Inflation, tariffs in focus ahead of Powell, CPI
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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 Monday, February 10th. After Treasury yields ticked up and stocks tumbled Friday on inflation concerns, prices remain a key topic this week.

Federal Reserve Chairman Jerome Powell's semi-annual monetary testimony to Congress starts tomorrow, followed by the January Consumer Price Index, or CPI, and the January Producer Price Index, or PPI, on Wednesday and Thursday. All could provide clues on inflation and Fed thinking, even as futures trading sent rate cut chances down last week.

Several Treasury auctions are ahead and could also help set direction for yields. Today features three-month and six-month auctions, and tomorrow brings a three-year note auction.

Odds of a Federal Reserve rate cut in March fell to around 8% late Friday from 16% earlier in the week and 30% a month ago, according to the CME FedWatch tool. The Fed's monetary policy report to Congress on Friday reinforced commitment to the Fed's 2% inflation goal, called the financial system sound and resilient, and said the central bank will remain data-dependent as it considers the policy path.

It also called out high valuations in the equity market. After two weeks of mega-cap earnings reports, several well-known non-tech names report this week, including McDonald's, Coca-Cola, and Deere. McDonald's kicks things off this morning amid concerns about falling appetites for snack food and a recent E. coli outbreak. Other key earnings ahead later in the week include Cisco, Roku, Coinbase, and Applied Materials.

With the heart of earnings season over, the blended fourth quarter earnings growth rate is 16.4%, according to research firm FactSet. That's up substantially from 13.1% a week earlier and an estimated 11.1% at the end of the fourth quarter. Blended earnings growth includes actual data from the 62% of S&P 500 companies that already reported and estimates for the remainder.

So far, 77% of S&P 500 companies reporting have exceeded analysts' consensus earnings estimates, and 63% achieved better-than-expected revenue. January's U.S. jobs growth missed expectations at 143,000, but other metrics firmed, including wages climbing 0.5% and unemployment falling to 4%.

Analysts had expected 170,000 new jobs, unemployment of 4.1%, and hourly earnings growth of 0.3%. Lages rose 4.1% year-over-year. The government's benchmark revisions to the prior year's jobs data showed job growth lower than previously reported by about 500,000. Although that's a substantial downward revision, expectations had been for a much larger downward revision of 800,000 to 1 million.

The benchmark revision was in line with previous revisions. This report keeps the Fed on hold for the foreseeable future, the Schwab Center for Financial Research's fixed income team noted. With job growth firm and wages rising at a rate above 4%, there's very little reason for the Fed to ease policy anytime soon. We still expect the Fed to remain on hold for at least the first half of the year.

Meanwhile, tariff tensions persist as President Trump said Friday he'll announce reciprocal tariffs against China after the two companies traded tit-for-tat tariffs last week. The 10% increase in tariffs on Chinese goods was lower than the 60% campaign proposal, but Trump indicated this was an opening salvo, said Michelle Gibley, director of international research at the Schwab Center for Financial Research. China's retaliation was largely symbolic.

It appears both China and the U.S. prefer a grand bargain which will take time to secure. We believe tariffs are likely to rise, but by less than threatened and are unlikely to be across the board. Treasury yields clawed back to nearly 4.5 percent intraday Friday from seven-week lows near 4.4 percent earlier last week. Fresh tariff concerns and rising inflation expectations from the University of Michigan's preliminary January Consumer Sentiment Report played a part.

So did rising wages and strong jobs growth in Friday's non-farm payrolls data. The yield rally had major indexes playing defense to end the week. Sectors were a sea of red Friday as every single one fell and no late short coverings showed up. Consumer discretionary suffered the worst losses, hurt by disappointing earnings from Amazon. Mega cap earnings are mostly done with the exception of NVIDIA and most failed to inspire Wall Street.

worries about weaker cloud market growth and high spending dogged mega caps, and contributed to overall market struggles as the S&P 500 index fell slightly on a weekly basis. However, weekly losses were minimal for the major indexes, despite all the tariff and inflation noise, perhaps a sign that buying on the dip remains a factor.

The S&P 500 index dropped to 57.58 points Friday, or 0.95%, to 6,025.99, down 0.24% for the week.

The Dow Jones Industrial Average gave back 444.23 points or 0.99% to 44,303.40, down 0.54% weekly. And the Nasdaq Composite slipped 268.59 points or 1.36% to 19,523.40, off 0.53% for the week. This has been the Schwab Market Update Podcast.

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