Key Highlights

● Capacity utilization rose in September to a level above the consensus forecast.

● High utilization can add inflation pressure, as tight capacity gives producers pricing room.

● Eastman Chemical was downgraded by JPMorgan, with its price target cut to $66 from $82.

● J.B. Hunt closed lower at $228.78 as costs rose faster than revenue.

Above consensus

Capacity utilization, a measure of how much of the nation's industrial capacity is in use, rose in September to a level above the consensus forecast, according to data released Friday.

The reading accompanied a stronger-than-expected rise in industrial production, which market reports said jumped by the most since April to its highest level since 2018. Together, the figures suggest factories, mines and utilities were working harder in September than economists had anticipated.

Why the measure matters

Capacity utilization is watched for two reasons. First, it shows how much slack exists in the industrial economy. When plants run close to full capacity, companies may need to invest in new equipment or facilities to meet demand. Second, high utilization can be a source of inflation pressure, because tight capacity gives producers more room to raise prices.

That second point resonates this week. Producer prices posted their largest monthly gain since March 2022, according to a weekly market summary, and September CPI showed annual inflation accelerating and beating forecasts. On Friday, import and export prices also rose more than expected.

Drivers of the gain

Utilities were a key contributor to September's industrial output, with utility production jumping sharply. Mining output edged higher. Rising electricity demand from AI data centers has become a major theme for the power sector. NiSource (NYSE:NI) on Friday announced a long-term energy agreement with Microsoft (NASDAQ:MSFT) for its northwest Indiana campus.

Heavy industry has also been busy. Nucor (NYSE:NUE) rose on higher steel prices. Alcoa (NYSE:AA) jumped after beating third-quarter earnings estimates and reported a rise in alumina output from the prior quarter. Reports differed on the size of Alcoa's gain.

On the cost side, some industrial companies are feeling the squeeze. Eastman Chemical (NYSE:EMN) was downgraded by JPMorgan to Neutral from Overweight, with a price target cut to $66 from $82, citing narrowing propane-propylene spreads. J.B. Hunt Transport Services (NASDAQ:JBHT) closed lower at $228.78 after reporting that fuel, purchased transportation and insurance costs rose faster than revenue.

Rates and the Fed

The strong data come as the Federal Reserve weighs its next move. The Fed raised rates a quarter point in September, its first hike in three years. Odds of an October hike fell to about one in six in futures pricing by Friday, down from close to even after Wednesday's CPI. Markets still price a hike by December. Fed Chair Kevin Warsh said in Bangkok, "I don't prejudge meetings."

Market reaction

The industrial data were overshadowed by a technology selloff. The S&P 500 fell 84.62 points to 7,659.44, the Nasdaq Composite sank 572.99 points to 26,140.03, and the Dow Jones Industrial Average slipped 175.28 points to 52,002.41. Energy, utilities and materials were among six of 11 S&P 500 sectors that gained. The 10-year Treasury yield ended near 5.1, down for the week.

Industrial Earnings Run Through Oct 26

The Fed decides Oct 28, and third-quarter GDP and PCE inflation follow Oct 29. S&P Global's flash PMIs on Oct 23 will give an early look at October factory activity. Industrial earnings continue with 3M (NYSE:MMM) and GE Aerospace (NYSE:GE) on Oct 20, Honeywell (NASDAQ:HON) and Dow (NYSE:DOW) on Oct 22, and Nucor on Oct 26.