Here is Schwab's early look at the markets for Thursday, September 24.
An eventful week of diplomatic overtures concludes today when Chinese President Xi meets with U.S. President Trump in Washington, D.C., to discuss trade, the Iran war, and other topics.
Overshadowing almost everything for now, however, are Treasury yields, which took an elevator ride yesterday to fresh 19-year highs on signs of a galloping U.S. economy and little relief in oil prices.
Wednesday's September S&P Global U.S. Manufacturing PMI headline surprised market participants and instigated the Treasury sell-off, coming in well above expectations at 56.7. Anything above 50 marks expansion. Consensus was around 53. The overall S&P Global Flash Composite PMI rose to 58.4, the highest since mid-2021.
The 10-year Treasury yield popped on the robust data, trading above 5.13% intraday and ringing an alarm bell on Wall Street. While strong manufacturing can signal economic vigor, the report also showed price pressure intensifying for businesses. Yields rose across the curve, including double digit gains for the 10-year yield, an unusually strong daily move. Short-term yields climbed slightly less.
Adding to Treasury woes, Fed Gov. Michael S. Barr hinted strongly Wednesday that more rate hikes are likely needed to help the Fed return inflation to its 2% target. The Fed was "out of position" before last week's rate hike, Barr said.
Yesterday's 5-year Treasury note auction saw lackluster demand, adding to pressure on Treasuries and sending yields even higher around midday. The auction's high yield of 5.03% compared with the average high yield of 3.91% over the previous 12 auctions.
Action continues with a 7-year note auction today, and results should be available by early afternoon. The question is whether investors spring for current yields or wait, hoping the recent rate hike and expectations for additional Fed moves send yields up again.
"We expect the Fed to hike one more time this year and again either later this year or early next year, depending on the pace and breadth of inflation," said Cooper Howard, director of fixed income research and strategy at the Schwab Center for Financial Research (SCFR).
As of late Wednesday, odds of a rate hike next month stood near 69%, according to the CME FedWatch Tool, up from 48% a week ago. Chances of at least one hike by year-end hit 93%, with around 50-50 odds of two more hikes this year.
Though some analysts think an October rate hike is unlikely because the meeting date comes right before November's mid-term election, others say the Fed won't pay attention to the political calendar. Before the last mid-term election in 2022, the Fed delivered a 75-basis point rate hike at its October meeting.
Any conversations between the U.S. and China on the war and oil might grab attention considering China is a big oil customer of Iran's. China has reportedly started importing oil again after a pause, another bullish element for crude and possibly another boost for yields.
It's unclear if either country will have its technology priorities addressed in a single meeting. Instead, lower-level trade of U.S. agricultural products and Chinese low-tech consumer goods might take precedence, with tariffs potentially eased. The U.S. effective tariff on Chinese goods is around 23%, more than triple that of other major trading partners but below the punishing peak of 145% last year.
Another topic could be U.S. liquid natural gas (LNG), a product China has trade barriers on. Potential progress could boost energy stocks, especially those adding LNG capacity like Cheniere Energy and Exxon Mobil, Reuters recently reported.
In another energy-related development, Iran's president addressed the United Nations Wednesday and delivered a speech that, like Trump's on Tuesday, didn't provide much hope for détente. However, Trump indicated that lower-level officials talked this week.
On the home front, data and earnings remain light, though Costco reports later today. One item Costco sells is gasoline, which might have raised revenue. Paid membership growth is an important metric, rising 4.1% in the previous quarter. Darden Restaurants reports this morning in what's been a tough stretch for the industry.
Today's main numbers are initial jobless claims before the open and new home sales soon after. Analysts expect new home sales for August to fall to 600,000 on a seasonally adjusted annual basis, from 607,000 in July. New home sales fell more than 10% month over month in July, and the median sales price fell 0.9% year over year. A repeat of these moribund numbers could keep housing-related stocks under pressure.
On Wednesday, major indexes backtracked on rising yields and a 2% climb in crude. Selling pressure was widespread. Market breadth remained thin, as just 29% of S&P 500 stocks trade above their 50-day moving averages. This means fewer names carrying the indexes, making an upward path harder to maintain.
Ten of 11 S&P 500 sectors finished red Wednesday. Only energy avoided a decline. Utilities—a rate-sensitive sector—performed worst with 2% losses. High yields compete with the dividends they offer. Other rate-sensitive areas like staples and real estate also fell. Tech reversed gains from earlier this week in a wave of profit taking that hurt the chip sector.
The Cboe Volatility Index (VIX) rose 7% Wednesday but stayed well below levels that indicate advanced market uncertainty. At just above 15, VIX may indicate less concern about the yield surge.
Checking Wednesday's individual market movers, IonQ surged 4.4% as the company announced "a major milestone." Researchers successfully tested the first real-time quantum error correction decoder that runs on a single standard off-the-shelf central processing unit.
An exception to tech's slide yesterday was cybersecurity. Palo Alto Networks and Crowdstrike both jumped 5% amid an uptick in AI security concerns. Software in general reversed Tuesday's declines to also buck the overall lower trend in tech Wednesday.
Meta Platforms rose another 1% amid enthusiasm over the company's Muse AI agent. The app to access Muse became the most popular item on Apple's App store recently.
McDonald's fell almost 5% as investors mulled the company's 2030 goals that target improved operating margin and market share gains. Investors seemed concerned about associated costs.
Other consumer-oriented names came under rate pressure Wednesday, including airlines, retailers, resorts, and cruise lines.
New York Times shares fell 5% on worries subscribers might use Meta's MuseAI to cancel subscriptions. That said, several sites, including Amazon, have banned Muse from shopping.
Cracker Barrel Old Country Store jumped 4.5% on earnings that surpassed analysts' consensus.
KB Home dropped 3% after reporting third quarter results. Earnings beat consensus but the home builder delivered a cautious outlook due to high mortgage rates and other uncertainties.
The Dow Jones Industrial Average® ($DJI) crumbled 352.10 points (-0.68%) Wednesday to 51,511.59; the S&P 500 Index ($SPX) fell 58.61 points (-0.75%) to 7,706.03, and the Nasdaq Composite® ($COMP) dropped 308.24 points (-1.13%) to 26,936.04.