Stocks Stall as Yields, Hike Odds Climb

Every morning before the opening bell, the Schwab Market Update sets the stage for the day ahead, covering key market movers, economic developments, and emerging themes. Each edition includes "Three things to watch" while Thursdays feature a weekly section, "Crypto currents." This recap revisits select items for those who may have missed them, helping traders head into the weekend better informed.

Though some call a follow-up October hike unlikely because of November's mid-term election, the Fed probably won't let the political calendar interfere. Back in 2022, it hiked rates just before the mid-term vote. Odds of a rate hike next month are 68.6% this morning, according to the CME FedWatch Tool, after Wednesday's data and hawkish words from New York Federal Reserve Chief John C. Williams and Fed Gov. Michael Barr. Even if a Fed meeting weren't on the calendar after last week's hike, caution could define coming weeks. Markets followed a historic pattern recently, lacking direction before the mid-term. "Markets don't really care who wins the election, they mostly care that the election is over," said Michael Townsend, managing director, legal and government affairs at Schwab, noting that markets tend to be flat leading up to an election and average a 5.7% gain in the three months after. "Markets don't like the uncertainty of elections, but once the election is over, markets can take that piece of uncertainty off the table and focus on fundamentals."

The broader market hasn't posted a new high since August, chopping around in a trading range between 7,600 and 7,800 for the S&P 500^® Index even as crude and yields advanced. The S&P 500 managed to close slightly above 7,700 Thursday. "Market participants seem to have concluded that higher oil prices are bad, yes, but that they haven't really done anything to deter the U.S. consumer," said Nathan Peterson, director of derivatives research and strategy at the Schwab Center for Financial Research, or SCFR. The next major milestone for the market  is likely to be next week's flurry of key U.S. data, including Personal Consumption Expenditures prices, gross domestic product, and nonfarm payrolls a week from tomorrow. Earnings from memory chip maker Micron (MU) next Wednesday also could help set direction, and next week's September ISM Manufacturing PMI^® grew in importance following Wednesday's strong S&P Global PMI data. 

Bitcoin has broken through some key levels, perhaps signaling a shift in investor psychology. Trading at around $84,300 as of Friday morning, bitcoin had cleared the True Market Mean, or average on-chain acquisition cost, which sat at about $77,000, according to Glassnode data. It also had topped the average cost basis for spot buyers via exchange-traded products (ETP), at around $83,000. In other words, the average investor is now sitting on a profit, and profit-taking by both short- and long-term holders has been limited during the recent rally, which saw bitcoin jump more than 30% in about a month. These cost-basis levels had previously served as resistance and may now turn into support. Meanwhile, Monday and Tuesday saw the biggest two-day net inflows into spot ETPs since November 2024.

Treasury auctions often float below investors' radar, but with Treasury yields at multi-year highs and corporate debt increasingly competing for investor funds, the auctions can affect markets. Tuesday's $69 billion 2-year Treasury note auction drew the highest yield in more than two years at 4.787% but also saw solid demand. Treasury yields inched up afterward. Wednesday's 5-year note auction offered $70 billion and drew a yield of 5.033%, up sharply from the prior auction. Finally, Thursday's auction of 7-year notes brought in $44 billion with a yield of 5.085%—the highest for a 7-year auction in over 30 years, according to Morningstar. "Buyers appear to be stepping in around 5%, which coincides with the prior high in 2023," said Nathan Peterson, director of derivatives research and strategy at SCFR, referring to the 10-year Treasury note yield. The question is whether investors spring for current yields when the Treasury offers more debt for auction, or wait, hoping the recent rate hike and expectations for additional Fed moves send yields up again. Treasury yields hold a strong premium to the Fed funds rate, meaning they've arguably priced in a few more hikes. Also, yields are well above many other income sources, maybe keeping auction demand firm.

Fed Chair Kevin Warsh said strengthening of the labor market was one factor in the Fed's decision to raise rates in September after holding in July. The unemployment rate is consistent with full employment, he said, with risks to the labor market roughly balanced. Unlike in 2022, there is little evidence that excessive demand or rising wages are fueling inflation. But last week continuing unemployment claims hit their lowest level since January 2024. That could mean we're starting to see some tightness in the labor market, which may eventually turn into higher wages and inflationary pressures, said Kevin Gordon, head of macro research and strategy at SCFR. There's no sign of that so far in average hourly earnings, but the Atlanta Fed's Wage Growth Tracker shows it warming up, Gordon noted. The three-month moving average of overall median wage growth hit 4.1% in August, the highest level in 11 months. The figure for job-switchers hit 5%, the highest in more than two years.