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Briefing.com Summary:
*The AI trade is unwinding.
*Treasury yields are falling fast in a safe-haven rotation trade.
*The September PPI report went the way of the September CPI report, which isn't a good thing as far as the inflation trend is concerned.
There is a fracture in the market. Treasury yields are down noticeably since the start of the week, yet high-beta stocks are down even more since the start of the week. Entering today, the 10-yr note yield stood at 5.19%, and the Invesco S&P 500 High Beta ETF (SPHB) was down 6.5%.
Currently, the 10-yr note yield sits at 5.06%, which is remarkable considering it hit 5.32% yesterday in the wake of the September CPI report. The Invesco S&P 500 High Beta ETF doesn't have a pre-market indication, but it is destined to start today's session on a downbeat note considering the AI trade remains under pressure.
That was evident in Asian markets. Japan's Nikkei fell 4.9%, while South Korea's KOSPI Index plummeted 7.6%, leaving it down 16.2% for the week and down 21.1% (meeting the technical definition of a bear market) from the high it reached on October 6.
That is a fast-moving market alright, and the fallout has been precipitated by pronounced weakness in memory stocks that has flowed from competition concerns, worries about the cost of financing for the AI buildout, anxiousness about growth expectations being too high, and the unwinding of speculative positions.
Those factors have carried over here. The Philadelphia Semiconductor Index is down 7.1% week-to-date, and AI/data center infrastructure company CoreWeave (CRWV) is down nearly 20% for the week, with Bloomberg reporting that its unsecured debt due in 2032 is trading at levels that typically indicate distress.
It is a fine mess at the moment, and there is difficulty still in cleaning it up, evidenced by the improvement in the 10-yr note yield and the lack of improvement in the high-beta stock space.
The Nasdaq 100 futures are down 389 points and are trading 1.4% below fair value. The S&P 500 futures are down 27 points and are trading 0.3% below fair value; meanwhile, the Dow Jones Industrial Average futures are up 183 points and are trading 0.3% above fair value, aided by a rotation into lower-beta stocks.
The major indices, then, are slated to start the cash session on a mixed note, paying heed to a bevy of economic releases that were generally stronger than expected, although that isn't necessarily a good thing in the case of the September Producer Price Index.
- The Producer Price Index for final demand increased 1.3% month-over-month in September (Briefing.com consensus: 0.5%) following a 0.5% increase in August. The September increase was the largest increase since March 2022 and left the index up 6.3% year-over-year versus 5.6% in August. The index for final demand, less food and energy, rose 0.7% (Brieifng.com consensus: 0.3%) following a 0.2% increase in August. The September increase left the index up 5.0% year-over-year versus 4.8% in August.
- The key takeaway from the report is the accelerated pace of inflation at the wholesale level. That will be looked at by many as a setup for ongoing pass-through price pressures for the consumer.
- Retail Sales jumped 0.8% month-over-month in September (Briefing.com consensus: 0.3%) following an upwardly revised 1.3% (from 1.2%) in August. Excluding autos, retail sales rose 0.9% (Briefing.com consensus 0.3%) after increasing 1.4% in August.
- The key takeaway from the report is that there was continued strength across many discretionary spending categories that wasn't just driven by higher prices. Spending at food services and drinking places, for instance, was up 1.1% after increasing 1.4% in August.
- Initial claims for the week ending October 10 increased by 1,000 to 199,000 (Briefing.com consensus: 200,000). Continuing jobless claims for the week ending October 3 decreased by 4,000 to 1.710 million.
- The key takeaway from the report continues to be that it signals low layoff activity, which is a reflection of a solid demand environment.
- The October Philadelphia Fed Index dropped to 20.9 (Briefing.com consensus: 29.0) from 37.8. The dividing line between expansion and contraction is 0.0, so this report denotes a slowdown in the pace of expansion in October.
- The October Empire State Manufacturing Survey increased to 25.5 (Briefing.com consensus: 7.0) from 7.6 in September. The dividing line between expansion and contraction is 0.0, so this report denotes an acceleration in the pace of expansion in October.
A smattering of earnings reports has been overshadowed mostly by the fallout in the AI trade, which is afflicting Taiwan Semiconductor Manufacturing Company (TSM). In a sign of the current times, it delivered better-than-expected results and issued Q4 revenue guidance that was above consensus. TSM is down 3.4%, however, with reports suggesting its gross margin and revenue guidance for Q4 weren't strong enough.
