U.S. stocks are mixed and subdued as the markets digest another hot inflation report in the form of the September Producer Price Index. More inflation data is due out this week, headlined by tomorrow's release of the Consumer Price Index. Treasury yields are little changed, the U.S. dollar is moving higher, but gains for the greenback is being limited by strength in the British pound as the markets grapple with the Bank of England's recent actions to try to stabilize its financial markets. Crude oil prices are lower, and gold is trading to the downside. In other economic news, mortgage applications fell for a third-straight week. Q3 earnings season is getting started, and PepsiCo topped estimates and raised its guidance. In other equity news, Moderna is rising after Dow member Merck & Co. announced that it will exercise an option for a partnership with the company to work on a cancer vaccine. In the afternoon, the release of the minutes from the Fed's September monetary policy meeting are due out and will likely garner scrutiny. Asia finished mixed, and Europe is trading to the downside.
At 10:50 a.m. ET, the Dow Jones Industrial Average is up 0.3%, while the S&P 500 Index is little changed, and the Nasdaq Composite is declining 0.3%. WTI crude oil is dropping $1.91 to $87.44 per barrel, and Brent crude oil is falling $1.60 at $92.69 per barrel. The gold spot price is trading $8.90 lower to $1,677.10 per ounce, and the Dollar Index is advancing 0.3% to 113.51.
PepsiCo Inc. (PEP $170) reported adjusted Q3 earnings-per-share (EPS) of $1.97, above the $1.84 FactSet estimate, as revenues grew 8.8% year-over-year (y/y) to $22.0 billion, topping the Street's forecast of $20.8 billion. The company noted that the strong U.S. dollar negatively impacted its earnings and revenue growth, but its global business momentum remains strong. Organic revenue—excluding acquisitions, divestitures, and foreign exchange—was 16.0% higher y/y. PEP raised its full-year EPS and organic sales outlooks. Shares are moving to the upside.
Moderna Inc. (MRNA $131) is rising after Dow member Merck & Co. Inc. (MRK $91) announced that it will exercise an option for the partnership with the company that gained prominence from its COVID-19 vaccine to develop and commercialize a cancer vaccine. MRK is trading higher.
The S&P 500 has been volatile as inflation pressures have persisted, forcing the Fed to aggressively tighten monetary policy and boosting concerns about the economy as discussed in the article, Stock Market Volatility: Jobs Report Kills Rally. Meanwhile, as the markets gear up for the start of Q3 earnings season next week, Schwab's Chief Investment Strategist Liz Ann Sonders discusses in her article, Earnings: Trampled Under Foot? how the bear market has been driven by multiple compression, making valuations look relatively compelling, but expected weakness in earnings may limit the upside potential for stocks.
Additionally, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his latest article, The End of Earnings Growth?, how the earnings outlook is dimming as the economy slows, which could result in cuts to earnings forecasts and downside for stocks. However, Jeff points out that U.K. earnings have been a surprising outperformer.
Wholesale price inflation continues to rise as September inflation picture begins to develop
The Producer Price Index (PPI) (chart), showed prices at the wholesale level in September rose 0.4% month-over-month (m/m), above the Bloomberg consensus estimate of a 0.2% gain, and versus August's downwardly revised 0.2% decrease. The core rate, which excludes food and energy, gained 0.3% m/m, matching estimates and the prior month's negatively adjusted rise. Y/Y, the headline rate was 8.5% higher, north of expectations of an 8.4% increase and compared to the prior month's unadjusted 8.7% rise. The core PPI was up 7.2% y/y last month, below estimates of a 7.3% rise and in line with August's downwardly revised increase.
The MBA Mortgage Application Index declined 2.0% last week, following the prior week's drop of 14.2%. The index fell for a third-straight week as a 1.8% decline for the Refinance Index was accompanied by a 2.1% decrease for the Purchase Index. The decline came as the average 30-year mortgage rate advanced 6 basis points (bps) to 6.81%, which is up 363 bps versus a year ago.
