely due to all the tariff issues, but the components that feed through to PCE were fairly muted, which is positive, Schwab's Howard said, referring to August's personal consumption expenditures or PCE prices, the Fed's favorite inflation index due September 26. One takeaway from PPI might be that wholesalers aren't able to pass along higher tariff-related costs to the customers.

2:36Chances of a 25-basis-point rate cut next Wednesday when the Federal Reserve makes its rate decision were 92 % by late Wednesday, with 8 % odds of a 50-basis-point cut, according to the CME FedWatch tool. Though inflation and the Fed may be top of mind, geopolitics grew turbulent with a NATO plane shooting down a Russian drone over Poland and Israel targeting Hamas leaders in Qatar earlier this week. Crude oil rose nearly 2 percent Wednesday, but U.S. crude stocks rose for the second week in a row, the government said, keeping supply worries muted.

3:14In data released Wednesday, weekly U.S. mortgage demand climbed 9.2 percent last week, according to the MBA Mortgage Applications Index, following a 1.2 percent decrease the previous week. It's just one week, but suggests lower mortgage rates might be sending some potential homebuyers back into the market. The Atlanta Fed's GDP Now indicator for third-quarter gross domestic product or GDP growth rose to 3.1 percent from 3 percent. With the jobs market apparently under pressure following last week's soft monthly payrolls report, Friday's University of Michigan preliminary consumer sentiment data for September could get a close look.

3:55So could this morning's weekly initial jobless claims and continuing claims report due at 8 a.m. Eastern time. Continuing claims have been high for a while and initial ones edged up last week. Initial claims are seen at 240 ,000, according to Briefing.com, up from 237 ,000 a week ago. They had been around 220 ,000 much of the summer. Today also brings earnings from Kroger before the open and Adobe after the close. Adobe is more likely to move markets, with shares under pressure the last few months amid worries about AI competition's impact on software. Several AI platforms now offer content creation products competing with Adobe's.

4:41Major indexes closed mostly higher Wednesday, helped by the mild PPI report. The exception was the Dow Jones Industrial Average, which saw pressure from Apple as investors appeared disappointed with the company's product introduction earlier this week. Looking more closely, trading followed the same pattern Wednesday as the prior two days, with declining shares outnumbering advancing ones. The percentage of S &P 500 stocks trading above their 50-day moving average, one way to help gauge market strength, fell to 52 % yesterday from 55 % earlier this week, a sign that increasingly the market's strength reflects mega-cap gains.

5:21Oracle isn't a mega-cap, but its immense rally Wednesday of around 35 % was a factor in the tech sector's more than 1 % daily rise. Oracle's strong forecast overshadowed what was otherwise a mixed quarter. Cloud infrastructure revenue increased 55 % to$3.3 billion, just slightly ahead of analysts' expectations for 53 % expansion, but its outlook included a 360 % surge in the company's order book or remaining performance obligations. That's roughly four times Alphabet's backlog, according to Bloomberg Intelligence, suggesting Oracle's cloud growth rate is poised to surpass that of Alphabet. On its call, Oracle said it's seeing growing demand for renting AI servers in the cloud, Barron's reported.

6:10Later Wednesday, the Wall Street Journal reported that Oracle and OpenAI had signed a$300 billion five-year contract. Oracle gained more than$244 billion in value yesterday. Oracle's forecast helped chip stocks yesterday, giving the PHLX Semiconductor Index about a 2 % lift Wednesday and propelling NVIDIA more than 3.5 % and Broadcom more than 9%. However, Amazon skidded more than 2 % yesterday, hurt by ideas that Oracle may be taking cloud share. Alphabet also felt pressure. On the other side of the ledger, Chewy descended 17 % Wednesday, despite earnings and revenue that were in line with analysts' average estimates.

6:56Investors appeared disappointed the profit fell year-over-year due to what the company said was a$79.1 million expense related to share-based compensation and related taxes, the Wall Street Journal reported. And Synopsys crumbled 35 % after earnings and revenue missed analysts' expectations and guidance appeared mixed. The performance of Chewy and Synopsis on Wednesday reinforced ideas that investors will harshly punish companies that don't impress with results, perhaps not surprising considering the market's historically high valuation. High stock values also play into the fact that equity risk premium is now basically negative, depending on which part of the yield curve one looks at.

7:41When this premium goes negative, it's a sign of the market suggesting the stocks are no more compelling than treasuries or corporate bonds. Historically, high valuations may mean an equity market that's very reliant on rate cuts going forward. Sector performance was an interesting mix yesterday, with utilities leading and infotech close behind. Energy and industrials rounded out the top four. Utilities is typically a defensive sector, but it found support yesterday from signs of stronger cloud demand, which could mean more revenue for utility firms supplying energy to data centers that power the cloud.

8:21Vistra Energy, Constellation Energy, and NRG Energy all rose more than 5%. Treasury yields resumed their decline Wednesday after rebounding Tuesday, and the benchmark 10-year note yield dropped four basis points to 4.03%, a new four-month low. A 10-year Treasury note auction yesterday achieved firm demand, helping the Treasury market. This followed a solid three-year note auction Tuesday and preceded a 30-year bond auction today. Results of that should be available early this afternoon. The Dow Jones Industrial Average fell 220.42 points Wednesday, or 0.48%, to 45 ,490.92. The S &P 500 Index rose 19.43 points, or 0.30%, to 6 ,532.04.

9:15And the Nasdaq Composite gained 6.57 points, or 0.03%, to 21 ,886.06. This has been the Schwab Market Update Podcast. To stay informed, visit www.schwab.com slash marketupdate or follow us for free in your favorite podcasting app. And if you like what you've heard, please consider leaving us a rating or a review. It really helps new listeners find the show. Join us for another update tomorrow.

9:54For important disclosures, see the show notes and schwab.com slash market update podcast.