Middle East War, Central Banks Could 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'Claire, and here is Schwab's early look at the markets for Monday, June 16th. Middle East strife and central bank meetings could crowd other news early this week after investors fled riskier investments Friday. Many tech and Magnificent Seven stocks retreated while crude oil and treasury yields spiked, along with defense industry names after Israel attacked Iran and Iran struck back.

Israel did not yet target energy infrastructure, but there are concerns Iran could retaliate by targeting oil infrastructure or the transportation of oil in the Strait of Hormuz and or that the conflict would widen across the region, said Michelle Ghibli, director of international research at the Schwab Center for Financial Research.

Any prolonged rise in crude is something the Federal Reserve might ponder as it meets starting tomorrow. Recent softer jobs and inflation growth point toward a slowing economy, but rate cut odds remain below 4 percent late Friday, according to the CME FedWatch tool. The Bank of Japan meets late today U.S. time, and analysts don't expect a rate move.

While military conflict in the Middle East could worsen, we believe investors should avoid overreacting to geopolitical developments, which typically don't have a long-lasting impact on markets, absent significant disruption to energy supplies, Ghibli said. Oil prices could rise further, but there remains ample spare capacity globally.

The Middle East crisis could overshadow data and central bank news this week, but investors still have economic developments to follow after stocks dove Friday.

Many retail sales due tomorrow are another fresh data point for the Fed. They rose just 0.1 percent in April as spending on goods decelerated. Analysts expect a similar increase for May, but a 0.3 percent climb, excluding auto sales. Industrial production is another number to watch tomorrow morning. Today is light on data, but homebuilder Lennar reports after the close.

A framework U.S. trade deal with China outlined by White House officials late last week remains under scrutiny while the U.S. continues negotiations with a host of other trading partners. The framework keeps tariffs on Chinese imports at the current 55 percent and doesn't loosen export controls to allow more shipments of U.S. high-tech products. Investors appeared unimpressed by the details last week and likely want to hear more in days to come.

Meanwhile, the deadline of early July for President Trump's 90-day extension on other countries draws near with little word of progress. The administration has said that could be extended. The Fed will present new economic and rate projections Wednesday. Fed Chairman Jerome Powell's press conference Wednesday after the decision is likely to be a weekly highlight as investors look for color on the Fed's updated outlook.

Friday's preliminary University of Michigan Consumer Sentiment Report for June rose sharply to 60.5, well above the consensus of 53.0 and up from 52.2 in May. It's still down from a year ago, but consumers' expectations for inflation in a year rose just 5.1 percent, down from 6.6 percent in May.

This could reflect that tariff-generated inflation simply hasn't been a factor yet. That doesn't mean it won't be, however. Many companies have vowed to increase prices, and tariffs on China remain high, even with the framework trade deal.

Last week's Producer Price Index, or PPI, and Consumer Price Index, or CPI, data, as well as a recent bounce in jobless claims and falling jobs growth, all suggest softening economic trends, but the Fed may be wary about projecting rate cuts when tariff-generated inflation remains a possibility. The Middle East war now raging means climbing oil prices might also bring an inflation risk.

As the Fed prepares to meet, investors await homebuilder earnings and housing numbers this week and early next. Lennar's results later today follow a 12.5% weekly jump in mortgage applications last week as mortgage rates fell thanks to softer U.S. inflation data. There's more data ahead, including May housing starts and building permits on Wednesday morning after the April reports on both showed relative caution in the key market for single-unit homes.

Lennar competitor KB Home reports a week from now. Treasury yields jumped Friday on inflation concerns linked to rising oil prices, with the 10-year yield ending the week at 4.42%. That was still down nine basis points from a week earlier. There's a 20-year bond auction today that might be worth watching for signs of whether recent solid demand for treasuries continues. Weaker demand might mean higher yields.

Odds of a Fed rate cut in July were around 21% late Friday. Investors seem more certain the Fed could cut rates in September, building in 68% chances of that, up from earlier last week. Futures trading shows a strong likelihood of two rate cuts taking place before the year ends.

Crude oil finished Friday with 8 percent gains, raising concerns about the impact of gas prices on consumers and margins for major transport companies like airlines and trucking firms.

Major U.S. indexes started weak Friday following Israel's strikes on Iran, made up ground at midday on the better-than-expected sentiment reading, and then weakened again by the last hour as Iran hit back at Israel. News of missiles over Tel Aviv helped push crude oil prices back up toward the end of Friday's session, and stocks lost ground as risk-off sentiment built ahead of the weekend.

Friday ended up being a tough day across the market, with energy the only sector to gain. The worst performers included real estate, infotech and financials, all of which could be hurt if inflation pushes rates higher and slows economic activity. Utilities and health care fell, but still finished in the top three, a sign of investors at least for one day seeking stocks that might be less prone to near-term volatility generated by geopolitics.

Defense names and oil companies did well, as did a handful of tech firms like Oracle and Palantir. Tesla also managed to come back from early weakness. Travel stocks, including cruise lines, resorts, and airlines fell sharply amid the geopolitical tensions. Homebuilder and supply stocks also did poorly as yields rose on inflation concerns.

Visa, MasterCard and PayPal fell sharply on Friday after the Wall Street Journal reported that they could lose business if Amazon and Walmart issue stablecoins.

The week is shortened for U.S. markets by Thursday's Juneteenth holiday. Markets will reopen Friday. That day, Friday, June 20th, happens to also be the date when stock index futures, stock index options, stock options, and single stock futures all expire simultaneously, known as quadruple witching.

This could mean extra volatility in the coming days, especially considering Thursday's closure that gives traders one last day to square positions. Technically, Friday's close looked weak, with major indexes closing near their lows and potentially setting up more softness today.

The Dow Jones Industrial Average fell 769.83 points Friday, or 1.79%, to 42,197.79. The S&P 500 Index dropped 68.29 points, or 1.13%, to 5,976.97.

And the Nasdaq Composite lost 255.66 points, or 1.3%, to 19,406.83 for the week. The Dow Jones Industrial Average fell 1.32%. The S&P 500 Index dropped 0.39%. And the Nasdaq gave back 0.63%. This has been the Schwab Market Update Podcast.

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