Producer prices surge 6.3% Long-term interest rates pull back

Thursday (2026-10-15) U.S. stocks closed slightly higher, SPY up 0.28%, QQQ down 0.13%; over the past 5 trading days SPY down 0.28%, QQQ down 2.62%. The novelty today is on the corporate side: September producer prices rose to 6.3% year-over-year, yet long-term Treasury yields are instead retreating.

Corporate-side prices surged to 6.3%, but long-term rates are falling

Wednesday's consumer price data showed a year-over-year increase of 3.7%, and Thursday delivered the corporate-side update. The Producer Price Index records prices firms charge one another. In September it rose 6.3% year-over-year, the highest since 2022, driven mainly by energy and service costs. Month-over-month it rose 1.3%, while the market had expected only 0.6%. In the same period, retail sales increased 0.8% month-over-month, expectation 0.3%; core CPI month-over-month 0.3%, expectation 0.2%. All three data points were hotter than expected. Corporate-side 6.3% versus consumer-side 3.7% is a sizeable gap, indicating cost pressure is piling up more upstream.

Transmission to markets: traders reportedly increased bets on Fed rate hikes. But Thursday's yield movements diverged. The 2-year Treasury yield was 4.77%, unchanged over the past 5 trading days. The 10-year fell to 5.10%, down 18 basis points over the past 5 trading days (1 basis point is 0.01 percentage point). The 30-year fell to 5.43%, down 24 basis points. The above figures are as of 10/15. TLT on Thursday rose 1.37%, retail sector XRT up 3.68%, the market's reaction to the consumer data skewed positive. Precious metals mining stocks that were sold off the previous day also rebounded: GDX up 4.34%, SIL up 3.48%, though over the past 20 trading days they are still down 9.28% and 13.38% respectively.

The root of upstream cost pressures remains in the Gulf. On Thursday, the United Nations Security Council issued a statement strongly condemning Houthi attacks on Saudi targets. Air India extended cancellations of flights to and from Riyadh, Dammam, and Jeddah through 10/20. In the Strait of Hormuz area, Greece's maritime monitoring agency said ships, even if they turn off their positioning systems, are still being subject to 'indiscriminate' attacks, with the number of attacks surging. Trump said the war with Iran will end 'soon'. Meanwhile, according to CBS, the White House and the Pentagon have prepared contingency plans: if the president orders a resumption of military operations, the U.S. military would use its largest non-nuclear bomb against Iranian targets. Statements and preparations appearing together leave the market without a clear end date. As the strait remains unreopened, corporate energy costs are unlikely to ease.

There is a second front in the Black Sea. This month at least seven cargo ships have been attacked by drones off the coasts of NATO members Romania and Bulgaria, and some NATO members are worried that Putin is probing the alliance's response. On Thursday, a tanker was attacked and set ablaze off the Romanian coast, and seven crew members are missing. Ukraine resumed attacks on Russian refineries after a short ceasefire, and Russia publicly denounced them. At the EU summit, Zelensky turned to Brussels for help, and his dispute with Trump is also escalating. The Black Sea is an export route for grain and energy; with ships repeatedly attacked, the risk to grain shipments rises. This line directly connects to the wheat ETF WEAT discussed later.

Other things worth knowing

UK GDP for August grew 0.1% month-over-month, slowing, but the report said the data beat expectations and UK equities rose accordingly. The Bank of England deputy governor said the economy's handling of the energy price shock has been 'surprisingly good'. The drag on UK growth from the energy shock is for now smaller than previously feared.

In China, central bank data shows that in the first 9 months bond and equity financing accounted for 49.48% of the increment in social financing, exceeding the share of loans. Net corporate bond financing was 2.75 trillion yuan, 1.75 times that of the same period last year. The report said the central tendency of bond market rates has eased downward, opening a window for corporate bond issuance. The focus of corporate financing is shifting from bank loans toward bonds and equities.

