Tariffs Take Back Seat Ahead of CPI, Bank Results

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, July 15th. The show hits the road today as investors brace for bank earnings and inflation data before the bell, possibly pushing tariff chatter into the background, at least for the moment. The June Consumer Price Index, or CPI, due at 8.30 a.m. Eastern Time, is seen rising 0.2 % month-over-month for headline CPI and 0.3 % for core, which excludes volatile food and energy. Headline and core each rose 0.1 % in May. Analysts expect annual CPI growth of 2.7 % and core annual growth of 3%, compared with 2.4 % and 2.8 % in May.

1:05Though it's too soon to say if the expected gains reflect tariffs, the types of goods and services that rise or fall could provide hints. Recent inflation reports featured benign headlines thanks partly to less growth and shelter costs, while prices rose for items like building materials, furniture, pharmaceuticals, and personal care items. June still has a chance to be benign due to demand getting pulled forward into earlier this year. June was still early innings for tariffs, Briefing.com noted, meaning the main effect might be yet to come. Keep in mind that June's report is just a snapshot, like any single month.

1:45Over time, the inflationary impact from tariffs, if there is one, will likely become clearer. It might help to dive deeper into the report and examine price activity for various items in June, checking for increases in costs of things like cars and building materials that might reflect higher input costs from tariffs. The tariff impact on inflation has been relatively minor so far, but over time we expect to see goods prices rise a bit as some of the tariff gets passed along to the end consumer, said Colin Martin, Director of Fixed Income Strategy at the Schwab Center for Financial Research. Even if we see some tariffs pass through to goods prices, services prices have been cooling.

2:27If the June CPI report comes in higher than May's, which is currently expected, then the timing of the next Fed rate cut may be pushed back again. Chances of a July rate cut were 5 % late Monday, and odds of at least one cut by September were 63%, according to the CME FedWatch tool.

2:50Turning to bank earnings, investors tend to watch loan activity, consumer and business credit trends, and updates on investment banking and trading demand. After mid-level performance in the first quarter, financial sector's earnings growth is seen slowing in the second quarter, according to analysts, though favorable metrics like the yield curve could help margins by improving net interest income. Key banks reporting today before the open include JPMorgan Chase, Citigroup, BlackRock, and Wells Fargo. Headwinds for banks include tariff-related inflation concerns, a worsening U.S. fiscal outlook, a slow housing market, relatively high borrowing costs, and weaker consumer credit.

3:32Strengths could include the bank's market segments, which might benefit from volatile trading in treasuries and stocks during the second quarter. As always, investors will likely pay close attention to comments from bank industry leaders who often discuss consumer health and the economy. The banking sector heads into earnings mostly higher over the last few weeks, which could indicate a buy-the-rumor scenario ahead of reporting season. Other major firms on tap this week include 3M, United Airlines, Netflix, and Johnson & Johnson. A couple of semiconductor companies are also in the mix, including ASML, an important ship equipment supplier, and Taiwan Semiconductor.

4:13A relatively cheerful outlook last week from Delta Airlines got the consumer part of earnings off to a solid start, and Netflix could also put the spotlight on consumer demand. On Monday, market action appeared subdued, with volatility light and Treasury yields almost unchanged, despite all the data, earnings and trade events swirling. The calm trading, with slight gains, could reflect market confidence that something will be done between now and the August 1st tariff deadline to lower threatened levies, or market fatigue with the issue. President Trump's tariff threats over the weekend against the European Union and Mexico appeared to generate little consternation.

4:54Though tariffs may shift more to the background as earnings season gathers speed, they're far from out of sight or out of mind and likely to surface on many earnings calls. The uncertainty about whether tariffs will go into effect next month, at what rate, and how long the tariffs will remain in place is likely to pose a big challenge for companies and investors, said Michael Townsend, Managing Director of Legislative and Regulatory Affairs at Schwab. Monday's slow trading might also reflect participants waiting for this week's economic data, much of which has market-moving potential. Besides CPI, there's Wednesday's producer price index and Thursday's retail sales.

5:36Housing and sentiment data followed that Friday. Market breadth was still positive as the week began, with about 70 % of S &P 500 stocks above their respective 50-day moving averages. last week saw some rotation, following a pattern toward weekly changes in sector strength. Last week seemed to favor some of the more defensive sectors, but Monday saw communications services and financials take the lead. Exchange-traded fund flows have been positive lately, though tailing off a bit, but large speculators and hedge funds appear to remain bearish on the S &P 500, with negative futures positioning close to early 2024 levels, said Lizanne Saunders, Chief Investment Strategist at Schwab.

6:20Bank stocks rose yesterday, heading into the earnings deluge from that sector. About half of the early earnings reports are from banks. Boeing shares got a lift from an initial report that last month's Air India crash wasn't caused by a mechanical failure. And Netflix found buyers heading into Thursday afternoon's earnings report. Overall, Wall Street volume was below average on Monday. The Fed's unwillingness to lower rates in the face of political pressure remains in the spotlight. Fed Chairman Jerome Powell faced renewed criticism from President Trump over the weekend, and media reports Monday said Powell has asked the bank's inspector general to review its$2.5 billion headquarters renovation project.

7:05A bedine CPI report today, if that's what investors get, might ramp up calls for rate cuts. However, Powell can't do that himself, and seven Fed policymakers said last month they expect no rate cuts this year. Even if the Fed cuts rates, that wouldn't guarantee lower borrowing costs. Treasury yields rose sharply last fall when the Fed cut rates by 100 basis points over four months. The next Fed meeting is July 29th and 30th, the day before the June Personal Consumption Expenditures, or PCE, price index, the Fed's favored inflation report, and two days before the July non-farm payrolls report. Both of those could shape the September decision.

7:47Long-term yields might stay elevated given trade policy uncertainty and fiscal concerns, Schwab-Martin said. We don't expect rising deficits to pull long-term yields up significantly higher, but we think that they may prevent yields from falling much further. Yields may need to remain elevated to attract the marginal Treasury buyer. The Dow Jones Industrial Average climbed 88.14 points Monday, or 0.2%, to 44 ,459.65. The S &P 500 Index added 8.81 points, or 0.14%, to 6 ,268.56. And the Nasdaq Composite rose 54.80 points, or 0.27%, to 20 ,640.33. 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.

8:49And 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.

9:04For important disclosures, see the show notes and schwab.com slash market update podcast.