Dow Jones trims loss in final hour as Treasury yields climb after inflation data

What’s driving markets

U.S. stock indexes gave up all their earlier gains to trade sharply lower Thursday afternoon, pressured by rising Treasury yields after the latest CPI data showed the annual rate of inflation hasn’t moved since last month in a hotter reading than many predicted.

The September consumer-price index showed prices rose by 0.4% last month, just above economists’ expectations for a 0.3% increase. Meanwhile, core CPI, which strips out volatile food and energy prices, came in at 0.3%, which was exactly in line with expectations.

On a year-over-year basis, headline consumer prices rose 3.7%, unchanged from August but higher than the 3.6% increase economists had expected.

Market analysts said the inflation data didn’t offer much guidance about the Federal Reserve’s next moves, even as the market-based probability of a hike in December crept higher.

Fed funds futures traders boosted the chances of a 25-basis-point rate hike by the central bank in December to 31.4%, up from 26.3% a day ago. Meanwhile, traders saw only a 11.8% chance of a quarter-point hike on Nov. 1, according to the CME FedWatch Tool.

Christoph Schon, senior principal of applied research at Axioma, said Wednesday’s CPI report was “mildly disappointing,” but it was “not traumatic.”

Inflation might get a little bit worse before getting better, he said of the headline numbers. “But I think we’re still on a trajectory that could get us down to 2% over the next 12 months,” he told MarketWatch. That’s the Fed’s annual target for inflation.

Others, notably Krishna Guha of Evercore ISI, said the data could complicate the Fed’s inflation-fighting efforts.

“The September CPI report is not a good one for the Fed, but will keep the U.S. central bank in wait-and-see mode as it weighs bumpier progress on both disinflation and labor rebalancing in a context of firmer than expected growth against the additional drag from the step-up in yields over recent months,” he said in emailed commentary.

See: Treasury yields are likely to fall. That doesn’t mean stocks and corporate bonds are guaranteed to increase.

The 10-year Treasury yield
BX:TMUBMUSD10Y
was up 11.5 basis points, at 4.710%, while yields on the 2-year Treasury note
BX:TMUBMUSD02Y
were up 6.6 basis points to 5.069%. Both yields recorded their largest one-day yield gain since Oct. 3, according to Dow Jones Market Data. Bond price and yield are inversely related.

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

Looking ahead, traders are now bracing for the start of third-quarter corporate earnings reporting season.

Aggregate S&P 500 earnings are forecast to have risen 1.3% from a year ago, according to Tajinder Dhillon, senior research analyst at Refinitiv, who also notes that the market has grown more optimistic about corporate profits of late.

Investors also digested a report on weekly jobless claims early Thursday. The data showed the number of Americans applying for unemployment benefits was flat at 209,000 last week.

Boston Fed President Susan Collins is due to speak about the economic outlook at 4 p.m. Eastern, the latest in a parade of senior Fed officials to share their latest views.

Companies in focus

• Walgreens Boots Alliance Inc.’s
  WBA,
  +7.04%
  stock rose 6.9% on Thursday after the drugstore chain and healthcare services company missed fiscal fourth-quarter profit expectations and provided a downbeat outlook. Shares had reversed losses from the premarket session.

• Shares of Delta Air Lines Inc.
  DAL,
  -2.39%
  fell 2.6% after the air carrier reported third-quarter profit that beat expectations, and said the “robust demand” for travel it has been seeing has continued into the current quarter.

• Victoria’s Secret & Co.’s
  VSCO,
  +2.01%
  shares rose 2% after the maker of bras, lingerie and sleepwear said it could lose less than previously thought during the third quarter.

• Ford’s
  F,
  -2.00%
  stock fell 1.8% after the United Auto Workers union said 8,700 workers had walked out of a truck-making factory in Louisville, Kentucky.

Jamie Chisholm contributed