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• US stocks saw a decline on Friday, as the Dow Jones fell around 70 points, the S&P 500 lost 0.4%, and the Nasdaq declined 0.7%.
• The market reaction came in response to producer inflation data exceeding expectations, raising concerns about potential longer-lasting higher interest rates by the Federal Reserve.
• Producer prices showed a 0.3% increase on the month, primarily driven by a rebound in service costs.
• While recent consumer inflation numbers remained above the Fed’s target, yesterday’s data release indicated that headline and core consumer inflation were below forecasts.
• San Francisco President Mary Daly emphasized that there’s more work for the Fed to do in curbing inflation, suggesting that the central bank’s efforts to balance the labor market are ongoing.
• The probability of the central bank maintaining steady interest rates next month now stands at nearly 87%, down from 90% prior to the producer inflation report.
• The likelihood of a 25bps rate hike in November has risen to about 29%.
• The tech and communication services sectors experienced the most notable declines, while the Dow gained 0.2% for the week, the S&P 500 lost 0.5%, and the Nasdaq sank 1.5%, marking a second consecutive week of losses.
• The US dollar rebounded to nearly 102.7, nearing a one-month high, responding to a larger-than-expected rise in producer prices.
• Despite the cooling CPI, concerns remain about the Fed’s stance on interest rates and the health of the US banking sector.
• Geopolitical tensions resurfaced as the US prohibited specific technology investments in China.
• The yield on the US 10-year Treasury note approached the 4.13% mark, reflecting a nine-month high and underscoring a shift from disinflation hopes to support for restrictive monetary policies.
• Higher-than-expected producer prices slightly contradicted the previous day’s cooler CPI reading, leading to market anticipation of the Fed’s prolonged maintenance of restrictive interest rates.
• Additionally, the US government’s increased bond issuance contributed to elevated yields, observed in auctions for 10-year notes and 30-year bonds.

The surge in producer prices is placing pressure on the US stock markets, evidenced by the E-mini S&P 500 exploring lower prices within an imbalanced market structure. Currently, the market appears to be entering a phase of absorption, suggesting a possible impending pullback.

The combination of a stronger dollar and positive volatility is further exacerbating the situation. The uptick in producer prices could potentially lead to a more prolonged pause in elevated interest rates, thereby affecting stock markets and contributing to the strengthening of the dollar.

To initiate a potential upward rotation, the market needs to auction back into the previous balanced price range. This move could be accompanied by absorption and short covering activity around the current lower levels.

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