Treasury yields are a bit subdued following the inflation data, as the yield on the 2-year note is ticking 1 basis point (bp) higher to 4.32%, the yield on the 10-year note is dipping 1 bp to 3.93%, and the 30-year bond rate is rising 1 bp to 3.91%.
Volatility has spiked recently as markets react to concerns about the ability of the global economy to cope with the rise in bond yield across the globe as monetary policies tighten. The Fed has led the charge and Schwab's Chief Fixed Income Strategist Kathy Jones discusses this in her latest article, Markets to Fed: Slow Down, You Move Too Fast, and how, if these trends continue, the Fed may end up slowing its pace of tightening—but not stopping it.
Along with rising bond yields, the U.S. dollar has rallied, and Schwab’s Liz Ann Sonders examines the impact of the greenback’s rise in her article, Ripple(s) From Surging Dollar. She discusses how while a spike in global market volatility has prompted some investors to think a Fed response is imminent, we caution against thinking that intervention is a bullish development.
In afternoon action, the markets will be paying close attention to the release of the minutes from the Fed's September monetary policy meeting after which it raised rates by 75 bps for a third-straight time.
Europe lower as markets digest data and Bank of England actions
Stocks in Europe are trading to the downside in late-day action, as the markets continue to grapple with a host of economic concerns, with U.K. GDP, industrial production and manufacturing production all coming in below expectations for August. However, August Eurozone industrial production rose much more than expected. The markets are also digesting another hot U.S. inflation report. Recent volatility in the currency and bond markets, the festering regional energy crisis, and the tight global monetary policy environment have all weighed on the market’s outlook.
Additionally, the Bank of England (BoE) has stepped in to purchase bonds in an attempt to stave off a "fire sale" of UK bonds by pension funds and preserve financial stability after the British pound fell to record lows recently and bond yields have jumped. The BoE has refuted reports that it may extend its purchases beyond Friday and the British pound is rising versus the U.S. dollar. The euro is declining, while bond yields in the U.K. and the Eurozone are gaining ground.
The worrisome inflation picture is being exacerbated by an ensuing energy crisis in the region due to the escalating war in Ukraine. Schwab's Jeffrey Kleintop notes in his article, What's Next: Good, Bad, & Ugly, that the persistence of global inflation could determine which of the three paths central banks may follow and which market qualities investors might consider for their portfolios.
The U.K. FTSE 100 Index is decreasing 0.8%, Germany's DAX Index and France's CAC-40 Index are declining 0.3%, Italy's FTSE MIB Index is losing 1.1%, Spain's IBEX 35 Index is dropping 1.3%, and Switzerland's Swiss Market Index is dipping 0.1%.
Asia diverges ahead of U.S. inflation data
Stocks in Asia finished mixed ahead of today's key inflation data out of the U.S. as choppiness continues as the chip sector remains volatile following the recent expansion of restrictions on the exportation of certain types of semiconductor chips to China. Also, the markets focused on China's renewed COVID restrictions as new cases resurfaced recently, while continuing to contend with tighter monetary policies in most parts of the world to try to fight rising inflation pressures, led by the Fed. However, Japan has maintained its accommodative policy and China has actually provided further monetary policy stimulus, which has weighed on their respective currencies. Today the Bank of Korea announced a 50-bp rate hike, as expected. Schwab's Jeffrey Kleintop provides commentary on China's situation in his article, China Q&A: Top 5 Questions, discussing various topics including inflationary concerns, currency movements, government policies, and more. In other economic news, China's aggregate financing—a measure of total credit issued—rose more than expected, along with its new yuan loans for September. Japan reported a larger-than-expected drop in core machine orders for August, and growth of its September preliminary read on machine tool orders decelerated.
Japan's Nikkei 225 Index was little changed, while the yen weakened versus the U.S. dollar. The yen remains near multi-decade lows versus the greenback given the divergence of monetary policies. China's Shanghai Composite Index ended the day 1.5% higher, and the Hong Kong Hang Seng Index lost 0.8%. South Korea's Kospi Index rose 0.5%, Australia's S&P/ASX 200 Index was nearly unchanged, and India's S&P BSE Sensex 30 traded 0.8% higher.
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