Schwab Market Update

Published as of: January 14, 2025, 9:24 a.m. ET

(Tuesday market open) U.S. wholesale prices cooled last month, with the Producer Price Index (PPI) up 0.2% and core PPI excluding food and energy flat. Those were below estimates for headline growth of 0.3% and core of 0.2%, and helped send Treasury yields slightly lower ahead of the open as stocks rebounded. Though PPI is an important report, tomorrow's Consumer Price Index (CPI) is likely more influential, but after weeks of mounting inflation worries, PPI appeared refreshing.

"It's just one report, but it's good news for the path of inflation," said Cooper Howard, director, fixed income strategy at the Schwab Center for Financial Research. "The components that feed through to PCE were fairly tame. That bodes well for PCE being lower than expected." PCE stands for Personal Consumption Expenditures and is the price data most closely followed by the Federal Reserve. The next PCE data come out later this month. The PPI data showed goods prices up but services prices flat, finally providing some relief on that front. Services represent 67% of the PPI's weight.

Beyond the inflation reports, tomorrow marks the unofficial start of earnings season when four of the biggest U.S. banks report. This puts corporate news back in the spotlight after a holiday break and could potentially serve as a catalyst to move the market based on company health. The last month featured a sharp focus on Treasury yields amid inflation fears and worries that Fed rate cuts may be nearly over.

1. Deeper dive on PPI: Today's report saw the headline PPI cut in half from 0.4% in November despite a sharp rise in gasoline prices. Generally, goods prices rose last month even as services prices were unchanged, and the core year-over-year PPI rose to 3.5%, below the average 3.8% forecast. Headline PPI rose 3.3% year over year. PPI measures prices paid by producers and is often viewed as the "pipeline of inflation" because producer prices sometimes get passed along to consumers. Looking at components, the biggest drops in the service sectors were travel, accommodation services, consumer loans, and computer hardware. The data didn't immediately seem to affect expectations for this month's Fed meeting where the CME FedWatch tool still prices in 97% odds that policy makers will stand pat on rates. The market prices in a nearly 75% chance of at least one rate cut this year.
2. CPI outlook: Expectations for CPI look mixed from an interest rate standpoint. For CPI and core CPI, analysts expect 0.3% and 0.2% monthly growth, respectively. The November readings were both 0.3%. If core CPI does fall to 0.2%, as analysts expect, that would put it back at mid-2024 levels, a time when investors saw progress on inflation that ultimately helped lead to rate cuts starting in September. However, year-over-year core consensus is 3.3%, according to Trading Economics, no improvement from a month earlier and well above the 2% Federal Reserve target.  "Monthly CPI and PPI will likely determine the near-term trajectory of yields, given the market's current sensitivity to economic data following the recent strong jobs data and warmer inflation signals" said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. "If yields are going to be moving higher because of stronger economic data and warmer inflationary data, then the bulls will want to see Q4 earnings back up their belief that 2025 earnings growth will help support current valuation."
3. Technical "orange flags" waving: The recent drop in the S&P 500 took out some key technical support levels, including at one point the 100-day moving average just above 5,820. Yesterday's finish just above that looks positive technically, but that level could continue being watched closely. Also, the 20-day moving average is trending downward and threatening to fall below the 50-day moving average, which Schwab's Peterson calls "an orange flag regarding recent momentum." These aren't necessarily signs of gloom and doom but indicate the trend may be changing as investors reassess fundamentals considering rising yields, he added. The last time the SPX traded below its 100-day moving average was in early August and it quickly bounced back. But yields were heading down then, not up, and last week's hot jobs report may have sealed the deal for no Fed rate cuts the first half of this year.

• KB Home (KBH) climbed nearly 10% ahead of the open but remains down sharply over the last month amid stubbornly high borrowing costs. The company reported better-than-expected results late Monday and issued positive guidance, helped by a rise in the average home selling price and a rise in net orders.
• Nvidia (NVDA) and Tesla (TSLA) rose 1% and 2%, respectively, ahead of the open, and mega cap stocks generally did well overnight following a Bloomberg report that the Trump administration might decide to add tariffs gradually rather than suddenly. This report might have sparked the late recovery in the SPX yesterday, and Treasury yields fell slightly from recent peaks.

The week ahead: Schwab's Kleintop walked investors through key events ahead in his Weekly Market Outlook. "CPI for December may again show that reports of inflation’s death are exaggerated," Kleintop said in his latest report.

This six-month daily chart of the S&P 500 index (SPX—candlesticks) shows the importance of the 100-day moving average (blue line). A drop below it in early August didn't last long, and another test of it in early September failed. Recent losses, until this month, also didn't take the index down to the moving average. Now there are signs of that support possibly starting to crack, with Friday's dip below the 100-day line followed by Monday's pivot to just above that level. Failure to hold support here could mean testing pre-election lows near 5,700.

Check out the Investors' Calendar for a summary of the top economic events and earnings reports on tap this week.

January 15: Expected earnings from JPMorgan Chase (JPM), Goldman Sachs (GS), Citigroup (C), Wells Fargo (WFC), Blackrock (BLK), and December CPI and core CPI.
January 16: December retail sales and expected earnings from Morgan Stanley (MS), UnitedHealth (UNH), Taiwan Semiconductor (TSM), and Bank of America (BAC).
January 17: December housing starts and building permits.
January 20: No major earnings or data expected.
January 21: Earnings expected from 3M (MMM), D.R. Horton (DHI), Fifth Third (FITB), Netflix (NFLX), Capital One (COF), United Airlines (UAL).