CPI, Banks, Warsh in View as War, Rate Fears Climb

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 Tuesday, July 14th. Earnings season unofficially begins today after the week started with the thud. Yesterday's oil-driven risk-averse sell-off in semiconductors pushed the volatile chip sector down almost 5 % and kept it in correction territory. The PHLX Semiconductor Index, or SOX, is down 15 % from its late June peak. Focus now shifts to results from a host of the largest Wall Street banks, including JPMorgan Chase and Citigroup, due before the open. This comes as rate hike worries mount. If we get another hot reading on core inflation this week, then the FOMC will need to consider tightening monetary policy in the near term, said Fed Governor Christopher Waller in remarks Monday, Bloomberg reported.

1:09The FOMC is the Federal Open Market Committee. Odds of a July rate hike surged almost 59 % late Monday from 30 % earlier in the day, according to the CME FedWatch tool. Odds of at least one hike by September rose to more than 75%. Waller's remarks and rising oil prices appeared to be the combined instigators of this move. That intensifies the importance of today's 8.30 a.m. Eastern Time June Consumer Price Index, or CPI, data, followed by Federal Reserve Chairman Kevin Warsh's 10 a.m. Eastern Time semi-annual testimony to Congress. What Warsh says about inflation and the overall economy could shape today's trading even beyond CPI and the bank results.

1:57Warsh's debut testimony is a wild card, said Lizanne Saunders, chief investment strategist at the Schwab Center for Financial Research. The Fed's internal family fight is over hiking versus holding. With Warsh having committed to less communication, every word will get amplified. Headline CPI is forecast to fall 0.1 % month over month in June, thanks to lower gas prices, while core CPI that strips out food and energy is expected to rise 0.2 percent, according to Wall Street analysts' consensus views. The key year-over-year core number is seen at a relatively benign 2.9 percent, still well above the Fed's 2 percent goal.

2:39Saunders noted a divergence in CPI with headline inflation seen falling, but core inflation accelerating. One possible outcome to watch with today's data is for a sticky services CPI story not oil-driven headline relief, Saunders said.

2:58Earnings today include Bank of America, JPMorgan Chase, Citigroup, Goldman Sachs, and Wells Fargo. Though their Wall Street businesses appeared to thrive last quarter, U.S. consumer credit and business loan demand might come under microscopes when the banks report, along with net interest income trends. Any shakiness in those metrics could give markets pause. Bank stocks also made solid gains in the second quarter, possibly building some anticipated earning strength into prices. In sum, it's a day when investors might want to keep their hands firmly on the wheel and brace for possible bumps, especially considering the uncertain Middle East situation.

3:42The week began with chips rolling downhill again. The worst hit were memory firms, including South Korean newcomer S.K. Hynix, as Middle East conflict intensified. Crude oil surged more than 9 % after President Trump reimposed a blockade on oil from Iran following tit-for-tat weekend attacks. Indexes fell across the board, and the tech-heavy Nasdaq trailed the pack. Taiwan Semiconductor Manufacturing fell less than rivals after the chip foundry company said quarterly revenue climbed 36 % annually, including a 68 % jump in June alone. Other key earnings this week include Netflix and United Airlines.

4:26Analysts expect S &P 500 earnings growth of nearly 24 % in the second quarter. Fax has said, expectations remain high, so any major misses or failure to raise guidance could cause tech stocks in particular to skid. Volatility surged 14 % Monday after Friday's descent to six-month lows. Though the SIBO Volatility Index, or VIX, calmed last week, there's a record spread between single-stock volatility and index volatility. A calm sea masked turbulence down below entering the week, but the rise in the VIX to above 17 on Monday narrowed the gap and perhaps points to more choppiness ahead. The main bearish driver Monday was crude oil and intensified weekend attacks in the Middle East.

5:16The Strait of Hormuz appeared mostly blocked, though Bloomberg reported some ships able to transit. In a Monday interview with Fox News, President Trump said the U.S. will take over the Strait and be its guardian. He also said the U.S. would impose a 20 % fee on cargo going through the passage. Treasury yields were another burden, closing Monday above 4.6 % for the 10-year note, the highest since late May and not far below that month's peak. The 10-year yield is up more than 20 basis points from recent lows, partially reflecting pricey oil, which raises inflation and rate hike fears. Despite weakness, six of 11 S &P 500 sectors advanced Monday.

6:02Weakness in chips masked resilience in other tech stocks, including software names like Microsoft and Salesforce. Energy led all sectors, thanks to oil, but defensive areas like utilities and staples also moved up, as did financials ahead of bank earnings. Among individual movers Monday, SK Hynix tumbled sharply about 15 percent following a big pullback overnight in the South Korean market. South Korean markets are flirting with bear market territory, down nearly 20 percent from recent highs. Other memory chip stocks, including Micron and SanDisk, fell 4.6 percent and 12.6 percent respectively, keying off South Korean weakness.

6:47Other chip and AI infrastructure stocks also dropped in Monday's risk-off trading, with shares of Applevin down 13%, Marvell Technology down more than 7%, Arm Holdings off nearly 8%, and Oracle losing more than 6%. Sector leader NVIDIA backed off from its recent rally and fell more than 3%. And material stocks felt pressure from gold and silver being down 2 % and 3 % respectively, hit by the renewed Middle East tensions and concerns the Fed might keep rates high.

7:25The Dow Jones Industrial Average slipped 138.37 points or 0.26 percent Monday to 52 ,498.64. The S &P 500 Index fell 60.05 points or 0.79 percent to 7 ,515.34. and the Nasdaq Composite plunged 408.43 points, or 1.55%, to 25 ,873.18. This has been the Schwab Market Update Podcast. To stay informed, visit www.schwab.com slash marketupdate or follow us for free in your favorite podcasting app. And if you like what you've heard, please consider leaving us a rating or a review. It really helps new listeners find the show. Join us for another update tomorrow.

8:23For important disclosures, see the show notes and schwab.com slash market update podcast.