US stocks regained momentum on Wednesday, as investors assessed hotter-than-expected inflation data and prepared for more on Thursday while looking to Federal Reserve minutes for a window into policymakers’ thinking on interest rates.
US wholesale prices rose last month at the fastest pace since April, with the producer price index for September climbing 2.2% from a year earlier, compared with the 1.6% gain expected.
The PPI reading suggests that inflationary pressures remain despite the Fed’s aggressive interest rate hikes. The next read on inflation will come in Thursday’s look at consumer prices, which are expected to have slowed slightly from last month.
Minutes from the central bank’s last meeting released Wednesday confirmed that Fed members saw one more hike in the bank’s two remaining meetings this year, but the inflation picture that emerges from this week will fuel expectations for what the bank decides Nov. 1.
Read more: What a Fed rate-hike pause means for bank accounts, CDs, loans, and credit cards
Meanwhile, Treasury yields continued to retreat from 16-year highs hit during the bond sell-off after Israel stepped up its bombardment of Gaza. The benchmark 10-year (^TNX) yield dropped to trade below 4.6% on Wednesday, compared with last week’s peak above 4.88%.
But bonds may not be out of the woods yet, some analysts said, given the lack of weak economic data or a solid reason for yields to keep falling.
More investors are now betting the Federal Reserve won’t hike interest rates at its November meeting, as the recent surge in bond yields is seen as effectively doing the tightening work of the central bank.
Potentially lifting some pressure, oil prices continued to slide as the impact on supply from the Middle East conflict appeared contained. Crude oil futures (CL=F) dropped to below $84, while Brent crude futures (BZ=F) were down to finish just above $86.
Also in focus, Birkenstock (BIRK) made its trading debut on the NYSE on Wednesday, sliding more than 10% from its initial price.
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Stocks close higher as investors await CPI report
Stocks battled back after losing steam earlier in the session to close in the green on Wednesday. The tech-heavy Nasdaq Composite (^IXIC) was the day’s leader, closing up 0.7%. The benchmark S&P 500 (^GSPC) climbed about 0.4% higher while the Dow Jones Industrial Average (^DJI) inched up a modest 0.2%, or 65 points.
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All eyes on September CPI report — here’s what to expect
On Thursday, investors will watch closely for one of the most important data points the Federal Reserve will consider in its next interest rate decision: September’s Consumer Price Index (CPI).
The report, set for release at 8:30 a.m. ET, is expected to show headline inflation of 3.6%, a slight deceleration from August’s 3.7% annual gain in prices, according to estimates from Bloomberg.
Over the prior month, consumer prices are expected to have risen 0.3% in September, a slower clip than August’s 0.6% monthly increase.
Oil will continue to be a big area of focus after energy prices drove the bulk of August’s price increases. Energy prices, which have fluctuated amid the ongoing crisis in Israel, are expected to have moderated last month, with Bank of America anticipating a modest month-over-month increase of 0.4% following the 5.6% jump seen in August.
The bank also expects continued upward pressure in food prices, which increased 4.3% in August on an annual basis and 0.2% month-over-month.
On a “core” basis, which strips out the more volatile costs of food and gas, prices in September are expected to have risen 4.1% over last year — a slowdown from the 4.3% annual increase seen in August, according to Bloomberg data.
Monthly core prices are expected to have climbed 0.3%, matching August’s monthly rise. Within core, used car prices are expected to have fallen further last month, after dropping 1.2% month-over-month in August and 1.3% in July.
Read more here.
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One reason why the Russell 2000 hasn’t rally with the rest of the stock market in 2023
Small cap stocks never participated in the 2023 market rally.
The lead small cap index, the Russell 2000 is just above the flat line this year. Meanwhile the tech-heavy Nasdaq (^IXIC) is up nearly 30% and the S&P 500 (^GSPC) has risen 13%.
Recent work from Bank of America’s equity strategy team highlights a key issue facing small cap companies that’s likely spooking investors: Debt.
Bank of America’s research shows over 75% of S&P 500 companies’ debt is long-term fixed and more spread out than the small caps. The Russell 2000 is much more front loaded with about 60% of their debt long-term fixed and overall the debt is more front loaded.
“Despite the fastest hiking cycle in 40+ years, we believe the impact to S&P 500 earnings will be manageable,” Bank of America’s equity strategy team. “The real risk is in the Russell 2000.”
While the Fed has jacked interest rates at a historically fast pace, investors have grown concerned about how corporates and consumers would shift from the low interest rate regime of the 2010s to one where the cost of capital is much higher.
As the Bank of America chart shows, Russell 2000 companies are some of the most at risk because their debt expires sooner, meaning they’ll have to pay higher interest rates in the near future if they need further capital to operate their business. Paying more in interest would likely shrink profits.
“Unless interest rates reverse lower, interest expense should continue to eat into small-caps’ earnings,” Ed Clissold, Ned Davis Research chief US strategist wrote in a research note on September 21. “Lower expected earning growth for small-caps is one of the reasons we favor large-caps over small-caps.”
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Birkenstock, Exxon, Alphabet: Stocks trending in afternoon trading
Here are some of the stocks leading Yahoo Finance’s trending tickers page in afternoon trading on Wednesday:
Birkenstock (BIRK): Shares of the the shoe maker fell in their Wall Street debut on Wednesday, down about 10% shortly following the stock’s opening trade. Shares debuted at $41 under the ticker symbol “BIRK” after the company priced its IPO at $46 a share on Tuesday. evening.
