Dow, S&P 500 waver as Treasury yields retreat ahead of Fed minutes

How are stock indexes trading

• The S&P 500
  SPX
  was flipping between small gains and losses at 4,359.

• The Dow Jones Industrial Average
  DJIA
  was down 24 points, or 0.1%, to 33,714, after rising over 100 points after the opening bell

• The Nasdaq Composite
  COMP
  gained 40 points, or 0.3%, to 13,603.

On Tuesday, the Dow industrials rose 0.4%, while the S&P 500 increased 0.5%, to 4,358, and the Nasdaq Composite gained 0.6%, according to FactSet data.

What’s driving markets

U.S. stocks were trading mixed on Wednesday late morning, with the S&P 500 wavering between gains and losses, while the Dow industrials was edging lower after opening in the green.

The latest wholesale inflation report showed the September producer-price index increased 0.5% for the month, bolstered by higher energy costs. That was down slightly from a 0.7% increase in August, but above the Dow Jones consensus of a 0.3% gain. The core PPI, which strips out food, energy and trade services components, rose 0.2% in September, in line with expectations.

See: Producer price inflation comes in a little hotter in September, highest annual rate in five months

Gregory Daco, chief economist at EY, said he is not concerned about the PPI inflation trajectory despite “the energy bump in the road.”

“While the disinflationary impulse from easing supply chain strains is largely over, the all-important PPI for trade services — a proxy for margins — has shown significant disinflation which should in turn feed into lower consumer price inflation,” he said in emailed comments on Wednesday.

Meanwhile, he said Fed officials seem to view the recent climb in the 10-year Treasury yield on a “one-to-one basis” in terms of equivalent fed funds rate increases, but the ratio could be greater so that the rapid rise in the long-end of the yield curve could bring into consideration not just an additional rate hike, but earlier rate cuts, Daco added.

See: 10-year Treasury yield falls further to two-week low despite hot producer price inflation

The yield on the 10-year Treasury
BX:TMUBMUSD10Y
continued to retreat from the 16-year highs reached last week, off 8 basis points, at 4.572% on Wednesday, while the yield on the 2-year Treasury
BX:TMUBMUSD02Y
advanced 2 basis points, at 4.987%, according to FactSet data.

The decline in long-term implied borrowing costs comes after recent comments from Federal Reserve officials indicated the central bank may have finished raising interest rates for this cycle.

The U.S. consumer price index report for September will be published before Thursday’s opening bell on Wall Street. Investors also will focus on Wednesday’s release of minutes from the Fed’s previous policy meeting, due at 2 p.m. Eastern.

The Fed’s minutes may sound “hawkish” about where to fix the neutral real policy rate in the U.S., and that may reverse Wednesday’s bond rally, said Thierry Wizman, global FX and interest rates strategist at Macquarie.  

The neutral rate of interest, or “r-star”, is the the real short-term interest rate expected to prevail when an economy is at full strength and inflation is stable.

But to have a more sustainable reversal toward a 4% 10-year Treasury yield, signs of a bona fide consumer-led slowdown need to emerge, Wizman said, which may get the Fed to eventually drop the “higher-for-longer” interest-rate narrative.

“Watch Q4 guidance from consumer companies for the first rumblings of a consumer slowdown,” he added.

Traders also were awaiting the start of the third-quarter company earnings reporting season, which gets in full swing when banks that include JPMorgan Chase
JPM,
-0.08%,
Citigroup
C,
-0.02%,
and Wells Fargo
WFC,
-1.17%
deliver their numbers on Friday.

See: Q3 earnings are here: S&P 500 heads toward year of profit declines as JPMorgan, and Delta report this week

There’s another slew of Fed speakers on Wednesday, too. Fed Governor Christopher Waller said tighter financial conditions are set to do some of the central bank’s work for it. Atlanta Fed President Raphael Bostic is due to speak on the economic outlook at 12:15 p.m., and Boston Fed President Susan Collins gives the Goldman Lecture on Economics at Wellesley College at 4:30 p.m..

Companies in focus

• Exxon Mobil
  XOM,
  -4.57%
  dropped 4.8% on Wednesday after the company reached an agreement to purchase shale-drilling company Pioneer Natural Resources 
  PXD,
  +0.83%
  for $59.5 billion in stock. Shares of Pioneer Natural Resources rose 0.9%.

• DaVita Inc.
  DVA,
  -18.54%,
  a dialysis-services provider, plunged 19.7% and the U.S.-listed shares of Fresenius Medical Care 
  FMS,
  -18.47%
  declined 17.9% after the trial success of Novo Nordisk’s hit drug against kidney failure sent shares of kidney dialysis services firms plummeting.