Inflation Data, Bank Stress Tests, Sentiment Ahead
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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'Claire, and here is Schwab's early look at the markets for Friday, June 27th.

Though May personal consumption expenditures, or PCE, price data this morning won't be the final word on inflation before the next Federal Reserve meeting, it's one factor as some policymakers make the case for a rate cut this summer. Analysts expect relatively benign headline in core PCE readings, up 0.1 percent month over month when the data arrive at 8.30 a.m. ET. Core excludes volatile food and energy prices.

Today is an important day for financial sector investors as the Fed is scheduled to release its 2025 stress test results. The stress tests subject banks to hypothetical strains on the market and sudden downturns in the economy to see how well their businesses can handle trouble and protect clients. All 31 banks tested last year easily passed.

Some names to watch include Wells Fargo, Citigroup, and JPMorgan Chase. Passing the stress tests allows banks to announce share buybacks and boost dividends, which potentially could help their stock prices.

Yesterday's data was a mixed bag. The final government estimate for first quarter gross domestic product, or GDP, unexpectedly declined to minus 0.5 percent, compared with the consensus view and previous estimate of minus 0.2 percent. The weakness was related to heavy imports ahead of tariffs, and analysts widely expect a rebound in the second quarter.

Weekly initial jobless claims fell to 236,000, below expectations for 247,000. That sounded benign, but continuing claims rose to a new three-year high of 1.974 million. Durable goods orders for May jumped a surprising 16.4 percent, though the core number that's watched more closely rose 1.7 percent, a sharp rebound from minus 1.5 percent in April.

That's a lot to digest and sends mixed signals, but major indexes ticked higher after the news. Good news on durable goods orders, said Cooper Howard, director of fixed income strategy at the Schwab Center for Financial Research.

GDP, although backwards-looking, was revised lower, suggesting the economy wasn't as strong as originally expected. Unemployment numbers suggest it's more difficult to find a job after getting let go. Providing more evidence, the labor market is weakening.

The claims data leads into today's final University of Michigan June consumer sentiment just after today's open. Typically, the employment climate helps determine sentiment. Analysts expect an improvement in the headline number to 60.5 from the prior 52.2, but as always, inflation expectations might get more scrutiny. It's been at multi-decade highs for several months.

Next week is an abbreviated one on Wall Street, with markets closed for Friday's July 4th holiday and closing at 1 p.m. Eastern time Thursday. A lot of jobs data gets packed into those three and a half days, however, beginning with job openings Tuesday. The main event is Thursday's June non-farm payrolls report, with early job gain expectations on the low side near 100,000.

Data next week are the last round of major employment numbers the Federal Reserve will get before its July 30th rate decision, and odds of a rate cut at the July meeting remain low but have moved up. A couple of important policymakers now say they're biased toward a possible trim.

As of late Thursday, odds of a July rate cut were 22 percent, according to the CME FedWatch tool. Odds of at least one rate cut by September were 94 percent. The case for a July cut has increased, but it would be a surprise if it occurred, Schwab's Howard said. Today's PCE data will be the last PCE report before the Fed meets, though June consumer and producer prices will come in mid-July.

The Fed closely watches PCE even more than consumer and producer inflation measures because PCE is structured in a more flexible way that attempts to capture consumer decision-making in a more real-time manner.

Next month also brings President Trump's July 9th deadline for reciprocal tariffs to take effect. The administration has indicated it might extend that for countries negotiating in good faith, but that's a judgment call and investors have little insight into details of any negotiations.

The president may be looking for wins, said Michelle Gibley, director of international research at the Schwab Center for Financial Research. He declared deals with the U.K. and China as wins, despite both being thin on substance. We could get a flurry of trade frameworks, broad-based outlines for what would be covered in trade deals, which could allow some countries to keep tariffs at the current rates while trade deals are sorted out after July 9th.

As a reminder, investors still await U.S. announcements on pharma and semiconductor tariffs, and pharma makes up 25% of all European Union exports to the U.S. Leaders of the EU are discussing whether they want a quick deal or would rather wait. Decisions could start soon, raising market volatility. The Wall Street Journal raised hopes of a resolution yesterday, reporting that the EU is considering lowering tariffs.

The dollar skid to three-year lows this week could reflect a Wall Street Journal report that President Trump might announce his pick to replace Fed Chairman Jerome Powell by September or October. That person would become, in effect, a shadow Fed chair and would likely be dovish, providing a counterpoint to the more hawkish Powell until Powell's term ends next May.

Treasury yields fell in the report as well, with the 10-year yield down four basis points to 4.25 percent yesterday, the lowest close since May 1. Nike shares wavered after it reported late yesterday. The giant retailer narrowly beat analysts' earnings and revenue estimates but reported declines in North America and China revenue.

In trading Thursday, the S&P 500 closed within a whisker of the all-time peak of 6,144, rising nearly 1% amid continued hopes of improving sentiment on trade and relief that Middle East tensions receded. Lower oil prices and falling Treasury yields are also supporting equities this week.

Infotech and semiconductors played a smaller role yesterday than earlier this week when they carried the market on their shoulders. Instead, a healthy mix of sectors and major stocks contributed, not the least of which were communications firms like Meta Platforms, Netflix, and Alphabet. The S&P 500 Equal Weight Index, which weighs all stocks equally rather than by market cap, has trailed the market cap-weighted S&P 500 Index this month.

Bank stocks had a solid session Thursday after the Fed's board voted in favor of a rule that would allow banks to keep less money on hand and possibly trade more in the Treasury's market. The KBW Nasdaq Bank Index rose 1.6 percent by late Thursday, also lifted by hopes for today's Fed stress tests.

The Dow Jones Industrial Average climbed 404.41 points Thursday, or 0.94%, to 43,386.84. The S&P 500 Index rose 48.86 points, or 0.8%, to 6,141.02. And the Nasdaq Composite added 194.36 points, or 0.97%, to 20,167.91.

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