CPI Next, but Trade in Spotlight Following Rally
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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 is Schwab's early look at the markets for Tuesday, May 13th. Though excitement over an ease in trade tensions put economic data on the back burner yesterday, investors now face an important update on U.S. inflation at 8.30 a.m. ET.

The April Consumer Price Index, or CPI, is the first in a trio of key data points this week, followed by the Producer Price Index, or PPI, at April retail sales Thursday. Inflation remains above the Federal Reserve's 2% goal, and recent consumer surveys show elevated inflation expectations, a concern for the Fed that's among factors keeping the lid on near-term rate cut odds.

Heading into CPI, analysts expect both the headline and core figures to rise 0.3% versus negative 0.1% and positive 0.1% respectively in March, according to Trading Economics. Core CPI removes volatile food and energy prices. The year-over-year headline inflation rate is expected to remain at 2.4% and core is seen up 2.8%.

Fed speakers continue to remind investors they're focused on managing inflation, and this was true even on Monday after the Trump administration announced a 90-day delay on 145% tariffs against Chinese goods. Tariffs of 30% are still in place, enough to potentially cause rising prices, and this might be one reason the market continues to see hawkish rate policy ahead.

However, 30% is a lot lower than 145%, possibly lessening odds of a recession that might raise unemployment and force the Fed to act. In a sense, the trade news could renew the Fed's current determination to stay on hold.

Fed expectations are ratcheting down, said Cooper Howard, director of fixed income strategy at the Schwab Center for Financial Research. The market's now priced for two 25 basis point cuts prior to year end due to the de-escalation of the trade war. This is down from three to four cuts, which we believed was too aggressive to begin with.

As of late Monday, odds of a June rate cut were down to 8% from 27% a week ago, according to the CME FedWatch tool. Chances of a July cut fell to 40% from 75% a week ago. U.S. Treasury Secretary Scott Besson told CNBC that he expects to meet again with Chinese officials in coming weeks. It's still unclear what happens after the respective 90-day delay and for both China and the rest of the world.

Both sides recognized that the sky-high tariffs were not a realistic long-term position, said Michael Townsend, managing director of legal and government affairs at Schwab. Also important to note, Besant was a key negotiator and seems to have settled into a role as the president's top economic advisor, something that the markets are welcoming.

In Trading Monday, stocks went straight up and pretty much stayed there all day. Every major index rose 2.5% or more, with the biggest gains in the tech-heavy Nasdaq and the small-cap Russell 2000, both of which were among the hardest hit by tariffs. The sharp gains didn't take the S&P 500 into overbought territory from the perspective of the Relative Strength Index, or RSI, which remained below the 70 level that signals possible overbought conditions.

Still, the fierce rally may have overshot the mark to some extent, as ripple effects from tariffs aren't necessarily out of the picture. Several sectors battered by tariffs, including consumer discretionary, infotech, and communication services, led the massive gains, with so-called magnificent seven stocks near the top of the pack.

Steel companies, retailers, travel-related firms, and delivery companies all performed well on hopes for economic growth, but the chip sector's strength was a highlight. The PHLX Semiconductor Index, or SOX, was up nearly 7% by late in the session. Nvidia jumped to one-month highs on the trade news, and other chip stocks getting a boost included Broadcom, Advanced Micro Devices, and Taiwan Semiconductor Manufacturing.

The sector has been among those hurt most by the trade war with China, though the 90-day drop in tariffs doesn't affect many of the chip export restrictions instituted by both the Biden and Trump administrations. Other firms with perceived exposure to China rose sharply as well. Apple and Amazon soared as the tariff relief takes massive pressure off each of their Chinese-centric businesses.

Tariffs threaten to raise prices of many goods on Amazon, and Apple has been scrambling to manufacture iPhones in other countries with around 80% to 90% of those still made in China. Apple also has a major iPhone business in China that's hurt by trade tensions. Apple was also supported by news reports that it's considering raising iPhone prices.

Though eagerly awaited results from NVIDIA are still two weeks away, investors get a couple of updates on tech this week as Cisco and Applied Materials report. Cisco, which reports Wednesday afternoon, is often seen as a proxy for global business spending trends on technology, so its earnings could be a helpful checkpoint on the early impact of U.S. tariffs.

Retail earnings gained steam this week, as Walmart reports Thursday, followed by more big boxes later this month. These might offer an up-close view at how tariffs on Chinese imports affected both supply and demand in recent weeks before tariffs got temporarily rolled down over the weekend. Although the risk of a full-blown trade war is lower now, the tariff rate is still elevated and therefore has the potential to slow growth and raise prices, Schwab's Howard said.

The closely watched 10-year Treasury note yield had a major rally yesterday, climbing eight basis points to 4.46%. That's the highest in nearly a month. A push past 4.5% to highs last seen in late February might trigger concerns that rising borrowing costs could slow the economy.

The Dow Jones Industrial Average climbed 1,160.72 points Monday, or 2.81%, to 42,410.10. The S&P 500 Index added 184.28 points, or 3.26%, to 5,844.19. And the NASDAQ Composite rose 779.43 points, or 4.35%, to 18,708.34.

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