Here is Schwab's early look at the markets for Tuesday, October 6.
The battle between lower oil and strong Treasury yields began this week, but stocks seem to be paying less attention. Where yields go next could depend partly on Treasury auctions in coming days, Federal Reserve minutes tomorrow, and next week's inflation data.
Investors got a preview of September inflation in the ISM's manufacturing and non-manufacturing data released last week and Monday, respectively. Prices paid, the key metric, jumped in the services report Monday, while headline growth expanded but less than August's pace, possibly a sign that prices might be taking a toll.
These reports feed into next week's September Producer Price Index (PPI) and the September Personal Consumption Expenditures (PCE) prices index later this month, helping the Fed navigate after last months' hike.
A Fed update is due Wednesday afternoon with release of minutes from last month's meeting. The minutes will provide details of policymakers' discussion and could help investors understand the decision and what might make the Fed more or less likely to follow with another hike later this month.
Chances of an October hike sank appreciably to around 24% by late Monday from 70% a week ago thanks to Friday's soft jobs data and a light August PCE. However, Treasury yields only seem to climb, rebounding quickly from Friday's jobs report-related dive and forging new 24-year highs Monday above 5.33% for the 10-year note.
Yields partly reflect pricy oil, but that relationship appears to be decoupling. Crude dropped almost 2% Monday on signs of improving flows out of the Gulf and Europe's decision to release diesel supplies.
Rising yields—which seemed to help mega-cap stocks lately as investors look for strong earnings growth to blunt rising borrowing costs--reflect many factors. One is strong economic growth. The U.S. government raised its final second quarter gross domestic product (GDP) estimate to 2.2% on a seasonally-adjusted annual basis last week from 1.5%. The AtlantaFed updates its GDPNow indicator tomorrow, with third quarter growth now seen at 3.7%.
Other factors include rising overseas yields, heavy corporate debt issuance, and rising U.S. and international deficits.
Treasury auctions this week--including a 3-year note today and a 10-year note tomorrow--could provide insight into U.S. debt demand. Results will be available each afternoon.
A few well-received auctions last month did nothing to slow the yield rally, and a more recent set saw lethargic demand.
Another challenge for Treasuries is declining foreign interest in U.S. debt, possibly due to rising yields overseas and surging U.S. deficits. China's holdings of U.S. Treasuries recently fell to the lowest level since 2008, according to government data.
In a metric that might work against the yield rally, the U.S. dollar index reached its highest point since early last year Monday above 102. This came as the euro weakened on concerns over French debt and pressure on that country's banking system. A snap election in Spain hurt the euro, as well. Theoretically, a rising dollar tends to cool yields, so that relationship is worth tracking.
Investors await monthly revenue numbers this week from Taiwan Semiconductor Manufacturing, typically issued early each month from the world's largest chip manufacturer.
Another corporate item to track is any potential pre-earnings guidance changes from major firms, which sometimes pop up in the last days before earnings season unofficially begins.
FactSet pegs third quarter S&P 500 earnings growth at 29.5%, down from close to 50% in the second quarter but well above historic norms. Info tech earnings growth is seen at 65%, while seven of 11 S&P sectors are seen with annual earnings growth of 14% or less. Cyclical sectors like discretionary and financials march near the rear.
While most investors think of earnings season starting with next Tuesdays' big bank results, PepsiCo and Delta Air Lines later this week offer insight into consumers grappling with high gas prices and borrowing costs.
Airlines may be shielded to a degree because their demand tends to come from better-off consumers enjoying stock portfolio growth, and by strong corporate earnings underpinning business travel. Still, expensive oil has transport stocks under pressure. The Dow Jones Transportation Average is down nearly 20% from its April peak.
Staples firms are also struggling, down about 4% over the last three months. At PepsiCo, chip sales—in this case corn chips, not semiconductor chips—suffered in the second quarter as consumers tightened their belts due to gas costs, the company said then in a report that disappointed Wall Street.
On Wall Street Monday, major indexes hummed right along despite hotter yields. The Nasdaq closed at all-time highs, and even the small-cap Russell 2000 index, hurt by rates recently, made up ground. Still, major indexes saw pressure in the final hour and finished off their intraday peaks, a common theme lately.
Materials led the way on gains in copper and silver, helped by strong demand possibly driven by the AI build-out. That showed up in industrials and energy, too. Companies
like Nucor, Cleveland-Cliffs, Alcoa, and Constellation Energy emerged from the gate quickly. Ten of 11 S&P sectors rose.
Tech shares climbed but finished well behind the lead pack as the PHLX Semiconductor Index (SOX) posted just 0.2% gains. This was despite Nvidia setting new all-time highs. Last week's strong Micron results appear to have investors bullish ahead of earnings season after a tough September, and the SOX is up almost 20% from late July lows.
Market breadth hasn't recovered much, however, still showing top-heaviness. While the S&P 500 Index sits near all-time highs, fewer than half of its members were above their 200-day moving averages as of Friday. This disparity is also evident from a sector view. Decliners outpaced advancers last week by a 1.5-to-one margin.
Checking other individual performers Monday, Cerebras rose 9% following a post by OpenAI CEO Sam Altman, who called Cerebras a "close partner." This came after a research firm said OpenAI was using Nvidia chips, not Cerebras hardware, in its latest AI model, Barron's reported.
SpaceX gained another 7% after several successful rocket launches and as Morgan Stanley maintained its overweight rating.
Lennar slipped almost 7% and other home builders also fell on rising yields.
Autodesk rose 4% on news that French firm Schneider Electric was buying Autodesk rival PTC (PTC) for $22.6 billion, according to Reuters. The valuation of the deal was considered low due to worries about AI's impact on software companies. Schneider builds equipment used in data centers. PTC shares jumped 34% and software generally did well.
Vistra rose 3% after the U.S. Department of Energy approved a $4 billion federal loan package that will help the company upgrade three nuclear plants, Yahoo Finance reported.
Intel slid nearly 3%, hurt by Tesla CEO Elon Musk's announcement that he's had discussions with Intel's rival chip maker Taiwan Semiconductor Manufacturing about a collaboration on a chip project in Texas. Taiwan Semiconductor shares rose 2.7%.
The Dow Jones Industrial Average® ($DJI) rose 90.94 points (+0.18%) Monday to 51,267.90; the S&P 500 Index ($SPX) moved up 51.23 points (+0.66%) to 7,773.95, and the Nasdaq Composite® ($COMP) added 286.45 points (+1.05%) to 27,477.31.