U.S. stocks edge higher as investors digest hot producer price inflation data ahead of CPI, bank earnings

What’s driving markets

The 12-month rate of producer price inflation slowed to to 8.5% from 8.7% while the annual core rate, excluding food and energy, was unchanged at 5.6%, but the monthly rate rose 0.4% in September, above forecast, and the monthly core PPI was also up 0.4% in September.

Such data has worsened fears that to curb inflation, the Fed will continue its aggressive rate hikes, which may steer the U.S. economy into a recession.

“We believe the odds of a recession in 2023 are now better than 50%,” Greg Bassuk, chief executive at AXS Investments, wrote in a Wednesday note. “Last week’s market turbulence saw volatility at levels we have not seen since July, and we believe investors should brace for ongoing market volatility and uncertainty throughout Q4, in concert with another likely Fed interest rate hike to the tune of 0.75% in November,” according to Bassuk.

The 10-year Treasury yield BX:TMUBMUSD10Y, which started the year around 1.65% was trading at 3.931% on Wednesday, off 1.3 basis points, after the producer price inflation data.

Traders are also awaiting U.S. September consumer prices data on Thursday due at 8:30 am Eastern Time. The September CPI reading, which tracks changes in the prices paid by consumers for goods and services, is expected to show an 8.1% rise from a year earlier, slowing from an 8.3% year-over-year rise seen in August. The core CPI, which omits food and energy, is expected to be running at a year-over-year pace of 6.5%, up from 6.3% in August. 

Liz Young, head of investment strategy at SoFi, doesn’t expect a big downside surprise in the CPI data as PPI prices came in above expectations and wage growth stayed steady in Friday’s jobs report.

“If core CPI comes in at expectations, 6.5% is still pretty troublesome,” Young told MarketWatch via phone. “So I don’t think that this report is going to change the trajectory of the Fed in any way. I think that the hawkish narrative will remain that the market will continue to expect 75 basis point in November.”

“For us, analyzing the month over month numbers is much more important than looking at the headline,” Zachary Hill, head of portfolio management at Horizon Investments, said in an interview.

“The way we’ve been thinking about it, the last three months annualized [inflation] gives you a kind of a decent idea of where the shorter term trends are around inflation,” Hill said. “We think that’s what the Fed is going to be looking at to see progress towards their 2% goal. And unfortunately, based on various measures, we’re nowhere near that today.”

See: What stock-market investors will be watching in Thursday’s U.S. inflation report

Adding to the market anxiety, and keeping any Wednesday rally in check, is the continuing volatility in U.K. government bonds after the Bank of England reiterated it would stop supporting the market after Friday.

Investors have become increasingly concerned of late that severe stresses in the financial system may emerge as central banks switch from the era of zero or negative interest rates to sharply higher borrowing costs as they try to tackle inflation at multi-decade highs.

“[G]lobal financial conditions have tightened as central banks continue to raise interest rates. Our latest Global Financial Stability Report shows that financial stability risks have increased since our last report, with the balance of risks tilted to the downside,” said the International Monetary Fund in a report released on Tuesday.

“The mood of global investors was gloomy enough and hardly needed yesterday’s reminder from the IMF that the risks to financial stability have increased,” Ian Williams, strategist at Peel Hunt, noted. “Its report highlighted specifically (if obviously) the threats from persistent inflation, China’s slowdown and the war in Ukraine. The highlighted ‘disorderly repricing of risk’ is arguably already underway.”

See: Wall Street’s ‘fear gauge’ is flashing a warning that stocks could be about to fall off a cliff

The Fed may offer its view on the topic as a number of officials are due to give comments on Wednesday. Minneapolis Fed President Neel Kashkari said the Fed is “dead serious” about getting inflation down. Fed vice chair Michael Barr will speak at 1:45 p.m. The minutes of the Fed’s previous monetary policy setting meeting will be released at 2 p.m. ET and Fed governor Michelle Bowman will deliver comments at 6.30 pm.

Companies in focus

• Shares of Philips PHIA, -12.27% PHG, -11.50% plunged 11.6% after the Dutch tech company issued its second profit warning this year, forewarning that supply chain problems will impact sales and third-quarter profits.
• Intel Corp. INTC, +1.48% may fire thousands of workers by the end of the month, around the same time the chip manufacturer reports quarterly results amid a tough year for semiconductor makers, Bloomberg reported late Tuesday. The company’s shares rose 1.4% Wednesday.
• Shares of PepsiCo Inc. climbed 4.1% Wednesday, after the beverage and snack giant reported third-quarter profit and revenue that rose above expectations and raised its full-year outlook, as higher prices helped offset some volume weakness.
• Shares of Moderna Inc. MRNA, +7.87% jumped 10.7% after the company announced it will partner with Merck MRK, -0.66% to develop and sell a mRNA-based cancer vaccine.

— Jamie Chisholm contributed to this article.