Fed Keeps Rates Steady, but Hike Odds Tick Higher

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 Thursday, June 18th. First, a note. U.S. markets are closed Friday, June 19th, in observance of the U.S. Juneteenth holiday. The Schwab Market Update podcast will return on Monday, June 22nd. The Federal Reserve's first meeting with Kevin Warsh in the chairman's seat concluded Wednesday, with the results markets were expecting, the central bank holding its benchmark overnight borrowing rate unchanged in the 3.5 % to 3.75 % range. However, other changes were notable. First, the Fed may be shifting into a more aggressive posture against resurgent inflation.

1:02In the central bank's latest quarterly economic projection, the so-called dot plot, where Fed officials record their forecasts for future rate moves, nine of the 18 submissions now forecast at least one rate hike in the latter half of the year. Warsh, a critic of the dot plot, confirmed that he abstained from making his own projection. That's a reversal from March's quarterly outlook when no officials foresaw further increases this year. Beyond this year, there's a large amount of disparity in the projections for 2027 and beyond, suggesting there's no clear path forward with policy. Second, in an apparent signal that Worshin tends to curtail some of the communication efforts that marked former chair Jerome Powell's tenure, the central bank's meeting statement was pared down to just four pithy paragraphs.

1:53The statement described the economy as expanding at a solid pace and noted that job gains have kept pace with the workforce. In describing inflation, it said the rate-setting Federal Open Market Committee will deliver price stability, though it didn't mention the other part of its dual mandate, stable employment. This could suggest the Fed is more concerned about inflation than the labor market at this point. Separately, Warsh said the Fed would also be overhauling some of the central bank's operations with a new task force looking at the Fed's communications and areas such as inflation and employment.

2:29Stocks turned decisively lower as investors digested the Fed's statement, while Treasury yields bounced higher. The two-year Treasury, which tends to be a market proxy for the near-term path of monetary policy, moves sharply higher, likely due to projections for hikes this year. Futures markets are now pricing in a higher likelihood of hikes this year. Traders now see just a 14.2 % chance of rates remaining at their current range as of the December meeting, according to the CME FedWatch tool, compared with 40 % as of Tuesday. The odds rates rising to a 4 % to 4.25 % range were pegged at 33.7%, up sharply from 14.8 % on Tuesday.

3:16The action could remain choppy today, which also happens to be the second quarter's triple witching day, when stock options, index options, and index futures all expire simultaneously. This could contribute some volatility, especially considering retail traders' heavy bullish positioning in options. Triple witching usually occurs on a Friday, but U.S. markets will be closed tomorrow for the Juneteenth holiday. In economic data Wednesday, retail sales surged 0.9 % in May despite the war in Iran, surpassing analysts' expectations of a 0.5 % increase and April's 0.4 % expansion. The report was better than expected and suggests that higher gas prices aren't pinching the consumer yet, said Cooper Howard, director of fixed income research and strategy at the Schwab Center for Financial Research.

4:09Retail sales data isn't adjusted for inflation, so higher prices did affect the headline number, as did heavy spending at gas stations. That said, the control group, which excludes sales from auto dealers, building materials stores and gas stations, rose 0.7 percent from April, topping expectations. The control group feeds directly into gross domestic product and suggests we may see another period of positive economic growth despite higher oil prices and the war in Iran, Howard said. The report looked solid across the board, he added. Sales were strong at furniture stores, general merchandise stores, and non-store retailers, which include e-commerce.

4:53Recent jobs and manufacturing data have also been decent. Though consumer sentiment remains historically low, inflation is elevated and job openings have fallen significantly. In other data Wednesday, housing continued to look weak, thanks in part to higher mortgage rates. Weekly mortgage applications dropped nearly 4 % from the prior week. Not much data is due out today, but the weekly initial jobless claims report due at 8.30 a.m. Eastern time could be noteworthy as claims have edged up recently. Claims hit a three-month high of 229 ,000 last week, and analysts are expecting today's report to show a weekly tally of around 226 ,000, according to briefing.com.

5:36Earnings have been light this week, but what investors saw appeared to impress. Today brings expected results from Accenture and Kroger, but next week gets more interesting when FedEx and chip giant Micron report. Shares of Accenture are down sharply this year, and the company has faced multiple ratings downgrades from Wall Street amid concerns its AI-related spending hasn't demonstrated meaningful returns. Kroger, for its part, could be an interesting read on consumer sentiment, namely in how sales of store brands did versus name brands. In tough times, store brands often see surging demand. The last time, Kroger reported in March, it impressed investors with its sales forecast.

6:24Besides earnings from Micron and FedEx next week, data picks up towards the end of the month with readings on first-quarter GDP and May personal consumption expenditures, or PCE, prices. Components of last month's Producer Price Index, or PPI, that map over to the May PCE price report, the Fed's favorite inflation meter, pointed towards sturdy growth. Only the air transport component declined. All 11 of the S &P 500 sectors turned lower Wednesday, with communications services, consumer discretionary, and real estate leading the decline. Treasury yields turned sharply higher after the conclusion of the Fed meeting.

7:04with a benchmark 10-year Treasury yield rising 5 basis points to 4.497%. Among individual movers Wednesday, Micron rebounded 2.2 % after yesterday's 6 % decline. Shares are up more than 800 % over the last year and hit a record close on Monday, with some analysts raising their price targets earlier this week. Gross margins could be in focus when Micron reports next Wednesday. Other chip firms also rebounded early from Tuesday's losses. The comeback includes shares of Intel climbing almost 3.5 % after CNBC reported the company had begun production of its most advanced chip node, part of an effort to produce chips for other companies.

7:51CarMax dropped nearly 9 % despite reporting earnings that surpassed Wall Street's expectations. Combined resale and wholesale unit sales during the quarter rose 3.3%, but gross profit margin per retail used unit declined from a year ago as the company took pricing actions to drive improved sales. SpaceX fell nearly 5%, pairing some gains after zooming above$200 per share on Tuesday and clinching the number six spot on the list of the largest publicly traded companies in the U.S. AST Space Mobile jumped nearly 4 % after SpaceX said it had put three AST satellites into orbit, though operational status has yet to be determined.

8:37SpaceX provides launch services for the company but also wants to compete with it in providing broadband-quality connections from space for mobile phones, Barron said. Lazy Boy surged nearly 15 % after the furniture maker topped earnings consensus. Quarterly sales appeared in line with expectations, while its forecast for the current quarter was slightly better than what analysts had expected. Lionsgate Studios dropped 6 % after surging Tuesday, following reports the company might be acquired by Netflix. However, Netflix later denied those reports, CNBC said. And CME Group shares fell roughly 3.5 % after the company announced CEO Terry Duffy would step down from that position early next year.

9:25He's led the CME Group for more than 25 years. The Dow Jones Industrial Average fell 507 points, or 0.98%, Wednesday to 51 ,492.55. The S &P 500 index dropped 91 points, or 1.21%, to 7 ,420.10, and the Nasdaq Composite shed 355 points, or 1.34%, to 26 ,021 .66. 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. 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.

10:28For important disclosures, see the show notes and schwab.com slash market update podcast.