Treasury Auctions, Trade, Nvidia Take Center Stage
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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's Schwab's early look at the markets for Tuesday, May 27th. Investors return from the holiday with renewed focus on trade after recent threats by President Trump against Europe and Apple.

The threats to impose tariffs on Europe, which Trump made Friday, would mean 50% tariffs on European Union goods taking effect June 1st, less than a week away. It's unclear if Trump's language was a negotiating tactic, but the market treated it as real and stocks slid into the long weekend. President Trump threatened 25% tariffs on Apple's iPhone if it's not made in the U.S.,

Wedbush analyst Dave Ives, who covers Apple, said in a social media post Friday that the pressure to build in the U.S. is a non-starter and would translate into iPhone prices of $3,500 or more, calling that not realistic. Apple builds most of its iPhones in China but has moved some production to India. That wouldn't meet Trump's demands as he threatened the tariff on iPhones made in India or anyplace else.

As for Europe, Trump said trade talks had been difficult. His threats put trade back on page one when some had hoped tensions were easing after the recent U.S.-China meeting and market volatility surged in the aftermath, a potential warning of more choppiness ahead.

Still, initial fears wavered later Friday after the White House followed Trump's posts with language suggesting the threat against Europe was indeed a negotiating tactic and that Trump is simply recommending a 50% tariff, not ordering one. That situation will be closely watched with June 1 looming this coming weekend.

Any spike in tariffs on European goods could affect prices and availability of major U.S. imports from Europe, such as pharmaceuticals, auto parts, electrical equipment, machinery, and even nuclear reactors. Those are in the spotlight after Trump signed an executive order Friday to speed up construction of nuclear plants.

The new fears raised worries about the U.S. economy, sending Treasury yields lower and the dollar down. The 10-year yield closed down four basis points Friday at 4.51%. The drop in yields will likely have limited legs because the market is now conditioned to believe that these proposals will eventually be throttled back, said Kathy Jones, chief fixed income strategist at Schwab.

Earlier last week, the 10-year yield briefly topped 4.6% after relatively light demand for a 20-year U.S. bond auction Wednesday, keeping stocks subdued. This week features several more Treasury auctions, starting today with three-month and six-month bill auctions, along with a two-year note auction. A five-year note auction follows tomorrow. Weak demand likely would be noticed on Wall Street and could cause Treasury yields to rise and weigh on stocks.

The 10-year rose 7 basis points overall last week, and the 30-year yield rose 14 basis points. Rising Treasury yields suggest creditors, or those who buy Treasuries, are wanting a higher yield to help compensate for higher perceived risk to repayment, said Nathan Peterson, Director of Derivatives Analysis at the Schwab Center for Financial Research.

Thursday features the second government estimate of U.S. first quarter gross domestic product, or GDP, after the first estimate showed an annually adjusted rate of negative 0.3%. Friday brings the April personal consumption expenditures, or PCE, price index, an inflation measure closely watched by the Federal Reserve, and another possible barometer for the Treasury market.

Though recent inflation numbers dipped, the market isn't out of the woods. Friday's PCE report and inflation data released earlier this month covered a period where the average effective tariff rate was less than 5%, slightly above the 3% on Inauguration Day. The effective tariff rate now is more than 17%.

Tariff worries triggered recession fears back in April, but recent Federal Reserve comments and futures trading suggest the central bank has no plans to shift gears by lowering rates. As of late Friday, futures trading indicated a 2% chance of a rate cut in June and 24% in July, according to the CME FedWatch tool.

Boston Fed President Susan Collins told Barron's late last week she's less confident that rate cuts will be appropriate this year, citing inflation and slower growth due to tariffs. Looking back at Friday's data, new home sales for April topped expectations at a seasonally adjusted rate of 743,000 units, well above the 670,000 revised figure for March.

Falling prices appeared to help the sales pace, but Briefing.com observed that any positive news out of the April report was balanced by the sharp downward revision to March sales. On the equity side, investors brace for tomorrow afternoon's earnings from NVIDIA, providing perspective on AI demand and the company's efforts to patch up its market in China after that was damaged by U.S. export controls.

Salesforce reports the same day. In my view, the keys for NVIDIA remain the overall pulse on AI chip demand and whether any competitive threats from custom chips are taking market share, said Schwab's Peterson. Investors have come to expect a beat-and-raise quarter from NVIDIA while maintaining low to mid-70% gross margins, so forward revenue and gross margin guidance will be important metrics to gauge both demand and pricing.

Stocks capsized early Friday on the tariff talk, but then spent much of the session clawing back. Light pre-holiday volume, about 15% below average on the New York Stock Exchange, might have exacerbated market moves and called into question how much conviction there was behind Friday's action. NASDAQ volume, however, was above normal. Still, it appears that the tariff-induced sell-off lacked conviction and may reflect investors rotating into defensive shares.

Utilities, real estate, and materials outperformed Friday, highlighting the defensive shift and helped by a slight drop in Treasury yields. That said, the S&P 500 index had its worst week since early April, and other major indexes also fell. Market breadth deteriorated late last week, with just 62% of S&P 500 stocks trading above their respective 50-day moving averages as of late Friday, down from 80% a week earlier.

Declining breadth often signals weaker sentiment, and the S&P 500 index starts this week on a four-session losing streak. From a technical view, the S&P 500 index remains just slightly above its 200-day moving average of 5,773, falling slightly below that level intraday Friday before rebounding. The 200-day could remain technically supportive.

Any negative trade developments could put this near-term support level in jeopardy, Schwab's Peterson said. Other threats this week are rising yields or a disappointment from Nvidia, he added. Both Thursday and Friday saw the major indexes struggle to hold intraday highs, slumping late in the session. That's not a positive sign technically, but the trend could reflect light pre-holiday trading.

The Dow Jones Industrial Average fell 256.02 points Friday, or 0.61%, to 41,603.07. The S&P 500 Index lost 39.19 points, or 0.67%, to 5,802.82. And the Nasdaq Composite fell 188.53 points, or 1%, to 18,737.21.

On the week, the S&P 500 fell 2.61%, the Dow Jones Industrial Average declined 2.47%, and the Nasdaq Composite fell 2.47%. This has been the Schwab Market Update Podcast.

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