After Hot Jobs Data, Focus Turns to Earnings, CPIv
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Welcome 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. I'm Keith Lansford, and here's Schwab's early look at the markets for Monday, January 13th. Treasury yields remain the pace setter for stocks with key inflation data ahead this week, but bank earnings starting Wednesday could provide distraction.

Friday's U.S. December jobs growth sent yields spinning higher and stocks tumbling to their lowest levels since the November election. Treasuries could continue calling the shots because tomorrow morning features the December Producer Price Index, or PPI, and Wednesday brings the December Consumer Price Index, or CPI.

Last Friday's robust U.S. jobs report showed resilience in the labor market, and the market's disappointed response reaffirmed that for now, good news remains bad news for Wall Street. But it doesn't work both ways. Bad news on inflation, if it comes, would likely be seen as bad news for stocks, too.

Early expectations for PPI and CPI appear relatively benign and even somewhat constructive from a rate standpoint, though investors should remember that Eurovier comparisons get easier in coming months thanks to surprisingly firm inflation growth in early 2024.

For PPI and Core PPI, analysts expect 0.3% and 0.2% monthly growth, respectively, according to Trading Economics. Core extracts volatile food and energy prices. The readings for November were 0.4% and 0.2%. For CPI and Core CPI, analysts expect 0.3% and negative 0.1%, according to Trading Economics. The figures were both 0.3% in November.

Readings like these might cool off Treasury yields slightly after they skyrocketed over the last month, but worries about inflation would likely persist, some related to the proposed tariff and immigration policies promised by the new U.S. administration that takes over a week from today.

The nonfarm payrolls report showing jobs growth of 256,000 and unemployment unexpectedly dropping to 4.1% remains a source of pressure on Treasuries too. But poring over the report in more depth shows that it's not necessarily one-sided, and a single data point can't determine if inflation rebounds.

There isn't much of an inflationary fingerprint in the December jobs report, given robust hiring and cooler wage growth. But the negative market reaction is not a surprise, given the spike in yield, said Kevin Gordon, director and senior investment strategist at Schwab. The correlation between changes in yields and stock prices has flipped back into negative territory. So for now, the market is assuming higher rates will be consistent with higher inflation.

Odds of Fed rate cuts this year dove after the data, with the CME FedWatch tool recently putting high likelihood of just one rate trim in 2025, likely in the second half of the year. However, futures trading still builds in about a 25% chance of a rate cut in the first quarter. The January meeting is expected to result in a rate pause.

Even though it's human nature to extrapolate the jobs data and expect the Fed to be on a prolonged pause, investors shouldn't have high conviction either way at this point, mostly because we won't get any policy meat on the bones until January 20th, Schwab's Gordon said. That's when the new administration takes office, providing clues on tariff and immigration plans. Worries about those aspects of policy also play into inflation fears.

December jobs growth was concentrated in health care and government, but retail made a comeback after falling in November. This could reflect strong holiday shopping demand, a positive sign for the economy. What's being somewhat ignored amid the hand-wringing over yields is the labor market's ability so far to weather high yields.

The good news for the bulls is that the economy is strong, which could help corporate earnings growth, and the U.S. economy has demonstrated over the past couple of years that it can hold up in a higher-rate environment, said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. That could get tested this earnings season. Banks are expected to kick things off Wednesday in relatively strong fashion, thanks partly to a climbing yield curve.

This can boost net interest income or what banks make on lending minus what they pay to customers. However, the breakdown of revenue streams differs across the sector. Banks with heavy exposure to retail and corporate lending might suffer if rates stay higher for longer because high rates can suppress business and consumer activity. Another area to watch is investment banking, where recent higher rates might limit mergers and acquisitions and initial public offering or IPO activity.

From a sector standpoint, energy managed like gains Friday, but the rest of the market turned tail. Rate-sensitive sectors, including staples, real estate, and financials were near the bottom of the list, while infotech and other growth sectors, including consumer discretionary, also got slammed by worries about the borrowing climate. Housing stocks like Lenar and KB Home took it on the chin amid worries higher rates could keep the real estate market in a deep freeze.

KB Home reports later today, offering investors a closer look at demand for new homes. Technically, the S&P 500 index made a late stand Friday and managed to finish above the 100-day moving average, which sits just below 5,820. It was a close call, however, with the index dipping below that intraday. Ability to continue defending that line in the sand could be important for direction this week.

The S&P 500 index surrendered 91.21 points or 1.54% to 5,827.04, down 1.94% for the week. The Dow Jones Industrial Average lost 696.75 points or 1.63% to 41,938.45 and was down 1.86% for the week.

And the Nasdaq Composite gave back 317.25 points, or 1.63%, to 19,161.63, losing 2.34% during the week. 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. 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. Join us for another update tomorrow. For important disclosures, see the show notes and schwab.com slash market update podcast.