Market Awaits Key Catalysts, Pauses After Rally

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, August 26th. Wall Street taps its collective fingers waiting for this week's key developments, which start tomorrow afternoon with NVIDIA's earnings. Key inflation data is also ahead, but not until Friday, and stocks limped out of the gate Monday after Friday's Federal Reserve-fueled rally. Some of Monday's lackluster action might reflect the waiting game, but also perhaps some second thoughts about Fed Chairman Jerome Powell's speech last Friday. Odds of a September rate cut remained at 84 % late Monday, up from 70 % before Powell's speech, according to the CME FedWatch tool.

1:01But viewed after the fact, Powell's speech looked more like an attempt to move the goalposts a bit as far as expectations and emphasized that although inflation remains a threat, the Fed might be more worried about a slowing jobs market ahead of the August jobs report due September 5th. Powell has warned that it will take time for tariff-related price increases to make their way through supply chains and distribution networks, and that the Fed's failure to adequately address inflation problems early enough in 2021 and 2022 led to hardship for the economy. While he also acknowledged that current Fed policy is in restrictive territory, which might allow for the Fed to adjust, he noted that risks to inflation remain tilted to the upside.

1:48With that in mind, data still matters, even if a September rate cut now looks likely. The labor market appears to be softening, especially given the revisions from the July non-farm payrolls report, said Colin Martin, director of fixed income strategy at the Schwab Center for Financial Research. When that's coupled with the high level of continuing jobless claims, the levels of long-term unemployment, and concerning survey-based measures of employment, the risks to the downside have become more clear. Inflation remains above target, however, and it's been moving in the wrong direction. Martin thinks the Fed will likely look through some of the recent price increases as one-time impacts from tariffs, not a persistent rise.

2:33Still, ongoing sticky inflation could give policymakers pause. For now, two rate cuts by the end of the year seem likely, but high inflation could prevent the Fed from cutting as much as the market currently expects, Martin added. Fed Governor Christopher Waller speaks Thursday evening on the economic outlook, and his words may carry extra importance because he was one of two Fed governors to vote for cutting rates back in July.

3:02The next look at inflation and arguably the most important data point this week is Friday's Personal Consumption Expenditures or PCE Price Index for July. There might not be too much shock volume because many of the inputs come from previous Consumer Price Index or CPI and Producer Price Index reports. The PCE weighs less toward housing than CPI and is considered a broader look at prices across the entire economy. Analysts expect monthly headline PCE to increase 0.2%, while core PCE, which excludes volatile food and energy prices, rises 0.3%, according to Briefing.com. June's figures were both 0.3%.

3:45Annual PCE is seen up 2.6%, the same as in June, while annual core PCE of 2.9 % would be up from 2.8 % in June. The Fed's inflation target is 2%. Before PCE, investors await the government's second estimate for second quarter gross domestic product, or GDP growth, due Thursday after the first one came in strong at 3%. The Atlanta Fed's GDP Now estimate is expected to get an update today after being pegged at 2.3 % for the current quarter last timeout. Other things to watch this week include market breadth, which can help investors gauge strength or weakness, and several Fed speakers. Breadth has steadily climbed this month, with more than 67 % of S &P stocks trading above their respective 50-day moving averages as of midday Monday.

4:40It was less than 50 % on August 1st, but was above 80 % earlier this year. Small caps rose sharply late last week on hopes of lower rates, and the S &P 500 Equal Weight Index, which weighs all stocks the same to avoid the heavy influence of the mega caps, broke out last week to its highest level since last December. That's another possible sign that technology isn't alone in the rally. Cyclicals and small caps' recent leadership suggests hopes for an economic rebound as a rate cut or rate cuts occur, said Lizanne Saunders, chief investment strategist at Schwab. Cyclicals are stocks that tend to perform better in a growing economy.

5:22Any retreat and risk appetite might be picked up by breadth metrics. However, retail investors appear to remain enthusiastic with speculative fervor undiminished even at current high levels for stocks. Another watchword is treasury auctions. About$69 billion in two-year notes goes on the block today, and investors will eye demand. Any sign of weakness might get noticed by the Treasury market potentially pushing yields higher. In data Monday, July new home sales of$652 ,000 on a seasonally adjusted annual rate came in above expectations. Consensus had been for$630 ,000, according to Briefing.com.

6:05June sales also got an upward revision. Median and average selling prices rose, and July sales were slightly below the upwardly revised June figure, showing the market remains sluggish. Today brings June's S &P Case-Shiller Home Price Index. Monday saw stocks mostly retreat, with 28 of 30 members of the Dow Jones Industrial Average in the red by late in the session, after Friday's first record close for the index since December. The small-cap Russell 2000 also took it on the chin after Friday's surge, but the tech-focused Nasdaq Composite spent most of the day above water thanks to support from some of the magnificent seven stocks, including NVIDIA.

6:49It fell towards the close. There wasn't much fundamental news behind Monday's lethargic downward move. Instead, stocks appeared to take their cues from a slight bounce in treasury yields ahead of today's auction. Rising crude oil may also have been a source of pressure, adding to inflation concerns. That said, crude remains just off recent two-month lows. Tech and other mega-cap stocks generally did best Monday, but even their performance wasn't notable. It's unclear if lack of buying interest represented the market taking a breather after Friday's jump or something more concerning. Technically, the uptrend in stocks persists, but catalysts are lacking for the moment, and Monday's soft close that featured selling picking up in the final hour doesn't bode well for Tuesday.

7:39One momentum measure, the Relative Strength Index, or RSI, for the S &P 500 declined Monday but remained near 59, not low historically. Four sectors, led by communication services and technology, managed to gain Monday, but the other seven declined. Some of last week's most sought-after sectors, including health care and materials, couldn't keep up the pace. The Dow Jones Industrial Average fell 349.27 points Monday, or 0.77%, to 45 ,282.47. The S &P 500 Index slid 27.59 points, or 0.43%, to 6 ,439.32. And the Nasdaq Composite lost 47.24 points or 0.22 % to 21 ,449.29. This has been the Schwab Market Update podcast.

8:39To 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.

9:03For important disclosures, see the show notes and schwab.com slash market update podcast.