US stocks rallied after a strong round of earnings, a welcomed dip with core producer prices and a new cycle low with weekly jobless claims. Investors remain committed to stocks as the current inflationary environment won’t likely trigger a rapid interest rate hiking schedule from the Fed. Real yields will still remain in negative territory in the foreseeable future and that should provide a safety net for stocks.
Wholesale producer prices delivered a smaller-than-expected increase of 0.5% for September and 8.6% year-over-year. The tentative easing of prices paid to US producers was impacted by 16.9% month-over-month decline in airline passenger services. Commodity prices are still headed higher and since supply can’t keep up with demand, the next PPI report will likely post larger advances.
Weekly jobless claims dropped to 293,000, a new cycle low, and a strong beat of the 320,000 level. Falling below the 300,000 level is a big deal as it suggests we could see it back to the low 200,000 levels we saw pre-pandemic. Continuing claims declined by 134,000 to 2.593 million. The number of Americans participating in all unemployment insurance programs fell 523,426 to 3.65 million. As families become more confident schools will remain open, the labor shortage problem could improve as more Americans will be incentivized and/or feel comfortable returning to the workforce.
The banks painted a strong and healthy picture of the US consumer. During the pandemic, we were used to seeing JPMorgan results always impress, but this time Bank of America, Morgan Stanley, Citigroup, and even Wells Fargo delivered strong results. Wall Street can’t turn negative on the economy after seeing reserve releases, moderating trading revenue, mixed loan growth, and a consumer willing to take on debt.
The dollar rally is taking a break as Treasury yields decline. Real yields are falling hard and that should keep the dollar vulnerable in the short-term. Traders are now fully pricing in a Fed rate hike next year, but subsequent ones will lag what the other major central banks will be doing.