Tariff Rulings Eyed Ahead of PCE, Sentiment Data
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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 30th.

A short but eventful week wraps up today with more key data as investors grapple with yesterday's whipsaw legal action where one court briefly struck down tariffs before an appeals court reinstated them. The case may ultimately reach the Supreme Court, according to Bloomberg, and all these fast-moving decisions generally raise uncertainty around trade and what kind of planning companies can make.

Though data takes center stage today with tariffs in the background, the market's initial positive response to the anti-tariff ruling underscored how closely Wall Street continues to focus on trade. It's unclear if the appeals process will end before July 9th, when President Trump has said he'd impose 50 percent tariffs on imports from the European Union. That date was already causing some investor concerns before the court ruling, which caught many investors by surprise.

The administration said Thursday the trade negotiations continue and analysts still expect the White House to roll out more tariffs on semiconductors and pharmaceuticals at some point.

But if the ruling from the Court of International Trade is backed up by the Supreme Court, it would eliminate 30 percent tariffs on Chinese imports, 25 percent tariffs on Canadian and Mexican imports, and 10 percent tariffs on most other goods entering the United States. However, media reports noted Trump could use other authority he has to reimpose the tariffs.

Infotech, healthcare, retail and industrial companies are among those most heavily affected by the tariffs and showed new life in the early going Thursday before it became clear that the White House would quickly keep the court ruling from affecting current tariffs during the appeals process. Apple and Tesla, two of the largest companies struggling with tariffs, saw their early gains mostly vanish over the course of Thursday's session.

Turning to today's business, at 8.30 a.m. Eastern Time, investors receive the April Personal Consumption Expenditures, or PCE, price index. Analysts expect a mild reading of 0.1% for both headline and core PCE growth month-over-month, with core excluding food and energy. This is the inflation report most closely watched by the Federal Reserve.

It's followed by the final May consumer sentiment update from the University of Michigan. So-called soft data, like sentiment, has been mostly weak lately, but consumer confidence earlier this week outpaced expectations.

Analysts expect a headline sentiment reading of 50.8, unchanged from the preliminary figure that was among the lowest in history. Eyes will also be on year-ahead inflation expectations, which surged to 7.3 percent in the preliminary report. Next week offers potential market-moving labor data, including job openings, layoffs, and the May non-farm payrolls report a week from today.

The economic data has largely remained firm in the face of trade uncertainty, though initial jobless claims, which has essentially been in the $220,000 to $230,000 range over the past couple months, were a little above estimates Thursday at $240,000, said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.

Though PCE prices usually take the spotlight on release days, today's 8.30 a.m. personal spending report for April could get extra attention. It rose more than expected in March, as many consumers appeared to buy ahead of anticipated tariff-related price increases. Spending rose 0.7 percent month over month.

The question is how much spending people did in April as the stock market cratered after Tariff Liberation Day. A weak number here might raise new concerns about the strength of consumers after yesterday's Gross Domestic Product, or GDP, report showed an unexpected consumption decline.

Data yesterday painted a mixed picture. The government's second estimate of first quarter gross domestic product, or GDP, inched up to negative 0.2%. Investors had expected a repeat of the negative 0.3% GDP growth seen in the government's first estimate last month. The quarterly GDP deflator, an inflation monitor, was unchanged at 3.7%.

Initial jobless claims were up 13,000 from a week earlier, but one week isn't a trend.

On GDP, details under the surface suggested some weakness, with personal consumption revised down to a 1.2% annualized from 1.8%, while inventory build was a bit higher than expected as businesses prepared for tariffs, said Colin Martin, director of fixed income strategy at the Schwab Center for Financial Research.

Bond yields declined following the release as softer economic data could pull forward the rate cut timeline. We still expect one or two rate cuts by year-end, with the first likely coming in September.

Treasury yields fell five basis points to 4.43% for the benchmark 10-year yield Thursday, with the underlying market helped by the higher-than-expected jobless claims data and a 6.3% drop in April pending home sales, according to Briefing.com. Strong demand for a $44 billion seven-year auction also helped lift Treasuries and weighed on yields, which move inversely to Treasuries.

As of late Thursday, futures trading built in a 5% chance of a June rate cut and 25% for July, according to the CME FedWatch tool. The July odds have fallen recently as Fed speakers continue to promote caution.

Trading Thursday saw major indexes start strong but quickly come off their overnight highs posted after the anti-tariff court ruling. There might have been a little sell on the news in regards to both Taris and NVIDIA, Schwab's Peterson said, referring to a rally in shares of NVIDIA after the AI giant's earnings appeared to impress Wall Street. He noted that the S&P 500 index was already up 22 percent from its tariff lows early last month.

Despite only slight gains for the major indexes, sector action Thursday was green almost across the board, led by defensive areas like real estate, health care and utilities. These sectors got a boost from lower Treasury yields because when yields fall, they pose less competition to dividend-paying stocks in these areas of the market.

In sum, it was a bit of a reversal from earlier this week when consumer discretionary and infotech were among the leaders and may point to caution as month-end approaches.

There are technical signs that the rally is losing steam. Notably, the percentage of S&P 500 stocks trading above their respective 50-day moving averages has fallen over the last two weeks, and the Momentum Signaling Relative Strength Index, or RSI, is down from peaks near 70 earlier this month to recent levels near 61.

Technically, the S&P 500 index bounced off its 200-day moving average last Friday, which is encouraging for the bulls. And the uptrend is back on track. But as we approach the end of earnings season, markets may struggle to find near-term bullish catalysts to propel stocks to fresh all-time highs, Schwab's Peterson said.

On the positive side, all the major indexes managed to close higher yesterday, with the S&P 500 holding above key support of 5,900 after falling briefly below 5,875 at one point Thursday.

The 200-day moving average of 5,782 is a key technical level of support and may be tested again if momentum flags. And despite the confusion over trade, volatility eased yesterday, dropping to lows last seen May 20th.

The Dow Jones Industrial Average added 117.03 points Thursday, or 0.28%, to 42,215.73. The S&P 500 Index climbed 23.62 points, or 0.40%, to 5,912.17, and the Nasdaq Composite rose 74.93 points, or 0.51%, to 19,175.8.

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