Producer prices jump most in four years, yet money flees to bonds

Another inflation number caught the market off guard. September producer prices, the wholesale prices businesses receive for what they sell, rose 1.3% in a month, the biggest jump since March 2022 and more than double the 0.6% forecast. Coming a day after CPI, it confirms that price pressure that started with energy is spreading to goods and services across the board.

Retail sales rose 0.8%, also ahead of forecasts, but much of that was simply the cost of pricier gasoline; spending elsewhere was modest. The 30-year fixed mortgage rate hit 7.4%, the highest since 2023. Cleveland Fed President Hammack warned that the Fed would need to act if inflation expectations start to slip.

Yet the market's reaction was surprising: fear about AI debt outweighed fear about prices. CoreWeave's credit default swaps and high-yield spreads hit record highs, and chip stocks have fallen nearly 15% in a few days. Money rotated out of AI shares into Treasuries and defensive names such as pharma and consumer staples, and the 10-year yield dropped 0.1 percentage point, its biggest one-day fall in over a year.

That lifted the Dow by 556 points and left most U.S. indexes higher at the close. Underneath, though, things look shaky. The small-cap Russell 2000 has officially entered a correction, and investors are sitting on close to $8 trillion in cash. On the energy front, Iran stepped up attacks on ships near the Strait of Hormuz, and two cargo vessels sank.