Retail Sales Take Spotlight Ahead Of Fed Meeting

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, September 16th. Investors' eyes are firmly centered on the Federal Reserve's Wednesday meeting, but the August retail sales report due before the open could likely set the tone today. With the softening labor market and higher goods prices weighing on consumers, economists are forecasting a weaker reading than what was seen last month. The Briefing.com consensus is for a 0.3 % month-over-month rise in retail sales compared to 0.5 % a month ago. It will be interesting to see how resilient the consumer remains amid pricing changes, said Joe Mazzola, head trading and derivative strategist at Schwab.

1:00Should the number beat substantially, I imagine you would see a bear-steepening event where long rates move up more than the front end. This should help cyclical sectors, especially financial and consumer discretionary stocks. A major miss would likely have the opposite effect, pushing down the long rates and benefiting the more defensive sectors like staples and utilities. Investors have been willing to look past weak economic data in recent months, particularly soft jobs data, inferring that it only provides the Fed with more ammunition to go ahead with multiple rate cuts this year. But weak retail sales data could signal consumers' resilience is fading, making it more difficult for corporations to pass on rising costs.

1:44That could impact margins and earnings moving forward. Markets continued their quote-unquote melt-up momentum on Monday despite this threat, however, with a positive backdrop for the AI investment cycle and the prospect of falling interest rates continuing to boost share prices.

2:05Now, all eyes will be on the Federal Open Market Committee or FOMC meeting Wednesday afternoon for confirmation that a more accommodative policy path truly lies ahead. At the close of trading Monday, futures markets priced in at 95.8 % odds of a 25 basis point rate cut and 4.2 % odds of a 50 basis point rate cut at the meeting. Besides the interest rate decision, investors will be monitoring the summary of economic Projections, or SAP, for insights into Fed Governor's long-term outlook for the economy and interest rates. Chairman Jerome Powell's post-meeting comments will also be highly scrutinized.

2:42If the SAP and Powell's remarks convey a dovish stance, it could provide fuel for rate-sensitive areas of the market, including real estate, financials, and small caps. The Fed won't be the only central bank in focus this week, however. The Bank of Canada is also expected to cut rates Wednesday, while the Bank of England and Bank of Japan are seen holding rates steady on Thursday and Friday, respectively. Looking out to the next 12 months, markets are expecting the Fed to outpace the other major central banks, delivering the biggest cuts in rates. This could keep downward pressure on the dollar, said Michelle Ghibli, director of international research at Schwab, noting that dollar weakness adds to international returns.

3:25The MSCI-IFA Index, which measures the performance of developed markets outside of the U.S. and Canada, has outperformed the S &P 500 by over 1 ,200 basis points this year amid the dollar's weakness. In other overseas news, China reported weaker-than-expected retail sales, industrial production and property investment data overnight. Despite continued signs of economic fragility in the country, the Shanghai Composite recently rebounded to levels not seen since 2015. So far, earnings are still being cut, so the stock gains are coming as valuations expand. Investor sentiment has become more optimistic about the future AI in particular, said Ghibli.

4:08Interestingly, the rally may be being led by institutional investors who are allocating away from low-yielding bonds. In Domestic Data Monday, investors got some more signs of weakness in the manufacturing sector. the Empire State Manufacturing Index came in well below the consensus forecast and turned negative, plunging from positive 11.9 in August to negative 8.7 in September. Looking deeper into the data, which provides a read into the health of the manufacturing sector in New York State, the New Orders Index declined 35 points to negative 19.6, while the Shipments Index fell 30 points to negative 17.6.

4:49Those are the lowest levels for both indexes since April of 2024, signaling manufacturers in the state are struggling with current economic conditions. Investors will be monitoring the Philadelphia Fed Manufacturing Survey due Thursday for more evidence of weakness in the manufacturing sector nationwide. Besides these regional manufacturing reports, there's additional economic data to monitor this week. On the housing front, the Home Builder Confidence Index, due at 10 a.m. Eastern Time, as well as tomorrow's housing starts and building permits data will offer a fresh read on the strength of the market.

5:24Despite persistent weakness in the housing market, homebuilder stocks have rebounded since July with mortgage rates inching down. But industry leaders including Lenar, D.R. Horton, KB Home and Pulte Group gave back some of their recent gains on Monday ahead of this week's housing data releases. Initial jobless claims for the week ending September 14th will follow on Thursday. Economists expect 240 ,000 initial claims, down from the nearly four-year high of 263 ,000 seen last week. The Conference Board's Leading Economic Index, or LEI, for August will then provide a forward-looking gauge of the momentum of U.S.

6:04economic growth. The LEI declined 2.7 % between January and July. Further weakness could heighten worries about an economic slowdown among investors and Fed officials. Today's earnings calendar is relatively light, with the second quarter earnings season coming to an end. However, investors will be monitoring the wholesale distributor Ferguson Enterprises report due at 8.30 a.m. Eastern Time as a gauge of demand in the commercial and residential construction sector. Looking ahead, General Mills' earnings will draw close attention tomorrow, with investors monitoring results for more clues about the health of the consumer.

6:42And FedEx's earnings will take center stage Thursday, with the company facing pressure from changes to tariff exemptions and shifting trade policies. Treasury yields continued their recent trend on Monday, dropping across the curve ahead of the Fed meeting. The 30-year Treasury bond yield sank to 4.66%, while the 10-year note declined to 4.04%, and the two-year Treasury note yield fell to 3.54%. As far as individual market movers, on Monday, Alphabet shares rose 4.3%, leading the company to surpass a$3 trillion market capitalization for the first time in its history. News that Alphabet's AI application Gemini took the top spot on the App Store's free apps chart last week, overtaking rivals like OpenAI's ChatGPT helped lift shares.

7:33Alphabet stock has now surged more than 22.86 % over the past month after a less severe-than-expected antitrust ruling prevented the company from having to sell its Chrome browser. Tesla also continued its run of form on Monday. Shares of the EV giant jumped 3.62 % after a regulatory filing revealed CEO Elon Musk bought$1 billion worth of Tesla shares. Investors saw the move as a vote of confidence in Tesla and a sign that Musk is committed to remaining at the company. Seagate Technologies surged 7.72 % on Monday amid optimism over the company's hard disk drive storage solutions for AI data centers.

8:16A computer hardware maker also got a boost after Bank of America increased its price target from$170 to$215 early Monday. Finally, CoreWeave stock popped 7.6 % after disclosing it landed an order worth at least$6.3 billion from NVIDIA for its AI cloud infrastructure solutions. On the other side of the ledger, Texas Instruments shares sank 2.41 % after the China's Ministry of Commerce initiated an anti-dumping investigation into imports of analog integrated circuits from the U.S. like those produced by the semiconductor company. Shares of Corteva also fell 5.69 % after the Wall Street Journal reported Friday that the agrochemicals company is considering splitting its business seed and crop protection units.

9:08Five out of 11 S &P 500 sectors rose on Monday, led by cyclical sectors, including communication services, consumer discretionary, and information technology. Meanwhile, defensive sectors, such as consumer staples and health care, lagged. The Dow Jones Industrial Average rose 49.23 points Monday, or 0.11%, to 45 ,883.45. The S &P 500 Index advanced 30.99 points, or 0.47%, to 6 ,615.28. And the Nasdaq Composite jumped 207.65 points, or 0.94%, to 22 ,348.75. 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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10:21For important disclosures, see the show notes and schwab.com slash market update podcast.