Awaiting PPI, Tech Earnings After Yields Spike
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Welcome to the Schwab Market Update podcast, where we prepare you for each trading day with a recap of recent news and a look at what's ahead. I'm Keith Lansford, and here is Schwab's early look at the markets for Thursday, February 13th.

January's Producer Price Index, or PPI, is the next leg of the inflation picture before today's open, offering a look at wholesale costs the day after an unpleasant Consumer Price Index, or CPI, topped expectations and sent stocks down while yields jumped.

PPI due out at 8.30 a.m. ET is expected to show 0.2% headline and 0.3% core monthly growth in January, with core stripping out volatile food and energy prices. The figures for December were 0.2% and flat, respectively. Expectations are for a year-over-year increase of 3.3% in core PPI, down from 3.5% in December.

Treasure yields hit their highest levels in almost a month for the 10-year note Wednesday, above 4.64%, well above last week's intraday low, just under 4.40%. A 10-year note auction late yesterday saw light demand, keeping yields elevated. Auction demand, if it's robust, is often bullish for treasuries, which move the opposite direction of yields.

But yesterday's CPI data pushed back chances of a Fed rate cut, with the CME FedWatch tool now showing March odds near zero, down from 30 percent a couple of weeks ago. Chances for at least one rate cut by the end of the year were still nearly 70 percent, taking the target range to forward percent to 4.25 percent. The Fed's latest projection in December was for two cuts this year.

The Headline Consumer Price Index, or CPI, climbed 0.5% monthly in January versus 0.3% expectations, and Core, which excludes food and energy, rose 0.4% to top the 0.3% consensus. Annual CPI numbers were also swollen at 3% for Headline versus the consensus of 2.9%.

Core annual CPI jumped to 3.3%, above 3.2% in December and above 3.1% expectations.

The CPI report slammed the door on hopes for a rate cut by the Fed anytime soon, said Kathy Jones, chief fixed income strategist at Schwab. Although the January figures often include seasonal factors that tend to make the report come in on the high end of expectations, this report was a disappointment even taking that consideration into account. Price increases were broad-based across every category, with the biggest jumps in the services sector.

Transportation services and housing stood out as major contributors. Year-over-year CPI is running at a 3% rate, with core at 3.3% higher than a few months ago. The market is now discounting one rate cut late in the year, Jones said, but if the inflation readings don't improve substantially, there may be no rate cuts this year. It's too soon to tell, but it's now something that's being discussed.

In testimony to the House Financial Services Committee on Wednesday, Fed Chairman Jerome Powell said, quote, We don't get excited about one or two good readings on inflation. We don't get excited about one or two bad readings, end quote. He repeated that officials need to see more progress on slowing inflation before considering further rate cuts, Barron's reported.

Key earnings to watch Thursday include Roku, Deere, Coinbase, Palo Alto Networks, and Applied Materials. Deere's earnings might be a good opportunity for investors to hear from a company likely to be affected by tariffs on aluminum and steel, as well as trade tensions with China, as China is a major importer of U.S. agricultural products.

The last time Coinbase reported, results disappointed Wall Street. Revenue from retail trading rose 98% annually in the previous quarter and will be closely watched. Semiconductor industry supplier Applied Materials might give investors a better sense of AI chip demand. Cisco jumped to 5% in post-market trading late yesterday after reporting above-consensus earnings, revenue that met expectations, and better-than-expected guidance.

Networking revenue fell 3% in the quarter, but that was a hefty sequential improvement. Tariff policy, including 25% steel and aluminum tariffs set for March 12, continues to concern Wall Street, but there may be reasons to think fears are overdone.

Trump's tariffs have a pattern of getting lowered, said Jeffrey Kleintop, chief global investment strategist at Schwab. Last time he did this, steel tariffs were 25% and aluminum was 10%. I think the 25% aluminum tariff is reduced or eliminated for some countries prior to being implemented on March 12th, and that is also why we aren't seeing aluminum prices in the U.S. deviate much from those in Europe.

However, tariff issues have the potential to drive volatility, even if the March 4 tariff delay extension for Mexico and Canada is extended, as Kleintop believes is likely. A 25% tariff on aluminum is likely inflationary, at least in the short run, according to Kleintop, as it's used to make many things, including airplanes and cars, two areas where the U.S. competes on a global stage.

Major U.S. manufacturers are likely reaching out to the White House to make their voices heard on how damaging to U.S. competitiveness that 25% tariff could be, Kleintop said. Sector-wise, rising yields after CPI data put rate-sensitive real estate and financials under pressure yesterday, along with small caps. But the market as a whole held together better than the initial reaction to CPI would have suggested.

Only three sectors posted small increases yesterday, but many tech stocks including Apple, Palantir and Intel climbed. Apple sometimes sees inflows on days with poor data, with investors seeking perceived safety in highly capitalized names, though no investment is safe. This might have helped several other mega caps yesterday as well.

Palantir and Intel may be up on the Trump administration's recent pledge that AI chips would be made in the U.S., but higher yields and lower rate cut chances hurt shares of home-related stocks like Lenar and Home Depot yesterday.

The S&P 500 index fell 16.53 points Wednesday or 0.27% to 6,051.97. The Dow Jones Industrial Average dropped to 225.09 points or 0.50% to 44,368.56. And the Nasdaq Composite added 6.09 points or 0.03% to 19,649.95.

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