Tracking the oil shock

Brent spot is trading richer than futures: the 5-day average spread is 23.0 dollars per barrel, about 17.3 a month ago; the cash market is tighter. Near the Strait of Hormuz, oil tankers' 7-day average is 0.6 vessels, about the pre-war normal of 1.3%, and flows remain nearly cut off. On the other hand, the futures-curve spread between the near month and the 6th month has narrowed to 11.0 dollars (14.7 a month ago), and the diesel futures vs Brent futures spread has narrowed from 109.6 to 96.3 dollars. Overall, the supply shock continues.

Today's logic: inflation is hot, so why are long-term yields falling?

Short-term Treasury yields closely track expectations for Federal Reserve policy; when rate-hike bets heat up, the short end moves up. Long-term yields incorporate an additional layer: the market's view of growth and inflation over the coming years. Put another way, the short end is like tomorrow's weather forecast, the long end is like a seasonal outlook. If traders believe that eventual rate hikes will suppress future growth and inflation, the long end can fall rather than rise, flattening the curve. Today's case already happened: the 2-year yield at 4.77% was flat over the past 5 trading days, while the 10-year fell to 5.10% and the 30-year to 5.43%, and TLT rose 1.37% that day. The short end is holding to rate-hike bets, while the long end is dialing down concerns about the more distant future.

How the ETF Radar model sees it

First, TLT. TLT actually rose 2.70% over the past 5 trading days (about a week), and is down 2.21% over the past 20 trading days. The one-week rise is exactly the result of the long-end yield retreat described above. Looking forward, the ETF Radar model's 1-3 month directional view for TLT is negative. There are two reasons. One: within the current window TLT has cumulatively fallen 4.78% with a maximum drawdown of 7.62%, the latest close was 78.89 dollars, and long-duration instruments under pressure have not shown a sustainable reversal. Two: PPI month-over-month surprised by 2.6 standard deviations (the larger the multiple of standard deviations, the more the data surprised the market) and retail sales surprised by 1.6 times; such hot data is unfavorable for yields. The recent one-week rise is not consistent with the model's view: the model looks at the next 1-3 months, and recent price action has not yet confirmed it.

Next, WEAT. WEAT is down 1.94% over the past 5 trading days and down 7.47% over the past 20 trading days. The transmission chain starts from the Black Sea: ships attacked, Ukrainian export routes threatened, and wheat supply tightening. On the positioning side, CFTC wheat net positions are -28,830 contracts, weakening for 4 consecutive reporting periods and at the low end of their own range. This indicates short positions on wheat are highly concentrated; if prices reverse higher, forced covering could amplify the rally. On the options side, implied volatility for calls is 37.5%, higher than puts at 20.7%, meaning those buying upside are willing to pay more. The prediction market Polymarket gives a probability of a ceasefire before year-end of 0.39; the probability of a rapid ceasefire is even lower. As for the outlook, the ETF Radar model's 1-3 month directional view for WEAT is positive. The market disagrees in the short term: net fund outflows over the past 5 days equal 8.86% of assets under management, today's turnover was USD 4.40 million, below the 20-day average of USD 9.70 million. The model's rationale is the supply shock from the ongoing conflict; prices and the funding picture have not yet caught up.

Finally FXI: today the model's view shifted from neutral to mildly negative. FXI rose 2.42% over the past 5 trading days and 0.20% over the past 20 trading days. This logic is not closely tied to today's battlefield developments, but comes mainly from interest-rate pressure driven by hot U.S. data, along with FXI's own flows and options signals. Net redemptions over 30 days equal 3.66% of assets, and over 90 days 4.85%. Put-option implied volatility is 30.37%, higher than call implied volatility at 21.53%, a difference of 8.84 percentage points, indicating the market is paying for downside protection. Short interest has risen to 64,399,308 shares, up 3.4%. Looking forward, the ETF Radar model's 1-3 month directional view for FXI is negative. The recent one-week rise is inconsistent with the model's direction, and the downside pressure in price has not yet materialized; within the window FXI still has 3.29% of excess gains relative to EEM, which is an uncertainty the model must contend with.

Summary

The new development today is that corporate-side prices rose to 6.3% while long-term yields are falling, and attacks in the Gulf and the Black Sea continue to add uncertainty to energy and grain supplies. A reminder: the above are system quantitative-model directional predictions for the general market and do not constitute investment advice tailored to you; consult a licensed investment advisor before investing.