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Hot inflation, and bonds rallied anyway
Wholesale prices posted their biggest jump since 2022 on Thursday. Bonds rallied anyway.
The Close A strong day for everything except tech. The Dow jumped 556 points, or 1.1%. The S&P rose 0.3% to 7,744 and snapped a three-day losing streak. The Nasdaq barely moved, up 0.1%. Small companies led. The Russell 2000 rose 1.4%. The chip stocks fell for a seventh straight day.
Lennar rose 5.7% and D.R. Horton 4.4%, as falling yields gave the homebuilders a break. Nike gained 5.2%, one of the best stocks in the Dow. DexCom rose 5.1% after its CONNECT study was published in the New England Journal of Medicine. The chip stocks kept falling. Lam Research lost 3.3%, Intel 2.8% and Nvidia 1.8%. Taiwan Semiconductor beat estimates and guided higher for the fourth quarter, then fell 1.8% because management sounded cautious about 2027. Valero fell 3.4% as the refiners gave back earlier gains. Schwab fell 2.7% despite record new client assets. And FMC, the crop chemicals maker, collapsed 30.5% after slashing its third-quarter outlook. What The Market Is Pricing In Yes, Thursday started with bad news. Wholesale prices rose 1.3% in September, the biggest monthly jump since March 2022. Fuel did most of the damage. Here's the strange part. Bonds rallied anyway, and the ten-year yield fell to 5.09%, down about a tenth of a point. Gold rose 1.5%, and the dollar slipped 0.5%. The market looked past the price tags and at the shoppers. Retail sales looked strong, but strip out gas and a few other jumpy categories and spending rose just 0.1%. The Philadelphia Fed's factory survey fell to 20.9 from 37.8. High gas prices are starting to squeeze everything else. When investors start to worry the economy will slow, they buy government bonds for safety. Bond prices go up and yields come down, even when inflation is hot. On Wall Street they call it a growth scare. That changes the Fed math. If gas prices slow the economy on their own, the Fed may not need to hike again. By Thursday's close, traders put the chance of the Fed holding rates at its October 27-28 meeting at about 71%.
I've seen this before. In 1990, oil spiked and inflation ran above 6%, but the economy was already slowing. The Fed ended up cutting rates, not raising them. The chips are still the weak spot. Seven straight down days tells you the market wants proof the AI spending pays off. Next week, it gets some. What's Next Three things I'm watching today and next week: 01 The Fed Chair Fed Chair Kevin Warsh spoke overnight at the IMF meetings in Bangkok. He said AI could substantially boost productivity, and the dollar fell as traders leaned further toward a pause in October. Watch the ten-year: if it holds near 5.1%, the homebuilders and small caps keep their bid. 02 Big Tech Reports Netflix reports Tuesday, October 20, after the close. Tesla, Meta and Lam Research follow on Wednesday, October 21, after the close. If they keep spending on AI and show it's paying off, the chip slide has a floor. If they trim budgets, the chips have further to fall. 03 Housing The homebuilders' confidence index comes out Monday, October 19, at 10:00 a.m. Eastern. Housing starts and building permits follow Tuesday at 8:30 a.m. Thursday's rally was a bet that lower yields help buyers. Those numbers tell you whether builders are seeing it yet. Hot inflation, falling yields. The market thinks gas prices will slow the economy before the Fed has to.
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