Digesting Netflix Before Housing, Sentiment Data

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. I'm Colette O 'Claire, and here is Schwab's early look at the markets for Friday, July 18th. A busy data week wraps up today with housing and sentiment numbers. June housing starts and building permits kick things off before the opening bell, followed by preliminary July University of Michigan consumer sentiment shortly after. Netflix reported late Thursday, and shares slid 1 % initially in post-market action, despite earnings and revenue that beat expectations, along with above-consensus guidance.

0:52Revenue rose 16%. The numbers looked firm, but from the market's reaction, it's possible there were whisper hopes for even better. Netflix had tough shoes to fill after blowout results the prior quarter, helped by a January price increase. Also, shares were up about 43 percent year-to-date heading into Thursday's results. Solid earnings from almost every S &P company that reported Thursday morning helped trigger a broad rally to new record high closes yesterday for the S &P 500 index and Nasdaq Composite, though guidance was mixed. It was the second straight day of upside surprises on the earnings front, and the early season tally shows more than the usual number of companies exceeding expectations.

1:41Improved June retail sales and jobless claims reports added to bullish sentiment, and the S &P 500 index just missed, closing above 6 ,300 for the first time. Key earnings today include 3M and American Express, both ahead of the open. Housing has been in the doldrums, but today's June numbers could see a slight recovery from May's weakness, according to the consensus among analysts. The consensus is for housing starts of$1.3 million on a seasonally adjusted annual rate basis, up from$1.256 million. Building permits are seen holding roughly steady. mortgage rates remain relatively high and mortgage applications fell 10 percent last week.

2:29Soft housing demand, which extends to existing and new home sales as well, could be one factor keeping inflation down, with shelter costs a large component of the Consumer Price Index, or CPI. Consumer sentiment played a bigger role last spring than usual, as market participants closely watched for signs of tariff-related concerns. It's been on the recovery path since then, but remains historically low, coming in at 60.7 last time out. Analysts expect a slight climb to 61.5. As always, inflation expectations in the report play a part, especially with investors closely tracking for any impact from tariffs.

3:13Year-ahead inflation expectations fell to 5 percent in June from 6.6 percent in May. In data yesterday, retail sales rebounded in June, climbing 0.6 percent month over month. That topped the consensus of 0.2 percent and May's sharp minus 0.9 percent decline. Despite uncertainty around tariffs, the consumer continues to spend, said Colin Martin, director, fixed income strategy at the Schwab Center for Financial Research. Treasury yields rose following this release as stronger economic reports supports the case for the Fed to hold rates steady rather than cutting sooner than expected. Chances of a July Fed rate cut were less than 3 % late Thursday, while odds of at least one cut by September were around 54%, according to the CME FedWatch tool.

4:11Also on the economic front, weekly initial jobless claims fell to 221 ,000, down 7 ,000 from a week earlier. Continuing claims were steady but remained high at 1.956 million. Initial jobless claims came in at a three-month low, suggesting that the labor market remains pretty steady for now, Martin said. Control group retail sales, the only part used in calculating gross domestic product or GDP, excludes sales from auto dealers, building materials, stores, and gas stations. It rose 0.5 percent, beating analysts' expectations for 0.3 percent. Big retail sales gains in June came in categories like miscellaneous store retailers, motor vehicles and parts, building material and garden equipment, and clothing.

5:02Sales fell at furniture and electronics stores. Retail sales were up 3.9 percent annually. Another economic indicator, the Atlanta Fed's GDP Now reading for second quarter GDP growth, fell to 2.4 percent Thursday from the previous 2.6 percent. The downward move reflects lower real personal consumption expenditures growth in recent data releases. Next week isn't too meaningful on the data front, but does include a rate decision from the European Central Bank and earnings that branch out from banks to include transports, tech, defense contractors, automakers, telecommunications firms, and a couple of magnificent seven members, Alphabet and Tesla.

5:50Also, Fed speakers enter their quiet period ahead of the Federal Open Market Committee's July 29th to 30th rate-setting meeting. The market continued to buzz late this week about threats from President Trump to fire Fed Chairman Jerome Powell. That concern led to a brief sell-off in Treasuries and stocks on Wednesday, though they bounced back after Trump said a firing wasn't under consideration. Trump may be testing markets regarding firing Powell, which the Supreme Court ruled he can't do other than for cause, said Lizanne Saunders, chief investment strategist at Schwab. But let's also remember that the C in FOMC stands for committee, not chair.

6:34Saunders added that it's crucial to look under the surface of inflation data to see the impact of tariffs, which are becoming noticeable, especially for imported goods. In addition, the current relative calm in the bond market appears supportive for equities for now. In stocks, the market is becoming more K-shaped, Saunders said, with divergences even among the magnificent seven. On Thursday, strengths shifted back to cyclical sectors that tend to rise when there's economic strength. Financials, which hadn't caught much of a tailwind from bank earnings earlier this week that mostly exceeded expectations were among the leaders, along with infotech and industrials.

7:18However, defensive sections of the market, like staples and utilities, didn't get left out. On recent days, when the market rallied, consumer-related firms tended to do well. Thursday was no exception, featuring strong showings by Disney, Netflix, PepsiCo, Lululemon, Norwegian Cruise, and KB Home, among others. Materials firms also had a strong day after a solid earnings report from Alcoa on Wednesday. The small-cap Russell 2000 lost ground over the last week, but is up around 18 percent since mid-April and outpaced larger indexes for the second straight session. Earnings strength and hopes for an easier regulatory climate are raising hopes for more mergers and acquisitions later this year, which would likely be bullish for smaller companies that might be acquisition targets.

8:11Recent U.S. dollar strength reflecting hopes for a stronger domestic economy and declining rate cut odds may also be helping small caps after the dollar had its worst first half in decades. Small cap firms tend to do more of their business in the U.S. and aren't often hurt as much as large companies by the effects of a strong greenback in overseas markets. However, it's very early days for this dollar rally, and it's still down sharply for the year. The dollar also got help from rising treasury yields, but the 10-year treasury note yield has stayed below 4.5 percent this week so far. That's roughly the high point of its near-term range.

8:52It added a basis point to 4.47 percent yesterday. A climb above 4.5 percent might cause concern. The Dow Jones Industrial Average rose 229.71 points Thursday, or 0.52 percent, to 44 ,484.49. The S &P 500 Index climbed 33.66 points, or 0.54 percent to 6 ,297.36, and the Nasdaq Composite added 153.78 points, or 0.74 percent to 20 ,884.27. This has been the Schwab Market Update podcast. To stay informed, visit schwab.com slash market update or follow for free in your favorite podcasting app. And if you like what you've heard, please consider leaving us a rating or review. It really helps new listeners find the show.

9:51Join us for another update Monday.

9:59For important disclosures, see the show notes and schwab.com slash market update podcast.