On Thursday the ISM said factory input costs surged to 77.9. Today the services report said 74. Two data points in four trading days, both at their highest level since the Iran war started in March. The Nasdaq hit a new record anyway. The 10-year yield hit a new 52-week high at 5.31%. Something in this picture doesn't add up.
The Close
Mixed close. The S&P 500 gained 0.17% to 7,735.79. The Dow slipped 0.21%. The Nasdaq rose 0.42%, hitting a fresh intraday record. The Russell 2000 jumped 0.94% — its best day in weeks.
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| ISM Svc Prices | 74.0 | +1.4 pts | ||
| 10-Yr Yield | 5.31% | +4 bps | ||
| S&P 500 | 7,735.79 | +0.17% | ||
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| Energy |
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+1.2% | ||
| Comm Services |
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+0.9% | ||
| Materials |
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+0.9% | ||
| Utilities |
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+0.7% | ||
| Financials |
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+0.4% | ||
| Technology |
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+0.4% | ||
| Consumer Staples |
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+0.3% | ||
| Health Care |
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+0.2% | ||
| Industrials |
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0.0% | ||
| Consumer Disc |
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0.0% | ||
| Real Estate |
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−0.1% | ||
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Eight of eleven sectors finished higher, with energy leading at 1.2% even as oil fell a percent. Communication services and materials both gained 0.9%. The only red was real estate, down 0.1% — the sector most hurt by rising rates.
The big single-stock story was PTC. Schneider Electric agreed to buy the industrial software company for $22.6 billion in cash. PTC surged 33.8%. Bentley Systems, a peer, rode the wave up 9%.
On the losing side, C.H. Robinson fell 14% after selling its global forwarding business. Lennar dropped 5.4% — homebuilders are getting hammered as the 10-year grinds higher. Insmed slid 6.4% after its CFO announced he's leaving.
Brazil was the wildcard. Right-wing Senator Flavio Bolsonaro topped the first round of the presidential election, and Brazilian stocks went vertical. The iShares Brazil ETF jumped 13.5%. Banco Bradesco surged 19%. Nu Holdings gained 13.5%. It was the biggest one-day move for Brazilian equities in years.
What The Market Is Pricing In
Four trading days ago, the ISM manufacturing report came out with a prices-paid reading of 77.9. That was the number that rattled the bond market on Thursday. Today the ISM services report arrived, and its prices-paid index climbed to 74.0, up from 72.6 in August. That's the highest since July 2022.
These two numbers are different parts of the same machine. The manufacturing prices-paid index tells you what factories are paying for steel, fuel, and components. The services prices-paid index tells you what hospitals, restaurants, trucking companies, and law firms are paying for labor, rent, and supplies. When both are rising at the same time, it means the inflation isn't confined to one corner of the economy. It's broad.
On Wall Street they call this cost-push inflation — when the price of making things and delivering things rises, and companies pass those costs on to consumers. It's different from the demand-pull kind, where people are buying so much that prices go up. Cost-push is harder for the Fed to fix because raising rates doesn't lower the price of oil or undo tariffs. It just makes borrowing more expensive on top of everything else.
Two ISM reports in four trading days, both showing prices at their highest levels since the Iran war began in March. The manufacturing number came in at 77.9. Services came in at 74.0. Together they tell you the inflation the market celebrated as "cooling" last week — the soft PCE print on September 30 — is already stale. The next inflation reading won't look as friendly.
The bond market heard it. The 10-year yield closed at 5.31%, a new 52-week high. But the stock market didn't blink. The Nasdaq hit a record. That gap between what stocks are pricing and what bonds are pricing has been widening for two weeks. One of them will be wrong.
The market is pricing in a Fed that pauses after Friday's weak jobs report. But the ISM is pricing in inflation that won't let the Fed pause for long. If the FOMC minutes on Wednesday show a hawkish tilt, the gap between stocks and bonds will start to close — and it won't be bonds that move.
I've seen this kind of split before — stocks making new highs while the bond market flashes warnings. It happened in late 2018, right before the Christmas selloff. The stock market kept climbing through October and November while yields ground higher and credit spreads widened underneath. When it broke, it broke fast — the S&P fell 14% in three weeks.
What's Next
Three things I'm watching this week:
01 — FOMC September meeting minutes — Wednesday, October 7
The Fed hiked at the September meeting. The minutes will show how close the vote was, how the committee talked about oil and the Iran conflict, and whether any members pushed for a larger move. After two ISM reports showing prices at war-time levels, the minutes could reinforce the message that one weak jobs number doesn't change the inflation picture.
02 — PepsiCo earnings — Thursday, October 8
Pepsi reports before the open. It's a direct read on pricing power and consumer spending. If Pepsi says consumers are trading down or pushing back on prices, that's the first sign the cost-push inflation from the ISM is starting to crimp demand. If pricing holds, the inflation story gets stickier.
03 — Michigan consumer sentiment — Friday, October 9
The University of Michigan releases its preliminary October reading on Friday morning. The September final came in weak, and inflation expectations have been climbing. Watch the one-year inflation expectations number — if it breaks above 4.5%, the Fed has a serious problem with expectations becoming self-fulfilling.
Two ISM reports. Same story. The bond market believes it. The stock market doesn't. Wednesday's minutes might settle the argument.
That's it for today. See you tomorrow after the close.
