Warsh's Words Spark Hike Fears with Jobs Data Next

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 Monday, August 31st. The new month starting tomorrow ushers in a host of labor data, crescendoing with Friday's August non-farm payrolls report. Investors await numbers while pondering the hawkish impact of Friday's speech by Federal Reserve Chairman Kevin Warsh, who gave investors plenty to ponder by suggesting the Fed has work to do on inflation. Speaking at the Fed's annual Jackson Hole Symposium, Warsh mentioned the word inflation 25 times and immediately sent odds of a rate hike next month far higher, according to the CME FedWatch tool.

0:58A September hike went from being around a 36 % possibility first thing Friday to 57 % by late Friday after his speech. Odds of at least one hike by the end of the year soared to nearly 90%. We must be confident that underlying inflation is moving to our objective clearly and at sufficient speed, Wors said, adding he doesn't see current financial conditions as restrictive. Treasury yields climbed after the remarks, with the two-year note yield quickly surging more than 10 basis points to 4.34%. that. That helped flatten the yield curve somewhat, possibly a sign of market faith that the central bank will try to tame inflation.

1:42Shorter-term yields are most sensitive to near-term rate policy. The long rally in yields appears to have the market, and perhaps the Fed, nervous, and stocks fell Friday but finished higher for the week. If we have one takeaway after the past couple of months, it's that the bond market is indeed final boss, said Kevin Gordon, head of macro research and strategy at the Schwab Center for Financial Research. Warsh reinforced the Fed's focus on inflation by saying that the central bank's 2 % personal consumption expenditure or PCE prices objective is a firm fixed target. PCE is the Fed's favorite inflation reading, and headline PCE was 3.7 % in July and 3.3 % for core PCE, excluding food and energy.

2:32Climbing yields can raise borrowing costs for companies and consumers, slowing economic and earnings growth. They also can steer investors into bonds hoping for solid income at perceived lower risk. Small-cap stocks, growth stocks, and defensive areas like real estate and utilities are particularly rate-sensitive and all struggled more than the broader market on Friday. Though monthly inflation data recently cooled, that didn't appear to satisfy Warsh. While this summer's PCE and CPI readings were better than expected, they do not tell me that underlying trends have meaningfully improved, he said.

3:10The speech came about a week after the Treasury Department announced a plan to increase the size of the Treasury Department's liquidity buyback operations, an apparent effort to address high long-term yields. Hike odds could change between now and the Fed's mid-September meeting as market participants watch August jobs and inflation data over the next two weeks. Friday's payrolls report is expected to show jobs growth of around 45 ,000 according to consensus from Wall Street analysts. That compares to a surprise drop of 23 ,000 in July. The July figure will again be in the spotlight Friday as investors watch for possible revisions.

3:51The July report downwardly revised May and June jobs growth by more than 100 ,000, making the labor market look far weaker than it had going in. Before Friday's report, investors get a full buffet of jobs data, starting with tomorrow's July Job Openings and Labor Turnover Survey, or JOLTS, report and August private sector ADP jobs data early Wednesday. Job cuts data arrives Thursday.

4:20Turning to earnings, the main event comes Wednesday morning when chip giant Broadcom reports. Others to watch this week include Snowflake, Palo Alto Networks, Dell, and Sienna. Margin worries for tech persist thanks to chip shortages and high memory prices, something investors will likely check for with Broadcom after NVIDIA's margin outlook came in conservative. With 97 % of S &P 500 companies reporting through Friday, blended earnings growth is 52%, Eurovier Fax has said. About 86 % of companies beat analysts' estimates for earnings. Crude oil eased slightly Friday after a media report that Iran was open to further negotiations.

5:05The U.S. stopped its barrage against the company several weeks ago and is focused instead on an economic blockade. Talks are stalled, and oil didn't make a meaningful move last week. Major indexes fell Friday as participants grew nervous over possible rate hikes. Rate-sensitive small caps performed worse, along with utilities. Growth areas like industrials and materials also retreated amid ideas higher rates could slow the economy. Five of 11 S &P 500 sectors climbed Friday, a better showing than one of 11 on Thursday. There was a mix of sectors in the green, including communication services and consumer discretionary, despite higher yields.

5:50Infotech got hurt by software losses and a sharp retreat for NVIDIA after Thursday's massive earnings rally. Tech is also sensitive to rising rates, as the huge AI spending depends in part on borrowed money. Technically, the week did some chart damage to the S &P 500 Equal Weight Index, which fell below its 20-day moving average for the first time in a month. Momentum measures are also lower. NVIDIA plunged 4%. The information reported that the White House is developing an AI rule to limit China's remote access to chips. NVIDIA just got back into China's market with its first sale of H200 chips, Bloomberg reported.

6:34Checking individual movers Friday, Gap climbed almost 13 % after reporting better-than-expected earnings and despite a revenue miss. The company's guidance topped consensus, and it also named a new CEO of Old Navy, a brand that's struggled. Marvell Technologies slid 10 % after earnings and revenue came in close to estimates amid strong AI-related demand. Guidance met expectations. Investors appeared disappointed that a recent AI chip agreement with Alphabet's Google didn't have more impact on the outlook, Reuters reported. Rubrik plunged 13 % late Friday, despite better-than-expected second-quarter revenue and improved guidance for the security software firm.

7:17PayPal plunged 12 % on a report by Bloomberg that Advent and Stripe had abandoned their$50 billion pursuit of the company. Bank shares edged up as long-term treasury yields remained high and potentially could aid profits on loans Amazon climbed 4 % after Evercore ISI raised its price target and noted its survey shows Agentic AI is supportive for Amazon's retail business Autodesk slipped 3.7 % even though quarterly results surpassed analysts' estimates the software company guided for third-quarter earnings per share below consensus. The dollar jumped 0.5 % after Warsh's speech as investors began pricing in higher rate odds.

8:05Gold, sometimes seen as an inflation hedge, fell 3%, on ideas the Fed might get more aggressive fighting price increases, and Bitcoin fell nearly 3 % after the Warsh speech, dragging crypto-related stocks.

8:22The Dow Jones Industrial Average lost 9.45 points or 0.02 % Friday to 53 ,559.99. The S &P 500 Index slipped 19.23 points or 0.25 % to 7 ,711.76. And the Nasdaq Composite fell 138.93 points or 0.52 % to 26 ,402.42. For the week, the Dow Jones Industrial Average added 0.53%, the S &P 500 Index climbed 0.49%, and the NASDAQ rose 0.85%. This has been the Schwab Market Update Podcast. To stay informed, visit www.schwab.com slash marketupdate 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.

9:25Join us for another update tomorrow.

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