Things You Need to Know
- CPI was hotter than expected
- Bonds get smacked and then they get bought, Yield surge and then decline.
- Tech continues to come under pressure – Overnight the selloff in tech continues. Leverage matters!
- PPI and Retail Sales due today.
- CRWV, ORCL and Softbank debt is trading like near ‘junk’ status…
- Stay Focused…Try the Bologna Sandwich
Ok look—stocks got slammed and the VIX finally woke up! Apparently, inflation didn’t get the memo that investors were ready to move on…
We came into Wednesday hoping earnings would give buyers enough confidence to keep this party going. Instead, September CPI reminded us that inflation is a problem….and that October FED pause that the market was pricing in, well, it just got a bit more ‘unpaused’…..
The reaction was immediate……the probability shot up to a 60% chance of an October hike in the mins right after the report hit the tape, bond yields also shot higher…the 2-yr traded up to 4.95%, the 10-yr surged by 15 bps to yield 5.32% while the 30 yr surged by 10 bps to kiss 5.62% and stock futures went from green to red…. Suddenly, the idea that earnings could carry stocks higher while interest rates quietly settled down looked a lot less ‘true’.
Headline CPI rose 0.6% for the month—the fastest increase since April—pushing annual inflation to 3.7%, up from 3.4% in August and above the expected 3.6%. The bigger disappointment came from core prices – which exclude food and energy – it rose 0.3% versus the expected 0.2%, while annual core inflation accelerated to 2.6% from 2.4%.
Energy did plenty of damage. Gasoline prices jumped 9.1% for the month, but the pressure extended beyond the pump. Shelter rose 0.4%, lodging increased 2%, and airfare, recreation, apparel and used vehicles also moved higher. So, this report gave the FED more to consider than just an isolated jump in fuel prices.
And then we heard from BAC and MS – and that only added to the angst…. BAC missed on EPS and revenue – They also got hit with a $1.2 billion regulatory settlement – that I think had mostly been priced into the action…recall BAC was down about 20% coming into the report. BAC ended the day down 4.7%.
MS beat, stronger equity trading, but weaker fixed income trading and given the tone yesterday, buyers chose to be more cautious, forcing sellers to be more aggressive. MS closed down 2.7%. The issue is the same – investors are looking beyond the quarter that just ended and asking what comes next.
All day long – stocks got weaker…the indexes trading lower and lower…until about 2 ish…. when they were at their lows……and then the selling slowed…. buyers who had gotten knocked down, stood up and stocks started to lift their head and closed OFF the lows…
At the end of the day – the scoreboard was NOT as ugly as it was at 2 pm – because believe me – mid-day was UGLY…. By the time the bell rang – The Dow lost 0.1%, the S&P lost 1.1%, the Nasdaq lost 1.8%, the Russell lost 1.9%, the Transports added 0.1%, the Equal Weight S&P ended essentially flat, while the Mag 7 lost 2%.
But -and this matters – the bond market did not finish the day where it began…
As the selling in bonds intensified and yields shot higher – investors did a 180 and went from selling bonds to buying bonds as yields were near multiyear highs and prices were at multiyear lows. Those aggressive rate-hike bets from the morning – faded, bond prices recovered and yields backed off. At the close the 2-year was yielding 4.79%, the 10-year had retreated to 5.189%, slightly below Tuesday’s level while the 30-yr ended the day yielding 5.52% – a substantial reversal from the morning spike.
This morning – bonds are getting bought and yields are dropping…the 10 yr is down 10 bps at 5.08% while the 30 yr is down 10 bps at 5.42%…. Why you ask – have you seen what happened to tech overnight? The chips are getting slammed – everywhere…. and so, it is a flight to quality – US treasuries.
Now, the sequence is important: CPI triggered a violent repricing in bonds, BAC disappointed, MS beat but failed to attract buyers and stocks got hit, and then Treasuries attracted buyers. Stocks, however, remained under pressure even after yields eased and this suggests that the selling in stocks was about more than the CPI shock.
Of the 11 sectors – Consumer Staples rose by 2.2% & Healthcare surged by 2.5% and that makes sense – they are defensive names…..and Energy added 0.8%…and that because of what’s happening in the middle east – the other 8 sectors ended the day lower with Tech down 3% and Communications down 1.3%.
Semiconductors continued to get slammed – losing 4.5% – putting it into ‘bear mkt’ territory – down more than 20% from their recent high, and most anything else somehow connected to tech also came under fire…Cybersecurity -3.5%, Disruptive Tech -3%, Software – 3%, Memory names lost 5% while Quantum names were down more than 8%.
CoreWeave – lost 15% and is down 57% from the October 2025 high – created more concern for investors and the markets…..Yesterday, their 9.625% bond due in 2032 traded at 79 cts on the dollar sending its yield to 15.1% – levels typically associated with distress (think JUNK). CEO Mike Intrator called the action in the stock and the bonds “irrational” – well of course he would – but stock and bond investors will vote with their money and right now they are questioning the company’s ability to carry their debt load.
But CoreWeave was not the only one to get punched in the face… The cost of insuring Oracle’s and SoftBank’s debt against default rose as well—showing that credit concerns extend beyond CoreWeave and that brings the financing behind the AI boom directly into focus. If raising money becomes more expensive (and it has), the next data center becomes harder to justify and finance—and that can eventually affect orders for chips, equipment and power infrastructure.
