Weekend Trade Talks Loom and Yields Raise Concerns
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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'Clare, and here is Schwab's early look at the markets for Friday, May 9th.

With a Federal Reserve meeting over and key inflation and retail sales data next week, investors focused today on trade news, including talks scheduled between the U.S. and China this weekend. Treasury yields are also in the spotlight after a large jump yesterday that reflected poor demand for a 30-year bond auction.

This weekend's talks with China are preliminary, and a major breakthrough seems unlikely. Yesterday, China joined Russia in a statement pushing back on international bullying in what looked like a thinly-veiled reference to U.S. trade policy. In 2018, when President Trump imposed tariffs on China, a deal took many months and even when inked was considered only a phase one agreement.

The weekend talks follow yesterday's announcements of a deal between the U.S. and the U.K. on trade that reduces tariffs for both countries but also keeps the U.S. 10 percent tariff on goods from the U.K. in place. The deal could mean increased U.K. imports of U.S. agricultural products, energy and machinery, media reports said.

Other positive trade news this week included the U.S. planning to rescind Biden-era chip export restrictions that affect many countries. The deal with the U.K. came roughly 60 days before Trump's 90-day tariff extension ends. Dozens of negotiations remain, which could keep markets on edge and the Fed uncomfortable making any rate adjustments.

The big sticking point preventing the Fed from easing policy is lack of clarity around trade policy, said Kathy Jones, chief fixed income strategist at Schwab. With the potential for tariffs to raise prices, the Fed's concern is that a temporary rise in inflation would become more persistent. Since the size and breadth of tariffs is still in flux, the Fed can't estimate what the impact will be on the economy.

Jones expects the Fed to cut rates later this year, most likely starting at the September meeting. Our outlook is for two rate cuts, she said, but a sharper drop is possible if the economy slips into recession.

The Fed's June meeting, once viewed as a possible date for the first rate cut since December, now looks like another pause. Chances of a trim in June fell to just 17 percent last Thursday, according to the CME FedWatch tool. Odds of a July cut are around 60 percent. The futures market builds in relatively strong chances of two to three cuts this year, but chances for four or more are down to just 23 percent.

The closely followed 10-year Treasury note yield climbed a hefty 10 basis points to 4.37 percent yesterday, the highest close since April 23rd. This appeared to reflect the weak 30-year bond auction, as well as hopes for economic strength as trade optimism grew. The 30-year auction saw the lowest foreign turnout since 2019, Barron's reported, resurrecting fears that overseas buyers might step away from U.S. assets.

Lower Treasury demand raises yields and tends to hurt stocks. The premium of longer-term yields to shorter-term ones has been rising lately, possibly a sign of inflation concerns. This might be one reason the 30-year auction didn't perform as well as 10-year and 3-year auctions did earlier this week.

The biggest yield jumps came in what investors call the belly of the Treasury curve, meaning the three-year, five-year, and ten-year notes. The two-year yield is now at three-week highs as hopes of near-term Fed rate cuts retreat.

Today is light on data and earnings, but next week features April consumer price index and producer price index data, along with April retail sales. Inflation has eased but remains above the Fed's 2% goal, and recent consumer surveys show high inflation expectations.

Retail sales in April will be the first to reflect the April 2nd tariff announcement that tripped up stocks and carved into consumer sentiment. Powell said this week that the economy is in a good place. The data could shed more light.

In data Thursday, initial weekly jobless claims of 228,000 fell from 241,000 the prior week and were below the briefing.com consensus. That was the good news after last week's slight bump raised concerns. Jobless claims are in line with the recent trend, Schwab's Jones said. Continuing claims have been steadily rising, however.

First quarter productivity fell 0.8% after a 1.7% rise in the fourth quarter. Unit labor costs also soared 5.7% versus the consensus of 4%.

productivity fell for the first time in nearly three years, but measuring productivity is difficult and quarter over quarter there can be distortions, said Cooper Howard, director of fixed income strategy at the Schwab Center for Financial Research. The market's not putting too much weight into this report. Elsewhere, the Atlanta Fed's GDP now forecast for the second quarter rose to 2.3 percent from 2.2 percent.

Earnings and data are quiet today, but next week marks the start of the unofficial retail earnings season, including Walmart and Alibaba. Other major firms to watch include Applied Materials, Deere, and Cisco. But Monday's schedule is light on both earnings and data.

In Trading Thursday, most sectors climbed on trade optimism, but health care lagged on worries about Trump's plan to lower drug costs. Defensive sectors like utilities and staples also finished weaker, a sign that at least for now, investors appear to have more of a risk-on focus.

The Relative Strength Index, or RSI, a momentum indicator, is now above 55 for the S&P 500 index after falling to oversold levels below 30 last month. It's still well below overbought territory of 70.

Energy finished second of all sectors yesterday on hopes trade deals could spark more demand for oil, but energy remains the second-worst sector of the last month. Consumer discretionary, industrials, materials, and infotech had strong sessions, also a sign of economic growth optimism. Technically, the market had another weak close, as major indexes retreated sharply from highs in the final minutes.

This has been a trend lately and could hint that investors remain reluctant to chase higher prices. The S&P 500 index again topped out Thursday about 25 points shy of its 200-day moving average of 5,747 and also failed to improve on last week's high close above 5,680.

The Dow Jones Industrial Average climbed 254.48 points Thursday, or 0.62%, to 41,368.45. The S&P 500 Index added 32.66 points, or 0.58%,

to 5,663.94, and the Nasdaq Composite rose 189.98 points, or 1.07%, to 17,928.14. This has been the Schwab Market Update Podcast.

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