PPI Data Awaited After Monday's SPX Recovery
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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's Schwab's early look at the markets for Tuesday, January 14th. After a month of struggles on Wall Street as Treasury yields relentlessly climbed, investors might be hungry for a bullish catalyst.

Inflation data and the start of earnings season are menu specials today and tomorrow, but positive outcomes are far from guaranteed. Trading starts after a surprise recovery led the S&P 500 index back from early weakness to close slightly higher Monday.

This busy stretch begins with the December producer price index due at 8.30 a.m. ET today. For PPI and Core PPI, analysts expect 0.3% and 0.2% monthly growth, respectively. Core extracts volatile food and energy prices. Those estimates compare with 0.4% and 0.2% in November.

Those estimates look relatively benign from a rate standpoint, but year-over-year changes are also important, and trading economics consensus of 3.7% for core annual PPI growth would be up from 3.4% the previous month and perhaps provide more evidence that inflation is far from tame.

Yields jumped and rate cut odds eased in part on worries of potential higher inflation associated with strong economic growth reinforced by last Friday's jobs report. Inflation expectations also climbed recently, rising to 3.3% for five-year inflation according to last Friday's University of Michigan Preliminary January Consumer Sentiment Survey. That's the highest since 2008.

Monday's New York Fed December survey was a little less elevated, with five-year inflation expectations at 2.7 percent, down from 2.9 percent the previous month. The survey also showed respondents less concerned about losing their jobs, which could go hand-in-hand with the solid jobs report and might send a positive message about consumers.

People don't tend to make big purchases if they're afraid of losing their job, and consumer spending represents about 70% of the U.S. economy. Several retailers shared holiday season shopping data Monday, but investor reaction wasn't enthusiastic.

PPI often plays second fiddle to the Consumer Price Index, or CPI, for most market participants, and core CPI is expected to rise 3.3% euro-vier when data comes out early Wednesday, Trading Economics said. That's well above the Fed's 2% target and could keep yields near recent 14-month highs.

The 10-year yield climbed three basis points yesterday to 4.8 percent, the highest since mid-November of 2023, and not far below the intraday peak of 4.997 percent that month. For a higher reading than that, the clock turns back to the administration of George W. Bush in 2007.

Housing and core services continue to be a key driver of inflation, and the relative strength of the labor market could keep those readings elevated if consumer spending remains strong, said Colin Martin, director of fixed income strategy at the Schwab Center for Financial Research.

For all intents and purposes, the jobs report likely sealed the deal for no Fed rate cuts at least in the first half of the year and, while it's early to say, supports ideas that there may be no rate cuts at all in 2025. As of late Monday, the CME FedWatch tool puts odds of a Fed pause at this meeting later this month near 98% and built-in 80% chances of no first quarter cut.

Domestic policy worries, accompanied by signs of strong economic growth, likely mean the path of least resistance for Treasury yields remains higher. Tariffs, immigration policy changes, and tax cuts could all add to inflationary pressures down the road, said Kathy Jones, chief fixed-income strategist at Schwab. It's too early to know what the choices will be, but we expect the market to be wary until there is more clarity.

Yield volatility represents a headwind for the equity market, which is down almost 5% from its early December all-time peaks. Still, there hasn't been many days of dramatic selling. Instead, it's been a measured downturn that continues to see rotation by investors out of tech and communication services and into sectors like energy and healthcare that lagged last year.

Another potential catalyst is due tomorrow morning, along with CPI, as several of the largest U.S. banks report earnings, informally kicking off fourth quarter earnings season. JPMorgan Chase, Wells Fargo, Citigroup and Goldman Sachs line up first thing Wednesday.

Bank earnings are expected to be relatively strong, with bottom lines potentially getting some benefit from a rising yield curve that makes lending more profitable. Potential for a lighter regulatory hand under the new U.S. administration aiding merger and acquisition activity is another potential positive scenario for banks, but is far from assured.

Checking sector performance Monday, Infotech started weak and remained that way the entire session, burdened by news that the Biden administration had imposed new export restrictions on chip technology. A PHLX semiconductor index, or SOX, hit its lowest intraday level of 2025, while AI giant NVIDIA descended another 2% and is now down double digits from the all-time high it established less than a week ago.

Shares of Nvidia also fell below their 100-day moving average, an important chart point that served as support on past downturns in September and December. Other major chip stocks, including advanced micro devices and Broadcom, managed to finish higher, while tech giant Apple, like Nvidia, continued to falter. If Apple and Nvidia keep losing steam, the broader market could have a tough time overcoming the power of their huge market capitalizations.

Energy and materials led all S&P sectors yesterday, but defensive areas like health care and real estate also ranked high as rotation out of tech continued. Technically, yesterday's slightly higher S&P 500 close after it fell below its 100-day moving average of around 5,820 earlier looked constructive from a chart standpoint. It was also positive that the S&P 500 index closed near its high for the session.

At one point, Indra Deya fell to its lowest level since early November.

The S&P 500 index added 9.18 points or 0.16% to 5,836.22. The Dow Jones Industrial Average climbed 358.67 points or 0.86% to 42,297.12. And the Nasdaq Composite fell 73.53 points or 0.38% to 19,088.10.

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