Now let’s talk about the VIX – the fear index….. Remember what I have been saying? The VIX was suggesting that there was nothing to worry about, even as bonds, oil and the conflict in the middle east gave us plenty to worry about. It was suggesting way too much complacency…
Yesterday, the VIX jumped 10.5% piercing two trendlines, and this morning it is up again – trading at 17.38…and that makes sense because overnight the tech selloff spread around the world…. Do not be surprised to see the VIX spike higher – the next trendline is at 18.16… If we pierce that – then the mood gets more anxious and stocks will come under more pressure.
Oil continues to be driven by the action in the middle east – this morning it is down 20 cts at $94.90 – nothing has changed.
Gold remains stuck in the $4,000/$4,250 trading range…this morning it is up $50 at $4,157.
Eco data today include the September PPI report – which is inflation at the Producer level…and after yesterday’s stronger CPI – all eyes will be focused on this data point this morning…It is expected to be a bit hotter, the issue will be if it is hotter than the expectation…we’re about to find out…
We will also get Retail Sales – which are expected to be down from last month.. It all happens at 8:30.
Today is setting up to be a difficult day for the chips…..they are getting dragged out and shot…Asian markets all ended the day lower……..the Kospi (South Korea) lost 7.5% – but remember there is all kinds of leverage in the South Korean mkt….and that leverage amplifies the damage…. When the very crowded chip sector comes under pressure, margin calls and leveraged-fund rebalancing can turn selling into FORCED selling, a position you never want to be in….. So, while AI financing concerns raise the temperature, leverage turns up the heat even more.
European markets are NOT panicking…. the UK, France and Spain are all higher, the Euro Stoxx is down 0.6%, Germany is off by 0.2% and Italy is down 0.1% – so there is not disaster happening…
US futures are mixed…. Dow futures are UP 103 pts, the S&P is down 23 (think tech weighting), the Nasdaq is getting slammed – down 350 pts while the Russell is up 9.
The S&P closed at 7,718—down 86 points—finishing just above trendline support at 7,710. But not before it broke below that level and traded down to 7,693. Futures this morning suggest another test—and a possible break—bringing the next trendline at 7,593 into focus.
Today’s economic data could add to the angst. Hotter inflation would complicate the FED outlook, while materially weaker growth would raise concerns about the economy’s ability to absorb these borrowing costs. Neither would offer much comfort.
Now, no one should be surprised that we are seeing a repricing – We expected this. Tech and AI-related names are getting hit the hardest – again that should not be a surprise to anyone – they were priced to perfection….…. higher rates always hit the growth names the hardest.
Now, we have also seen some weakness beyond tech, but that is just part of the cycle…valuations were stretched and so a repricing is not a surprise at all. And with 10 yr bond yields where they are, it was just a matter of time, Remember, I thought the danger zone was 4.75%, when it was really 5.3+%….so if yields decline then stocks should stabilize…
The S&P and Nasdaq are approaching oversold readings, while chips and small- and mid-cap stocks are already near those levels. Further weakness could push them deeper into oversold territory. That tells us the selling has become stretched, and a relief rally is possible, but it does not mean that sellers are exhausted or that we have reached a bottom. Markets can remain oversold and prices can continue to fall.
For the unleveraged, long-term investor, however, the distinction matters. You aren’t facing a margin call or being FORCED to sell into weakness. You have time to assess what has changed, what remains sound and where lower prices may create opportunity.
If you own high-quality stocks and maintain a diversified portfolio and have your near-term cash needs covered, you do not have to worry. Review your portfolio and keep your time horizon in focus. A temporary difficult market day does not, by itself, require a change in your long-term plan.
If you’d like to discuss your goals, evaluate the risk in your portfolio or simply get a second opinion, give me a call at 561-931-0190 or better yet – click on this link to connect. https://slatestone.com/contact-us/
I’m always happy to provide a complimentary portfolio review and risk assessment.
Take good care,
Kp
[email protected]
Source: Bloomberg, CNBC, Reuters, Wall Street Journal
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Ok – it’s time for a Fried Bologna Sandwich…. I mean considering all the Baloney being tossed around- it feels appropriate….…. today I am going to give you a childhood favorite…. this one will knock your socks off….
Sunshine’s Fried Bologna Sandwich…. (Sunshine is my mother…don’t ask – it’s a long story….)
You need: Sandwich roll, butter, onion, 4 slices of bologna, Dijon mustard, mayo and Yellow American Cheese and a good cast iron pan……
Caramelize the thinly sliced onion in the pan….
Spread the mayo on the sliced roll and place cut side down on a griddle. Toast it until golden brown. Remove
In the same pan – take the bologna and give it a perfect sear……. get that edge nice and crispy…. – now stack 2 slices of bologna and top with 1 slice of the American cheese – 2 slices of bologna and 1 more slice of American cheese and let it melt. (so, you have two sets of bologna and cheese).
While this is happening – spread some mustard and mayo on the toasted roll. Now add a layer of caramelized onions and then the bologna with melted cheese. Add another layer of onion and top with the remaining stack of bologna and melted cheese.
Place the top of the bun on the sandwich. Yum….and it takes me back to the late 1960’s…. oh, what a time it was!
Buon Appetito