Retail Sales, Fed Ahead While Market Monitors War
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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, June 17th.

The Federal Reserve meeting begins today following an overnight rate decision by the Bank of Japan. The Middle East conflict remains in focus after the Wall Street Journal reported yesterday that Iran seeks negotiations, but the conflict's isolation so far to Iran and Israel seemed to soothe Monday's trading. Crude oil prices, a good barometer of how much global impact markets see from the war, fell sharply while U.S. indexes rebounded, led by tech names.

Markets are shrugging off the Middle East conflict for now, said Kathy Jones, chief fixed income strategist at Schwab. The U.S. market week is shortened by Thursday's Juneteenth holiday with no trading that day. The one-day break affects the data calendar with weekly initial jobless claims tomorrow instead of Thursday. Claims have been on the rise the last three weeks to around 250,000 from their previous range of 220,000 to 230,000.

The Fed likely noticed this, though it's still a relatively new trend. That said, it may reflect a longer-term trend in layoffs, as claims sometimes take a while to materialize after people lose their jobs. Year-to-date, we have seen nearly 700,000 job cut announcements, which compared to nearly 390,000 in the same period in 2024, noted Lizanne Saunders, chief investment strategist at Schwab, citing data from Challenger Gray and Christmas.

Looking ahead to tomorrow's jobs data, analysts expect initial claims to rise to 253,000 from 248,000 the prior week, according to Briefing.com. Continuing claims are also being tracked after reaching new three-year highs above 1.95 million last week.

May retail sales due today give the Fed fresh data ahead of tomorrow's rate decision. The market builds in almost no chance of a rate change. Analysts expect retail sales to rise 0.1% in May, but 0.3% excluding auto sales. The data could track how much consumers reacted to trade worries.

Retail sales climbed sharply in March as shoppers tried to get ahead of possible tariff-related inflation, and then barely climbed in April when new tariffs took effect. Tariff concerns are still on consumers' minds, given the percentage telling the University of Michigan's Consumer Sentiment Survey they don't think prices will be coming down for goods, Schwab-Saunders said.

More evidence of economic softness came in Monday's June Empire State Manufacturing Survey. The headline of negative 16.0 was well below the briefing.com consensus of negative 6.6 and down from May's negative 9.2. New orders were particularly weak, while input costs fell sharply even as selling prices rose.

As the Fed gathers, investors will examine homebuilder earnings and housing numbers. Lennar's results late Monday precede 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.

Treasury yields haven't felt much pressure from the Middle East conflict, rising another four basis points for the 10-year note to 4.46% yesterday, despite what Briefing.com called decent demand for a 20-year Treasury auction. Signs of a possible thaw in the Middle East and strong retail sales growth in China were other factors weighing on Treasuries Monday. Treasuries move inversely from yields.

Historically, investors often gravitate toward treasuries amid geopolitical strife, this time not so much, at least to date. This could mean investors are looking past the Middle East tensions to President Trump's self-imposed budget and trade deal deadlines early next month. Both could raise inflation concerns, keeping longer-term yields elevated.

Short-term treasuries are worth watching after the Fed meeting to see their reaction to the updated Fed summary of economic projections. These will outline the central bank's thinking on inflation, economic growth, and the possible rate path. Investors may zero in on inflation projections after recent data uncovered signs of disinflation. Goods inflation, for instance, is up modestly even with the impact of tariffs. And services inflation has slowed.

In March, the median projection for core PCE was revised up from December's projection, but we might see that reverse this week as disinflation in services might offset any potential goods inflation, said Colin Martin, director of fixed income strategy at the Schwab Center for Financial Research. Rate projections will also get a close look.

The median projection in March suggested two rate cuts by the end of this year. If two officials who projected two cuts revised their outlooks to just one cut, the median projection would move down to just one cut by year-end, Martin said. Odds of a Fed rate cut in July were around 12% late Monday, according to the CME FedWatch tool. Investors seem more certain the Fed could cut rates in September, building in roughly 65% chances of that.

Futures trading shows a strong likelihood of two rate cuts taking place before the year ends. Odds could change quickly based on the Fed's new projections Wednesday. With stocks currently near all-time highs, the bar is relatively high for the market in the second half of the year, Schwab experts note in their 2025 mid-year outlook. It would be beneficial if tariff rates were to decline, the labor market stabilize, and inflation remain under control.

For now, investors' sentiment and positive earnings growth remain supportive for stocks, but stretched valuations and the potential that tariff policy will slow economic growth are headwinds. The S&P 500's current forward price-to-earnings, or P-E, ratio is back above 22, which is historically high. That means the coming earnings season could grow in importance. First-quarter earnings surprised the upside, but analysts expect much slower second-quarter earnings growth.

A host of positive surprises from major companies might be what's needed to give stocks more support considering current pricing. This is among the quietest weeks of the quarter for earnings, with no major ones on the calendar today or tomorrow. A few return on Friday, including Accenture and Kroger. Next week is more crowded.

Crude oil slipped more than 2% Monday. The front month fell below $72 per barrel, still well above levels before the Middle East conflict began. Energy was the worst-performing S&P sector yesterday, while Infotech recovered much of its Friday losses to lead the pack ahead of communications services. Consumer discretionary had a good day, as did financials. All these sectors tend to perform well when investors feel economic optimism.

Semiconductor and travel companies were among the best performing stocks Monday as the PHLX Semiconductor Index or SOX rose about 3%. Retail stocks also mostly climbed, possibly a sign of trade optimism as the Group of Seven met in Canada. Investors continue to watch that gathering for possible deals. U.S. stocks enjoyed stronger than average volume Monday and widening breadth, meaning more stocks rose than fell.

Technically, one level to watch is $6,045 for the S&P 500, last week's closing high.

The Dow Jones Industrial Average climbed 317.3 points Monday, or 0.75%, to 42,515.09. The S&P 500 Index added 56.14 points, or 0.94%, to 6,033.11. And the Nasdaq Composite rose 294.39 points, or 1.52%, to 19,701.21.

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