Week Ahead Features Powell Speech, Inflation Data

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.

0:18I'm Colette O 'Claire, and here is Schwab's early look at the markets for Monday, September 22nd. Tomorrow's speech by Federal Reserve Chairman Jerome Powell and Friday's inflation data take the spotlight this week, but there's not much hard-hitting earnings or data today. Major indexes posted record highs again Friday after the Fed's rate cut, but may need fresh catalysts with valuations at the high end historically. Stocks appear to be riding the don't fight the Fed theme, despite a relatively patient tone from the Fed out of last week's meeting, said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.

1:00Although the labor market has been softening, the Fed acknowledged the impact of immigration policy and there could be some digital labor or AI impact as well. So it's not 100 % clear that the labor market weakness is tied to economic slowing. Investors likely want to hear Powell's individual thoughts about the path of inflation and jobs when he speaks at 12.35 p.m. Eastern Time tomorrow. He's summarized the entire Federal Open Market Committee's projections at his post-meeting press conference last week, but tomorrow's remarks might have a more personal bent as he contemplates his final months as Fed Chair.

1:41Today also features a Fed speech from Governor Steve Myron. He was appointed just last week and voted in the FOMC's rate decision. His speech at noon Eastern time is called Non-Monetary Forces and Appropriate Monetary Policy. Key data this week include August new home sales Wednesday and an updated look at second quarter Gross Domestic Product Thursday. But Friday's Personal Consumption Expenditures, or PCE Price Index, will likely draw the most market attention. The August Consumer Price Index and Producer Price Index data didn't indicate major fluctuations, and the Fed estimated last week that total PCE rose 2.7 percent over the 12 months ending in August, while core PCE prices, which exclude Food and Energy rose 2.9 percent.

2:32Those are up from earlier in the year, reflecting what Powell believes is rising goods inflation. In contrast, services disinflation appears to continue, Powell said last week, and while near-term inflation expectations are up, longer-term inflation expectations remain consistent with the Fed's 2 percent goal. The PCE report is the Fed's favored inflation monitor.

3:01Another report to watch is Thursday's jobless claims, which popped two weeks ago before settling back last week. What's important is not just the release of initial unemployment claims, but continuing unemployment claims, said Lizzie Ann Saunders, chief investment strategist at Schwab. And that's one way to get a sense of whether we're seeing persistence in this notion of a low-hiring, low-firing kind of backdrop. The Treasury yield curve is worth watching, too, for how it reacts to the first Fed rate cut in nine months. The initial response was to steepen further, which means longer-term yield outpacing shorter-term ones.

3:39This suggests investors remain worried about demand for long-term Treasuries amid heavy supplies due to growing U.S. debt. However, demand for U.S. assets by foreign buyers was relatively strong in the most recent report of Treasury international capital flows, and recent Treasury auctions saw decent demand. This may reflect the fact that U.S. long-term yields continue to hold a premium to yields around Europe and Japan. Speaking of Japan, the country's central bank kept rates unchanged last Friday, but hinted more rates could come this year and announced plans to sell some assets it accumulated over the last few years to maintain easy money policy.

4:24Friday's announcement appeared to hurt Japanese and other Asian stock markets and could ultimately have implications for U.S. markets as well. If Japan keeps tightening policy as its economy improves, it could send more fixed-income buyers into that market, hurting demand for U.S. Treasuries and causing U.S. yields to rise while the dollar dips. That might weigh on U.S. stocks, though a weak dollar can help U.S. companies with big overseas sales. U.S. trade was in the headlines Friday after President Trump spoke with Chinese President Xi and the two agreed to talk more about social media platform TikTok without finalizing a deal.

5:06Other topics discussed on the call included trade, fentanyl, and the war in Ukraine, Trump said in a post. China could remain in the spotlight this week after the Beijing government forbid some companies there from buying NVIDIA's AI chips. With leaders of the country's talking, there's a sense that tensions could be easing, and NVIDIA shares bounced back late last week from midweek softness.

5:33Earnings season is still a few weeks away, though reports from Micron, Costco, and KB Home loom later this week. For the third quarter, Faxet sees S &P 500 earnings growth of 7.7 % year-over-year. So far, 56 S &P 500 companies have issued negative EPS guidance and 56 have issued positive guidance. Second quarter earnings growth was 12 % versus the pre-earnings season average estimate of 4.8%. In trading Friday, the small-cap Russell 2000 index took a breather after making its first record high in nearly four years the day before. Friday's drop could reflect a high relative strength index, or RSI, for the Russell, which some investors see as a signal of overbought conditions.

6:22The Russell 2000's RSI reached 71 last week and has typically topped out around 74 the last few years. If the long-term yields continue to creep higher, then it's possible the Russell's move could be another head fake since small caps are so sensitive to rates, Schwab's Peterson said. The yield curve steepening continued Friday, with the 10-year note yield up 4 basis points to 4.14%, while the two-year rose 1 basis point to 3.58%. For the week, the 10-year yield grew its premium to the two-year yield by 6 basis points, and the 10-year yield rose 8 basis points overall last week. Long-term Treasury yields are up since the Fed cut rates.

7:07Not a good signal, said Kathy Jones, chief fixed income strategist at Schwab. Friday featured skies of blue and seas of green for S &P 500 sector performance, with only two of 11 lower. Energy lagged as crude oil prices crumbled more than 1 % amid rising U.S. crude supplies. Cyclical sectors that often perform well in a growing economy led the rally Friday, including information technology, communication services, materials, discretionary, and financials. Utilities finished high as well. They're typically seen as defensive, but strong data center demand for power continues to lift shares of firms like Constellation Energy and Vistra.

7:55Other individual stocks moving Friday included home builder Lennar, toppling 4 % after quarterly revenue missed analysts' expectations. Gross margin also came up short. Competitors D.R. Horton and KB Home fell in sympathy with Lennar. Apple rose nearly 3 % Friday, helped by a Bloomberg report that early iPhone 17 demand in Asia is strong. Gold-related stocks including Barrick Mining rose Friday too, with gold up 1 % after the Fed rate cut. And Oracle rose 4 % after Bloomberg reported it's in discussions with meta-platforms for a cloud computing deal worth about$20 billion, while Tesla moved back into drive after its rally got interrupted Thursday.

8:45Banks and payment firms strengthened coming out of the Fed meeting, and so did shares of solar power companies, which often benefit from lower borrowing costs. The Dow Jones Industrial Average climbed 172.85 points Friday, or 0.37%, to 46 ,315.27. The S &P 500 Index added 32.40 points, or 0.49%, to 6 ,664.36, and the Nasdaq Composite gained 160.75 points or 0.72 % to 22 ,631.47. For the week, the Dow rose 1.05%, the S &P 500 rose 1.22%, and the Nasdaq climbed 2.21%. This has been the Schwab Market Update podcast. To stay informed, visit schwab.com slash market update or follow for free in your favorite podcasting app.

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