Fed Rate Cut in Focus Despite Sticky CPI Report

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.

0:18I'm Colette O 'Claire, and here is Schwab's early look at the markets for Friday, September 12th. Investors are now squarely focused on the Federal Reserve's policy meeting next Wednesday, but first, today's preliminary University of Michigan survey of consumers data will provide a read into American sentiment and long-term inflation expectations. The latter will be particularly important on the heels of Thursday's sticky Consumer Price Index, or CPI, reading and gloomy initial jobless claim report, which once again raised the specter of stagflation among some investors. Both year-ahead and long-run inflation expectations edged up last month in the University of Michigan survey.

1:02Another report like that could signal consumers are losing confidence in price stability as businesses attempt to pass on tariff costs, complicating the Fed's interest rate decision. CPI rose 0.4 percent from a month ago in August, above expectations for a 0.3 percent jump. Core CPI, which excludes more volatile food and energy prices, was in line with consensus, rising 0.3 % for the month. On a year-over-year basis, CPI advanced 2.9%, leaving it well over the Fed's 2 % target, and at its highest level since January, while Core CPI rose 3.1%. Headline CPI was stronger than expected thanks to stronger gains in the energy sector, But beyond that, there were notable gains across the goods sector, said Kevin Gordon, senior investment strategist at Schwab.

1:56At the same time, several parts of the services sector were firm, which shows the breadth of inflation gains continues to run relatively hot. Thursday's stubborn inflation data was largely overshadowed by fresh signs of labor market weakness, however. Initial jobless claims surpassed economists' forecasts for the week ending September 6th, surging 27 ,000 to a seasonally adjusted 263 ,000. This marks the highest level of initial jobless claims since October 2021. A significant portion of the increase was due to flooding in Texas, but it's another sign the labor market is cooling after last week's weaker-than-expected August non-farm payrolls report.

2:41Thursday's higher-than-anticipated consumer inflation data also followed a benign producer price index, or PPI, report. that helped calm investors' inflation fears on Wednesday. All three major market indexes rose to record highs on Thursday as investors bet August's CPI reading won't be enough to stop the Fed from cutting rates next week amid persistent labor market weakness. As of market close, futures trading built in 94.8 % odds of a 25 basis point rate cut and 5.2 percent odds of a 50 basis point rate cut at next week's Fed meeting, according to the CME FedWatch tool. Treasury yields fell across most of the curve Thursday, despite the uptick in CPI inflation.

3:29The 30-year Treasury bond dipped to 4.65 percent, while the 10-year Treasury note sank to 4.02 percent, and the two-year Treasury note rose to 3.54 percent. Falling treasury yields and the prospect of Fed rate cuts led the average 30-year fixed mortgage rate to drop to 6.35 % on Thursday, an 11-month low. The news helped lift homebuilder stocks including Pulta Group, Lenar, DR Horton, and KB Home. Looking ahead, investors will get a raft of economic data next week that could move markets, highlighted by retail sales, housing starts, and the conference board's leading economic index. But the Fed's interest rate decision, updated economic and rate projections, and Fed Chairman Jerome Powell's press conference on Wednesday will be the main events.

4:22While all eyes will be on the Fed next week, the European Central Bank, or ECB, was in focus on Thursday. The central bank held interest rates steady at its August meeting, as analysts had forecast. ECB President Christine Lagarde pointed out that eurozone inflation remains near the 2 percent target rate and is expected to fall to 1.7 percent in 2026 and 1.9 percent in 2027. Lagarde noted that inflation is where they want it to be, said Michelle Givley, Director of International Research at the Schwab Center for Financial Research. By not pushing back on the idea that rate cuts are over, markets are interpreting it that cuts are complete.

5:06The ECB last cut rates in June, pulling them down to 2 % after they'd reached a record 4.5 % late last year. The cuts were implemented with the Eurozone facing economic growth concerns due to the impact of tariffs and fiscal tightening from many member nations. GDP growth in the region fell to just 0.1 % in the second quarter, compared to 0.6 % in the previous period. The ECB slightly raised its growth projections for 2025 on Thursday to 1.2%, but lowered them for 2026 to 1%. Weak European economic growth could dampen earnings for U.S. companies with significant revenues made in Europe. Additionally, fiscal worries in parts of Europe and Japan have yields edging up in both economies, one possible reason investors may be scooping up U.S.

6:00Treasuries and sending yields lower there. Turning back to U.S. markets, Warner Brothers Discovery stock popped 28.95 percent on Thursday after the Wall Street Journal reported that Paramount Skydance is preparing a takeover bid, citing people familiar with the matter. Kroger's stock also rose 0.24 percent after the company raised its annual core sales forecast for the second straight quarter, likely signaling the dine-at-home trend is set to continue with customers still under pressure from inflation. The grocery retailer topped analysts' earnings estimates but narrowly missed sales forecasts.

6:43The sales miss came amid a restructuring. Kroger has slashed 1 ,000 jobs and closed 60 stores under interim CEO Rodney McMullen. Meanwhile, OpenDoor skyrocketed 79.52 % after the digital real estate platform named former Shopify executive Kaz Nijatian as their new CEO and announced co-founders Keith Raboi and Eric Wu will rejoin the company on the board of directors. Also, Tesla shares hit their highest level since May and appear to be getting support from hopes for interest rate cuts. On the other end of the spectrum, Netflix stock fell 3.54 % after announcing Chief Product Officer Eunice Kim will leave the company.

7:31Kim played a key role in the streaming giant's password-sharing crackdown and helped expand their offerings into live shows, advertising, and gaming. Shares of Delta Airlines slipped 1.55%. Despite a more optimistic revenue forecast from the airline, Delta now expects its third quarter revenue to rise between 2 and 4 percent, compared to its prior estimate of 0 to 4 percent. A strong summer for corporate travel has bolstered revenues, but the airline is still struggling to fill economy class seats, Barron's reported. Ten out of 11 S &P 500 sectors rose on Thursday, led by materials, real estate and health care.

8:13Energy fell on the day, but only slightly. In a departure from earlier this week, advancing shares far outnumbered declining ones on Wall Street. Stocks had risen despite decliners outpacing advancers the three sessions preceding yesterday. While one day isn't a trend, it implies improving breadth. The Dow Jones Industrial Average jumped 617.08 points Thursday, or 1.36%, to 46 ,108. The S &P 500 Index advanced 55.43 points, or 0.85%, to 6 ,587.47. and the Nasdaq Composite gained 157.01 points or 0.72 % to 22 ,043.08. 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.

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9:33For important disclosures, see the show notes and schwab.com slash marketupdatepodcast.