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Mega-cap stocks were in demand yesterday, which translated into good things for the S&P 500, as well as the Nasdaq Composite which topped 20,000 for the first time ever. Small-cap and mid-cap stocks also pushed higher on a day that saw Treasury yields ultimately rise in the wake of a November Consumer Price Index that met expectations, but nonetheless showed some stubborn inflation pressure.
The bid seen in yesterday's market has been lacking so far this morning.
Currently, the S&P 500 futures are down 16 points and are trading 0.3% below fair value, the Nasdaq 100 futures are down 123 points and are trading 0.6% below fair value, and the Dow Jones Industrial Average futures are down 32 points and are trading fractionally below fair value.
Disappointing FY25 guidance from Adobe (ADBE), which is down 11%, has been a limiting factor along with festering concerns about valuations, the market being overbought on a short-term basis, and another questionable inflation report.
Briefly, the Producer Price Index for final demand increased 0.4% month-over-month (Briefing.com consensus 0.3%), led by a 0.7% jump in the index for final demand goods, following an upwardly revised 0.3% increase (from 0.2%) in October. Excluding food and energy, the index for final demand increased 0.2% month-over-month, as expected.
With these increases, the index for final demand was up 3.0% year-over-year versus 2.6% in October. That is the largest increase since the 12-month period ended February 2023. Excluding food and energy, the index for final demand was up 3.4% year-over-year (3.45% unrounded versus 3.37% in October).
The key takeaway from the report is that inflation at the producer level is moving in the wrong direction, evidenced by the large jump in goods inflation, particularly food, that raises the potential for pass-through pressures for consumers.
Notably, Treasury yields fell after the PPI release. That isn't because the market thought the PPI results were good. Rather, it relates more to the (relatively) big jump in weekly initial claims.
Initial jobless claims for the week ending December 7 increased 17,000 to 242,000 (Briefing.com consensus 220,000). Continuing jobless claims for the week ending November 30 increased 15,000 to 1.886 million.
The key takeaway from the report is that initial jobless claims are the highest they have been since mid-October, which will contribute to the belief that the labor market is softening -- a softening the Fed would like to prevent from becoming anything more by lessening its policy restraint.
The 2-yr note yield, at 4.18% in front of the PPI report, fell to 4.13% in its wake and is now at 4.14%. The 10-yr note yield went from 4.30% to 4.27% and is now at 4.28%. There was virtually no change in the market's expectation that there will be a 25-basis points cut at the December FOMC meeting. The probability of that move stands at 97.9% now versus 97.5% yesterday, according to the CME FedWatch Tool.
The action in the Treasury market has also been influenced by central bank policy decisions that featured the ECB cutting its key interest rates by 25 basis points each, as expected, the Swiss National Bank cutting its key rate by a larger-than-expected 50 basis points to 0.50%, and Brazil's central bank raising the Selic rate by 100 basis points to 12.25%.
