Dow rises 100 points as Treasury yields retreat despite hotter-than-expected wholesale inflation data

What’s driving markets

U.S. stocks were rising on Wednesday morning after 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 5 basis points, at 4.605% on Wednesday morning, while the yield on the 2-year Treasury
BX:TMUBMUSD02Y
advanced 4 basis points, at 5.004%, 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.

“Markets continued to grind higher as the headwinds of the Middle Eastern conflict were neutralized by a further softening of rhetoric from the Federal Reserve,” said Richard Hunter, head of markets at Interactive Investor.

‘’The surge of optimism, fueled by hopes the Fed will go easier with its interest rate policies…appears to have plateaued,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown. “A little more caution is returning, as investors look ahead to tomorrow’s snapshot of inflation in the United States.”

The U.S. consumer price index report for September will be published before Thursday’s opening bell on Wall Street, but before that on Wednesday investors must also parse the minutes from the Fed’s previous policy meeting, due at 2 p.m.

“Investors are highly sensitive to data and if U.S. inflation shows any signs of tripping up in its downwards path, it is set to be unsettling and could upset expectations of a more dovish stance from the Fed,” Streeter added.

There’s another slew of Fed speakers on Wednesday, too. Fed Governor Christopher Waller will deliver comments in Park City, Utah at 10:15 a.m. Eastern, while 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..

Traders were also awaiting the start of the third-quarter company earnings reporting season, which gets in full swing when banks such as JPMorgan Chase
JPM,
+0.53%,
Citigroup
C,
+1.03%,
and Wells Fargo
WFC,
-0.15%
deliver their numbers on Friday.

Companies in focus

• Exxon Mobil
  XOM,
  -4.32%
  dropped 3.8% on Wednesday morning after the company reached an agreement to purchase shale-drilling company Pioneer Natural Resources 
  PXD,
  +0.79%
  for $59.5 billion in stock. Shares of Pioneer Natural Resources rose 0.7%.

• DaVita Inc.
  DVA,
  -19.49%,
  a dialysis-services provider, plunged 16% and the U.S.-listed shares of Fresenius Medical Care 
  FMS,
  -18.38%
  declined 16.3% after the trial success of Novo Nordisk’s hit drug against kidney failure sent shares of kidney dialysis services firms plummeting.