Catalysts Thin for Now as Cisco, PPI Data Awaited

0:05Welcome to the Schwab Market Update Podcast, where we prepare you for each trading day with a recap of recent news and a look at what's ahead.

0:17I'm Keith Lansford, and here is Schwab's early look at the markets for Wednesday, August 13th. After major U.S. indexes rallied to records Tuesday on reassuring inflation data, today brings a brief respite from major reports. But the final two days of the week are packed, as tomorrow brings the July Producer Price Index, or PPI, report measuring prices at the wholesale level, and Friday features July retail sales and the preliminary August consumer sentiment report from the University of Michigan. The July Consumer Price Index, or CPI, mainly met expectations. CPI was in line, reinforcing expectation of a Fed rate cut in September, said Lizanne Saunders, Chief Investment Strategist at Schwab.

1:03The monthly CPI rose 0.2%, as analysts had expected, while core CPI excluding food and energy also rose an as-expected 0.3%. On an annual basis, CPI rose 2.7%, the same as in June, and in line with expectations, but the one sore spot was annual core CPI, which advanced to 3.1 % from June's 2.9 % and analysts' 3 % consensus. Drilling into CPI, the 2.7 % annual increase was the same as in June, perhaps kept tame by falling energy prices, but the 3.1 % core increase was the highest since February. Shelter costs were the main driver of inflation in July. Items like home furnishings, video and audio products, jewelry and watches, and apparel, all of which rose sharply in June, perhaps reflecting tariff-related price increases, were up again in July, but mostly by a lower percentage.

2:04The largest contributor to the data was shelter costs, which continue to moderate, but core goods excluding new and used cars actually decelerated from June's pace, suggesting tariffs may not be having as large an impact as some expected, said Alex Coffey, senior trading and derivative strategist at Schwab. Chances for a September rate cut reached 94 % by late Tuesday, up from about 85 % before the CPI data, according to the CME FedWatch tool. Futures trading now prices in 50 % odds of three rate cuts before year end. Though the Fed focuses more on the personal consumption expenditures or PCE price index for its inflation analysis, and the July PCE data won't come until later this month, CPI's slightly elevated core readings perhaps puts more pressure on PPI and PCE to come in cool.

2:59The June PCE report showed tariff-related price increases filtering into the data.

3:08For PPI tomorrow, analysts expect headline and core readings of 0.2 % month-over-month, up from flat readings in June, Briefing.com says. The June PPI report brought positive vibes to Wall Street, especially because wholesale prices often preview future consumer prices. Another thing to watch tomorrow is weekly continuing jobless claims, a measure of how difficult it is to find a new job. It hit a nearly four-year high last week at$1.97 million. Two Fed policymakers, Richmond Fed President Thomas Barkin and Chicago Fed President Austin Goolsbee speak later today, perhaps providing insight on Tuesday's inflation data.

3:51Goolsbee is often seen as a dove on rates, and Barkin told Bloomberg yesterday that uncertainty over the direction of the U.S. economy is decreasing, but risks remain, including possible pressure on inflation and employment. He said he hasn't made up his mind on adjusting rates. On the earnings front, Cisco, a good bellwether for global tech demand, reports after today's close. The network hardware vendor benefited last time out from AI infrastructure orders made by big internet firms, CNBC reported at the time. Cisco beat consensus expectations but cited an uncertain macroeconomic environment.

4:30Networking revenue, a prime component to watch, rose 8 % when the firm reported in May. Applied Materials reports late Thursday and is another tech name to watch for possible insight into semiconductor sector underpinnings. Earnings have been much better than expected, Schwab's Saunders noted, saying the blended S &P 500 earnings per share growth rate is now 13.2%, up from the expected 5.8 % at the start of July. Blended earnings measure companies that already reported and estimates for those that haven't. Many of the major firms yet to report are in the retail space, where a flurry of big box and home improvement giants share results next week.

5:14Stocks soared to all-time highs for the major indexes in a broad rally yesterday that saw the S &P 500 close above 6 ,400 for the first time, after popping over that level several times intraday. Looking at which stocks did what, it's almost more constructive to check the few big names that lost ground Tuesday since advancing shares outpaced decliners by a 10-to-3 ratio at one point on the New York Stock Exchange, according to Briefing.com. Companies like fast food restaurants and discount stores that often thrive in tough economic times were among the biggest S &P 500 losers. On the other end, companies that tend to do well when consumers feel free to spend very well Tuesday, led by airlines, homebuilders, big box stores, and cruise lines.

6:02Financial stocks and chip firms held their own, and small caps also had a good day. Hopes for sliding interest rates tend to help smaller firms, which are often more dependent on borrowing. Airline shares also benefited directly from the CPI report as it showed airfares rising after five consecutive declines. Checking sector performance yesterday, leaders included many cyclical ones that thrive during a growing economy, consumer discretionary led, followed by infotech and communications services. Despite the broad rally, four of 11 S &P 500 sectors fell, though they were mainly defensive ones like utilities and health care.

6:45Energy has been under pressure from hopes for a break in the Ukraine conflict as U.S. and Russian leaders prepare to meet Friday. Looking at the market broadly, it remains top-heavy. The year-to-date spread between the market cap-weighted S &P 500 index and the non-weighted S &P 500 equal weight index is now more than 9%, not far from the all-time peak of 10 % recorded in 1999. And only 20 % of S &P 500 constituents have outperformed the index itself over the past three months. Treasury yields got a slight bump yesterday despite rising rate-cut hopes. Yields fell soon after the inline CPI, but the benchmark 10-year yield edged up two basis points to 4.29%, and the 30-year bond yield rose four basis points to 4.89%, even as shorter-term yields fell.

7:39The shorter-dated treasuries are more sensitive to near-term rate policy, but longer-term yields continue being supported by tariff-related inflation worries and rising U.S. debt issuance. This could hint that even if rate cuts happen, they might not have much influence on long-term yields. The Dow Jones Industrial Average rose 483.52 points Tuesday, or 1.10%, to 44 ,458.61. The S &P 500 index added 72.31 points, or 1.13%, to 6 ,445.76. And the NASDAQ composite gained 296.50 points, or 1.39%, to 21 ,681.90. This has been the Schwab Market Update Podcast. To stay informed, visit www.schwab.com slash market update or follow us for free in your favorite podcasting app.

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8:58For important disclosures, see the show notes and schwab.com slash market update podcast.