Fed Meeting, Treasury Auctions Dominate Week
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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 Colette O'Clare, and here is Schwab's early look at the markets for Monday, May 5th.

With last week's data deluge over, investors focus on another heavy round of earnings, Treasury auctions, and a Federal Reserve meeting. The Fed isn't expected to make a rate move, but Fed Chairman Jerome Powell's remarks Wednesday afternoon could help shape investor thinking on rate policy and economic trends.

Last Friday's jobs report, which showed payrolls up 177,000 in April and unemployment unchanged at 4.2%, isn't likely to do the trick when it comes to lowering rates. In fact, rate cut odds for the June Fed meeting eased Friday after the data, with chances falling to below 40% from as high as 85% a month ago, according to the CME FedWatch tool.

Odds of a rate cut don't top 50 percent until the Fed's July gathering, where the odds were 80 percent as of late Friday.

The jobs report, which easily outpaced estimates near 130,000, reinforced ideas that economic growth is slowing but not falling off a cliff. This suggests the Fed can likely focus more on fighting inflation and worry less about a recession, at least in the very near term. Recession odds remained heightened, with tariffs a continued concern.

The market's pricing in between three and four cuts prior to the year-end, but that's aggressive unless the labor market shows further signs of slowing, said Cooper Howard, director, fixed income strategy at the Schwab Center for Financial Research.

Treasury yields climbed late last week, partly reflecting the better-than-expected jobs picture and less chance of first-half rate cuts. The yield rise might also have been in anticipation of $125 billion in Treasury auctions this week. The first is later this morning, when three-year notes hit the auction block, followed by a 10-year note auction tomorrow.

These events took on new urgency the last couple of years as U.S. deficits rose, creating the need to auction additional debt and keeping treasuries under pressure.

The Fed is worried about possible tariff-related inflation, though the trade picture seems to be improving slightly. And a weaker dollar, which could result from higher U.S. debt, is often associated with rising inflation. The dollar is down about 8% so far this year, though it came off three-year lows last week.

The jobs report made the Fed's task a little easier by removing concerns about any immediate hit to the labor market. But other recent data show signs of struggle. The most obvious example was a slight drop in annually adjusted first quarter gross domestic product, or GDP, growth.

But that was an odd statistic that reflected massive imports influenced by tariff fears. Manufacturing remains in contraction and job openings are down. Also, the full impact of tariffs on prices hasn't yet been felt by consumers or the labor market, but still looms.

Any developments on trade might overshadow other news this week, especially with the Fed decision not in question and mega-cap earnings now complete, except for Nvidia later this month.

Conflicted signals from last week's economic reports, a better-than-expected jobs report and a worse-than-expected first-quarter GDP number, present a communication challenge for the White House as it continues to struggle with its messaging on tariffs, said Michael Townsend, managing director, legislative and regulatory affairs at Schwab. Enthusiasm surged Friday after reports that China was considering trade talks with the U.S.,

But, in an ominous note, Japan's finance minister said its U.S. Treasury holdings could be a card in trade talks, Bloomberg reported. Data gets quieter this week, but today features ISM Services PMI for April and earnings from Palantir, Ford, Clorox, and others. Berkshire Hathaway reported over the weekend, giving investors a chance to hear from its legendary CEO, Warren Buffett.

ISM Services just after the open is seen at a headline of 50.6, not changed much from 50.8 the prior month, according to Trading Economics. A reading of 50 or above signals expansion. The prices element of the report could get a close look. It's been elevated recently, coming in at 60.9 in March. Anything in that range could play into worries about inflation, though it's just one report and one month.

The busiest part of earnings season is over, with six of the magnificent seven now in the books and investors giving their results a mixed reception. About 72% of S&P 500 companies have reported, and 76% beat analysts' consensus on earnings per share, according to FactSet.

About 62% beat on revenue. Blended earnings growth, which includes companies that already reported and consensus for those yet to report, is 12.8% for the first quarter.

That's well above expectations going in, but the recent rally of major indexes back to levels last seen on tariff liberation day a month ago has raised stock valuations, a possible concern. The forward price-to-earnings ratio on the S&P 500 is back above 20, Faxet said, well above the 10-year average of 18.3%.

Second quarter S&P 500 earnings growth is now seen at 5.7%, down from 9.1% back on March 31, a sign that companies and analysts are getting more bearish about profits approaching mid-year.

Friday's trading saw the S&P 500 index post its ninth straight higher close, the longest stretch since 2004. Hopes for trade progress drove much of the gains, and a relatively solid earnings season also contributed to the market's comeback over the last two weeks. The SPX is now knocking on the door of possible technical resistance at the 200-day moving average of 5,745.

Every S&P sector rose Friday, but communications services and financials led. Tech also had a solid day, lifted by rallies in Palantir, Applovin, Micron, and Oracle. Travel stocks had a nice showing Friday as well, led by Delta Airlines and Norwegian Cruise Lines, as hopes grew for improved consumer spending.

The Philadelphia Semiconductor Index rose more than 3%, helped by guidance from mega-cap tech firms that appear committed to previous spending plans to boost AI.

The Dow Jones Industrial Average rose 564.47 points Friday, or 1.39%, to 41,317.43. The S&P 500 Index gained 82.53 points, or 1.47%, to 5,686.67%.

And the Nasdaq Composite rose 266.99 points, or 1.51%, to 17,977.73. For the week, the Dow Jones rose 3%, the S&P 500 Index rose 2.92%, and the Nasdaq Composite rose 3.42%. This has been the Schwab Market Update Podcast.

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