Week Begins with Rate Hike Odds High After CPI

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 Monday, September 14th. The Federal Reserve is front and center this week after Friday's August Consumer Price Index, or CPI, failed to soothe worries about surging inflation. As of late Friday, odds of a 25 basis point hike at 2 p.m. Eastern Time Wednesday were 86%, up from 70 % before CPI. As a reminder, headline CPI rose 0.4 % monthly, and core CPI, excluding food and energy, climbed 0.3%. Analysts had expected 0.4 % and 0.2%, respectively. Annual headline CPI was 3.4%, in line with expectations and unchanged from July, while core annual CPI of 2.4 % was also as expected and the lowest since early 2021.

1:12Despite the somewhat reassuring annual core figure, it's month-to-month core inflation that truly concerns the Fed. New York Fed President John Williams laid out the case clearly. We need to see monthly core inflation readings of 0.2 percent or less to have confidence that inflation is moving sustainably towards the Fed's 2 percent target, said Colin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research. August's core CPI print came in above that. Categories where prices rose most included shelter, airfares, education, and used cars and trucks. Shelter is weighted more in the CPI than in the Personal Consumption Expenditures or PCE price index, so that might lead to some discounting of Friday's CPI.

2:03Both the CPI and last Thursday's producer price index, or PPI, feed into PCE due later this month, and PCE is the Fed's favorite inflation meter. By later Friday, investors appear relatively certain the Fed would hike this week. Failure to hike after Fed Chairman Kevin Warsh's hawkish speech at Jackson Hole last month might leave a credibility gap now that core monthly CPI has ticked up from the more benign levels of June and July that hinted at cooling. This week is also the last Fed meeting until just before the November U.S. midterm election. A hike in late October might be politically unpalatable, though the Fed did raise rates by 75 basis points just before the 2022 midterm vote.

2:52Those were much more inflationary times, however, and the Fed was in a heavy hiking cycle already. Treasury yields initially rose Friday after CPI, but retreated soon after. Falling crude also kept the stock market supported after the S &P 500 index posted four consecutive losing sessions. Oil retreated after the Financial Times reported that Iran and Gulf states will meet to discuss how to manage shipping through the strait. Later Friday, CNBC reported that due to attacks, Saudi Arabia had shut down its key east-west crude oil pipeline. It's unclear how long this might last or the impact on exports.

3:35Despite slight pullbacks in oil and yields on Friday, they remain at uncomfortable levels for the Fed and equities. Higher borrowing costs tend to suppress economic activity and hurt future earnings growth. Crude topped$100 per barrel last week in the U.S. for the first time since May, also raising costs for consumers and businesses. The 10-year Treasury note yield touched 4.98 % early Friday, the highest since late 2023. It last topped 5 % in July of 2007. It closed at around 4.97 % Friday, perhaps setting up a test of 5 % today. The Fed's meeting starts tomorrow and follows a rate hike late last week from the European Central Bank, designed to combat rising inflation boosted by high oil prices.

4:25The Bank of Japan delivers a rate decision this Friday, and analysts also expect a hike. There's concern the Bank of Japan might get more aggressive, which could rekindle fears of the yen-carry trade breaking down and investors shifting from U.S. to Japanese assets due to rising Japanese yields.

4:47In other data Friday, University of Michigan preliminary consumer sentiment for September came in at 47.8, its second lowest reading on record, missing analyst estimates of 51.5 and dropping from 51.7 in August and 55.1 a year earlier. This survey has often shown weaker results than other sentiment surveys, though the Conference Board's Consumer Confidence Index for August was also soft. Another bearish aspect of the sentiment report was long-term inflation expectations ticking up to 3.4 % in August from 3.3 % in July. This is a metric closely watched by the Fed. The earnings calendar this week is arguably as light as it ever gets, with homebuilder Lenar among the only major companies reporting.

5:39Data resumes Wednesday with August retail sales after a light menu today and tomorrow. Friday is traditionally known as Triple Witching Day when options expire for various traded products. This could fuel volatility later this week as funds shift positions. Last Friday, major indexes rebounded from four days of losses despite the warm CPI report and rising rate hike odds, possibly because CPI removed any final ambiguity around Fed policy. Markets tend to flinch from uncertainty. Initially, stocks got help from falling oil. Tech strength also contributed amid bullish reports from the options market and possibly some buy-the-dip action.

6:24The Russell 2000 small cap index, more exposed to high borrowing costs, trailed others. The broader market ended the week down a bit less than 1%. In a major turnaround from earlier this week, 9 of 11 S &P 500 sectors landed on the green Friday, led by growth sectors like Infotech, Communication Services, Consumer Discretionary, and Industrials. Still, breadth was down sharply as the week ended, with 39 % of S &P 500 stocks trading above their 50-day moving average. That's well below last month's highs, above 65%. Technically, the S &P 500's 50-day moving average near 7 ,600 could remain a pivot point in days ahead.

7:11Despite last week's struggles, the index remains only about 2 % below all-time highs reached last month. Support could be near 7 ,490, a level where the index traded in late July before a pop from strong Magnificent 7 earnings. Some of Friday's strength might have reflected the S &P 500's ability to defend 7 ,600 earlier in the week. Checking individual movers Friday, Oracle initially jumped on solid quarterly results, but then skidded to finish 1.6 % lower as cost concerns proved resurgent among market participants. Dell and HP both popped after Oracle's earnings, which reinforced impressions that demand for AI infrastructure could remain bountiful.

7:59Super Microcomputer was another beneficiary. The PHLX Semiconductor Index rebounded Friday from Thursday's poor showing, getting support from Taiwan Semiconductor Manufacturing's strong August revenue growth, and Bloomberg's report that Microsoft plans to triple its data center capacity by 2032. Adobe climbed 2.5 % after beating expectations on the bottom line and posting revenue that matched consensus. Guidance also was as expected. Sweetgreen rose 5 % after the Centers for Disease Control said the cyclospora outbreak has ended. Homebuilding stocks bounced back from weakness early in the week as oil prices retreated, though Treasury yields remain near the highest level since October of 2023 after the Warm CPI report.

8:49And Oklo dropped 9 % after entering into a new equity offering program.

8:58The Dow Jones Industrial Average added 509.19 points or 0.98 % Friday to close at 52 ,573.90. The S &P 500 Index climbed 65.28 points or 0.86 % to 7 ,656.98 and the Nasdaq Composite rose 251.31 points or 0.96%. to$26 ,333.03. For the week, the Dow Jones Industrial Average retreated 1.57 percent, the S &P 500 index fell 0.8 percent, and the Nasdaq lost 0.66 percent. This has been the Schwab Market Update podcast. To stay informed, visit www.schwab.com slash market update 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.

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