Markets Digest Rate Hike Amid Light Earnings Slate

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, September 17th. Investors head into today still digesting the implications of the Federal Reserve's first rate hike in more than three years. With a light earnings and economic calendar through the end of the week, attention will likely remain on the path forward for rates amid elevated treasury yields, oil prices, and geopolitical tensions. The Fed raised its benchmark interest rate by 25 basis points yesterday in a widely expected and unanimous decision, pushing its target range to between 3.75 % and 4%. It's very unlikely this will be a one-and-done, and quite likely the Fed will hike again, said Colin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research.

1:09From an economic perspective, 25 basis points isn't going to do too much, but it sends a message. The decision to hike rates came after U.S. crude oil prices surged above$100 per barrel this month amid the Iran conflict. Growing hostilities in Yemen have also added to the upward pressure on crude in recent weeks by threatening key shipping lanes near Saudi Arabia. U.S. consumers are feeling the impact of these conflicts. The average price of a gallon of gasoline hit$4.36 on Wednesday, while diesel prices hit a record high of$6.31 per gallon, according to the American Automobile Association. Inflation has also been above the Fed's 2 % target for more than five years now, and the August monthly core consumer price index, which excludes food and energy prices, topped expectations at 0.3%.

2:04That might have been the final straw for a Fed that's been patient for many months. Our predominant focus is on the price stability side of our mandate. The plain fact is that inflation is too high and has been for too long, Chairman Warsh told reporters in his post-meeting press conference. This summer's inflation readings do not tell me that underlying trends have meaningfully improved. Warsh seemingly set the table for yesterday's hike in his Jackson Hole speech last month when he promised to not let inflation get out of hand. The question now is whether the Fed might have more rate hikes up its sleeve, and the market appears to think so.

2:47After Wednesday's decision, futures trading priced in a nearly 90 % chance of at least one more hike before the end of the year, according to the CME FedWatch tool. The odds of two additional hikes surged above 35%. Checking the Fed's so-called dot plot of rate projections, the average estimate for the end of 2026 came in at 4.1%, compared with 3.8 % in June. While Chairman Kevin Warsh has chosen not to submit a dot since taking on his new role, 16 of the 18 other voting Fed officials expected another hike this year, with four of those seeing two more hikes as possible. For 2027, the average rate projection was 4.1 percent compared with 3.6 percent in June, suggesting another hike next year will depend on the pace and outlook of inflation moving back towards 2 percent.

3:41The Fed also delivered its inflation expectations and gross domestic product, or GDP, estimates yesterday. It pegged 2026 headline and core personal consumption expenditures, or PCE, price index growth at 3.7 % and 3.4%, respectively, on a year-over-year basis. Those projections were a touch above June's estimates of 3.6 % and 3.3%. For 2027, it sees headline and core PCE prices matching June's estimates of 2.3 % and 2.5%, respectively. The central bank also expects real GDP to hit 2.3 % in 2026 and 2.4 % in 2027, up slightly from June's estimates. And finally, now it sees a median unemployment rate of 4.1 % in both 2026 and 2027, compared with 4.3 % for both years in June.

4:43Major indexes plunged and Treasury yields rose across most of the curve yesterday after the hawkish Fed meeting. The 10-year Treasury yield pushed back above 5 % after touching that level for the first time since 2007 earlier this month. From a bullish perspective, while oil prices have pushed back higher over the past six weeks, the consumer remains resilient and bond yields are higher but not running away, said Nathan Peterson, director of derivatives research and strategy at the Schwab Center for Financial Research. However, from a bearish near-term trading perspective, the most important leading indicator is the state of the Iran war, in my view, and it doesn't appear to be going very well.

5:28While the Fed was in focus yesterday, there were multiple major economic reports that also garnered tension. Some of these appeared to signal inflation remained an issue in August. For instance, August U.S. export and import prices rose 0.6 % and 0.7%, respectively, the Bureau of Labor Statistics reported. However, the August retail sales report was a bright spot in some respects. Retail sales rose 1.2 percent month over month, topping the 0.8 percent consensus estimate. The closely watched control group retail sales figure, which feeds into the government's gross domestic product estimate, climbed 1.4 percent.

6:09Retail sales registered a strong bounce back across the board following July's week report, which was also upwardly revised, said Peterson. The data suggests that consumer spending remains resilient and echoes encouraging commentary from the big bank CEOs on the state of the consumer at the Barclays Global Financial Services Conference. The breadth of retail sales was also solid, with gains in 12 out of 13 categories. Only building materials was lower, noted Kevin Gordon, head of macro research and strategy at the Schwab Center for Financial Research. The services economy isn't slowing. Retail sales for restaurants and bars jumped by 1.2 % month over month in August, the seventh consecutive monthly increase.

6:57Though retail sales looked resilient on a headline basis, the report doesn't adjust for inflation, meaning some of the strength might have reflected rising prices. After the retail sales report, the Atlanta Fed GDP Now estimate for third-quarter GDP growth rose to 5.1 percent from the previous 4.4 percent. The average analyst estimate for third-quarter GDP is still below 3 percent, however. There are no major earnings reports on tap for the rest of the week, but today brings August housing starts and building permits at 8.30 a.m. ET. time. Analysts expect housing starts to rise to 1.32 million on a seasonally adjusted annual basis, up from 1.24 million in July, according to Briefing.com.

7:44Building permits, a leading economic indicator, are seen dropping to 1.41 million from 1.44 million in July. These reports will be closely watched after the Mortgage Bankers Association reported yesterday that mortgage purchase applications sank 19 % year-over-year last week as elevated mortgage rates and home prices weighed on home buyers.

8:10Checking individual movers Wednesday, SK Hynix and Intel both popped at the open before pairing their gains throughout the day. The jump came after Reuters reported that the two firms discussed a potential partnership that would involve SK Hynix producing memory chips in the U.S. for the first time. SK Hynix later said no plans have been confirmed. SpaceX Technologies surged 5.2 percent after announcing the next test flight for its Starship rocket. The company plans to deploy Starlink V3 satellites during the flight. J.B. Hunt Transport Services sank 13.3 percent after the company revealed that it expects its third-quarter profit to drop 5 to 10 percent sequentially due to higher costs.

8:58Eight out of 11 S &P 500 sectors ended Wednesday in the red. Risk-off sectors, including utilities and health care, led the pack, although Infotech also managed to eke out gains. Energy and financials plunged as oil prices took a break from their recent surge and the Fed raised rates. But now Jones Industrial Average sank 631.21 points or 1.21 percent Wednesday to 51 ,461.90. The S &P 500 index dropped 33.92 points, or 0.45%, to 7 ,551.81. And the Nasdaq Composite fell 3.15 points, or 0.01%, to 25 ,978.43. 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.

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