Sentiment Data Next Following Defensive Shift
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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, May 16th. A frantic Thursday could reach calmer waters today with a much lighter data and earnings load, but consumer sentiment later this morning might set the tone heading into the weekend.

Thursday saw defensive sectors take control after relatively soft U.S. data contributed to a drop in Treasury yields. The University of Michigan preliminary May consumer sentiment number comes out at 10 a.m. ET, and analysts expect a slight drop to 55, still historically low.

One supportive factor for sentiment could be that the U.S. jobs market looked relatively steady in April, with decent employment gains and relatively stable jobless claims. However, recent confidence and sector surveys show people more worried about possibly losing their jobs. This can weaken sentiment, as can tariff worries, which likely were still top of mind for many.

Thursday featured a bucketful of data, including lower-than-expected April retail sales and a sinking producer price index, or PPI.

PPI fell 0.5% when analysts had expected a 0.3% increase. Core PPI, excluding food and energy, fell 0.4%, while annual headline PPI rose 2.4%. Retail sales rose just 0.1%, below the 0.2% consensus and well under March's 1.7% gain.

Retail sales shows there might be initial signs of cracks in the consumer, said Cooper Howard, director, fixed income strategy at the Schwab Center for Financial Research. There was weakness across the board.

However, job market softness didn't surface, as initial weekly jobless claims of 229,000 stayed in the near-term range. The retail sales data could be seen as consumers stepping back after stockpiling ahead of tariffs, while the wholesale inflation figures were another sign of relief after mild consumer price index, or CPI, data earlier this week.

However, some of the shine came off the PPI report in the wake of remarks by Powell, who said inflation could be more volatile going forward with more frequent supply shocks. He warned of the possibility of higher real rates.

And with Powell warning of possible persistent supply concerns, another possible harbinger of inflation, the odds of a June Fed rate cut stayed below 10%, while July odds fell to around 35%, according to the CME FedWatch tool. Deflationary PPI data is likely not a longer-term signal and was probably trade war distorted, said Lizanne Saunders, chief investment strategist at Schwab.

Jobless claims remain subdued, but that's where to focus in terms of any coming labor market weakness. Tariff de-escalation has lowered recession odds, but not eliminated them.

At the same time, PPI components that matter for personal consumption expenditures, or PCE, prices data closely watched by the Fed implied a relatively soft PCE print for April, said Kevin Gordon, director, senior investment strategist at Schwab. Lower airfare was a big drag on PPI. PCE data is due later this month.

Rate cuts keep getting pushed further back into the year, with the market now putting the highest odds on just two trims. That would take the Fed's target rate down to between 3.75% and 4%, from the current 4.25% to 4.5%, above the central bank's March projections that pegged end-of-year rates at 3.9%.

Next month's Fed meeting features updated projections, and from Powell's recent tone, it might be interesting to see if that number goes up. The September meeting is now seen as the first real chance of a rate cut, futures trading suggests, with odds around 75%. That would make 2025 feel a bit like 2024, when the Fed also waited until fall to deliver rate trims.

Walmart's results yesterday looked impressive, though revenue merely matched Wall Street's expectations. Sales at U.S. stores open a year or more rose 4.5 percent, with strong growth in health, wellness and groceries, Walmart said. Probably the biggest takeaway for investors was that Walmart didn't change its guidance for the fiscal year despite tariffs, saying it's well-positioned and flexible to navigate the near term.

Applied Materials, which supplies equipment and services for chip manufacturing and can be a useful barometer for semiconductor demand, reported late Thursday and beat analysts' average earnings expectation, but shares initially fell in post-market trading as revenue appeared to just miss Wall Street's average forecast.

Friday's earnings calendar is light, but next week features more retail results including Home Depot, Lowe's, and Target. Though earnings are light today, CBOE, Equity Index, and ETF options expire, possibly creating volatility.

Treasury yields, which climbed sharply over the last week in part on ideas of delayed rate cuts, finally took a breather Thursday as the 10-year yield skidded seven basis points to 4.46%. This came despite an initial rally on Powell's remarks and the Atlanta Fed's GDP Now forecast getting revised up to 2.5% from 2.3% for a second quarter gross domestic product, or GDP.

The 2025 high for the 10-year yield is around 4.8%, but anything over 4.5% tends to get investors' attention as they worry it could keep borrowing costs higher for consumer and businesses, slowing the economy. Before Thursday's slide, yields topped 4.5% for the first time in a month this week.

The soft U.S. retail sales and PPI likely gave Treasuries some strength. They moved the opposite of yields. And defensive sections of the stock market, like utilities and consumer staples, also enjoyed buying interest Thursday. Those two sectors are still near the bottom of the sector scorecard for the last five days.

Infotech, communication services, and consumer discretionary led gains earlier this week, but also took a backseat Thursday in more of a risk-off market. It's unclear if the data drove some of this shift and whether the move back into defensives and treasuries has more legs. Communication services slumped yesterday, in part on a slide in Meta Platforms shares, after a Wall Street Journal report that Meta is delaying a flagship AI model.

This may also have hurt chip stocks late in the session as NVIDIA and advanced micro devices both fell. Foot Locker, meanwhile, catapulted nearly 86 percent yesterday after The Wall Street Journal reported that the footwear company would be bought by Dick's Sporting Goods in a $2.4 billion deal.

Checking technical factors, the S&P 500 index managed to close above 5,900 on Thursday. That level had been seen as a resistance point, so topping it might contribute positive momentum today. The S&P 500 rallied into the close and finished near its intraday high.

The Dow Jones Industrial Average rose 271.69 points Thursday, or 0.65%, to 42,322.75. The S&P 500 Index added 24.35 points, or 0.41%, to 5,916.93.

And the Nasdaq Composite fell 34.49 points, or 0.18%, to 19,112.32. This has been the Schwab Market Update Podcast.

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