Exxon Mobil Corporation (XOM): Shares fell 4% in afternoon trading following the news the company will buy US rival Pioneer Natural Resources in an all-stock deal valued at $59.5 billion. Shares of Pioneer Natural Resources (PXD) were up about 1.2%.
Alphabet (GOOG, GOOGL): Shares of the tech giant rose more than 1% just ahead of the company’s Pixel 8 and Pixel 8 Pro smartphone debuts. The phones, built for the AI generation, will go on sale Oct. 12 and will cost $699 and $999, respectively.
Novo Nordisk (NVO), Eli Lilly and Company (LLY): Shares of of drugmakers Novo Nordisk and Eli Lilly rose on Wednesday, up about 5% and 4%, respectively, after Novo said a trial of its diabetes drug, Ozempic, showed early signs of delaying kidney failure. LLY makes a similar drug for the treatment of diabetes.
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Wall Street thinks corporate America’s earnings recession is over
Third quarter earnings season begins in earnest this week, and Wall Street analysts expect earnings growth won’t be negative for the first time this year.
The second quarter’s 6% earnings decline was the “trough,” according to Bank of America’s equity strategy team.
“It gets better from here,” BofA strategists Ohsung Kwon and Savita Subramanian wrote in a research note on Wednesday.
Notably, the Street’s consensus projections aren’t for stellar earnings growth in the third quarter but rather flat earnings compared to the same period a year prior. In the fourth quarter, the picture improves further as Wall Street expects earnings to grow at a 9% clip.
Both Bank of America and Evercore think the third quarter earnings growth projection is too low.
Evercore ISI Senior Managing Director Julian Emanuel sees more upside to earnings driven by the stronger than expected economic data that poured in throughout the third quarter. On Tuesday, the Atlanta Fed’s GDPNow tool projected the economy grew 5.1% in the third quarter, up from an initial forecast of 3.5%.
Emanuel describes third quarter expectations as “muted,” which he believes sets a low bar for earnings beats and therefore provides “opportunities from potential surprises given the still strong economic backdrop.”
Bank of America’s team notes that dating back to 1950, quarterly earnings growth has typically outpaced GDP growth by 1.5 percentage points. That hasn’t happened in the past five quarters as the post pandemic economy shifted to one favored by services over goods.
But zooming into recent economic data shows manufacturing activity had been catching up to services activity throughout the third quarter. BofA’s team notes that’s “historically been a tailwind” for earnings leading GDP.
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Stocks waver on PPI surprise
Stocks lost steam in afternoon trading after the Producer Price Index (PPI) for final demand increased more than expected in September. The tech-heavy Nasdaq Composite (^IXIC) remained the only major index in the green, up a modest 0.1%. The benchmark S&P 500 (^GSPC) and Dow Jones Industrial Average (^DJI) traded near the flatline, each down about 0.2%.
The yield on the 10-year Treasury note (^TNX) continued to decline, down 7 basis points to trade near 4.58%.
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Investors await Birkenstock IPO
Germany-based footwear company Birkenstock is indicated to open between $42 and $44 a share, below its IPO price of $46, as the company preps its much-anticipated Wall Street debut. The stock will trade on the New York Stock Exchange under the ticker symbol “BIRK.“
“Through the strong reputation and universal appeal of our brand — enabling extensive word-of-mouth exposure and outsized earned media value — we have efficiently built a growing global fanbase of millions of consumers that uniquely transcends geography, gender, age and income,” Birkenstock said in a recent SEC filing.
Birkenstock’s public debut will be the fourth US IPO in the past month, following the debuts of Arm Holdings, Klaviyo and Instacart.
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Oil prices cool
Oil prices continued their downward trend on Wednesday with Crude oil futures (CL=F) dropping nearly 3% to trade below $84 a barrel. Brent crude futures (BZ=F) were down about 2.3% to trade at just under $86 a barrel.
The cooling price levels come after oil prices jumped on Monday amid escalating fears over the latest conflict in Israel. Since then, however, concerns surrounding supply have begun to ease.
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Producer prices edge higher amid energy, food costs
The Producer Price Index (PPI) for final demand increased more than expected in September, rising 0.5% on a seasonally adjusted basis, according to data released by the Bureau of Labor Statistics Wednesday morning. Economists polled by Bloomberg had expected a 0.3% rise.
The 0.5% increase followed a 0.7% increase in August and a 0.6% in July, according to the report. The measure increased 2.2% on a year-over-year basis, well ahead of estimates of 1.6%.
The rise comes amid higher energy and food costs with oil prices reaching the highest level in over a year last month. Excluding those components, PPI ticked up 0.3% in September, slightly above estimates of 0.2%.
“While we would expect the Fed look past volatility in the energy market, less encouraging is the pickup in core services momentum,” Oxford Economists economist Matthew Martin wrote in reaction to the report. “Officials are committed to reigning in inflation, but we expect prices to slow enough over the coming quarters to keep additional rate hikes off the table.”
Martin noted moderating oil prices this week will will be “encouraging news” for October’s report.
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Stocks open slightly higher
Stocks opened modestly higher on Wednesday with the tech-heavy Nasdaq Composite (^IXIC) leading early morning gains, up about 0.5%.
The benchmark S&P 500 (^GSPC) and Dow Jones Industrial Average (^DJI) each climbed about 0.4% while the yield on the 10-year Treasury note (^TNX) slid 6 basis points to trade near 4.59%.
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