Yields, Home Sales Take Stage Before Long Weekend
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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. First, an important note. U.S. markets are closed Monday, May 26th in observance of Memorial Day. The Schwab Market Update podcast will return on Tuesday, May 27th.

I'm Colette O'Claire, and here is Schwab's early look at the markets for Friday, May 23rd. Heading into a three-day weekend, trading might be thin as some participants head out early. There is not a great deal of news to keep them around with data and earnings light besides this morning's April new home sales.

Light volume can exacerbate market moves, so anyone making trades today might want to keep that in mind. Those sticking out the session will likely take at least some cues from the bond market after yields pulled back yesterday but remain elevated. The 30-year Treasury note yield topped 5 percent this week and hit its highest level since late 2023 after the House advanced a budget proposal expected to raise U.S. debt.

Historically, there hasn't been a relationship between the size of our budget deficits and the level or change in Treasury yields, so it hasn't been a key driver in our Treasury yield outlook, said Colin Martin, director, fixed income strategy at the Schwab Center for Financial Research. That relationship could change with deficits expected to stay wide for years, financed by more and more Treasury issuance.

The benchmark 10-year Treasury note yield briefly topped 4.6 percent late this week after relatively light demand from a 20-year U.S. bond auction Wednesday, keeping stocks subdued. Next week brings the April Personal Consumption Expenditures, or PCE, price index, an inflation measure closely watched by the Federal Reserve and another possible road sign for yields.

Though recent inflation growth looked light and the PCE report may stay that way, there's increasing concern about the impact of higher tariffs on inflation reports further out.

Even with the de-escalation of tariffs over the last month, they remain well above levels earlier this year, and companies including Walmart are contemplating price increases. The full effect of tariffs on inflation is far from clear, one reason why Fed speakers this week collectively lean toward waiting longer before any rate cuts.

We expect the first rate cut to come in September or later, Schwab's Martin said. Despite fears of a weaker economy and a rising unemployment rate, the economic data right now doesn't suggest the Fed needs to do anything. As of late Thursday, futures trading indicated a 5% chance of a rate cut in June and 29% in July, according to the CME FedWatch tool.

The House budget measure now heads to the Senate. It makes permanent all the 2017 tax cuts that were set to expire at the end of 2025. It increases the estate tax amount, increases the cap on the state and local tax or SALT deduction, and temporarily ends the taxation of TIP income and overtime hours. There is a special $4,000 tax deduction for seniors.

The bill also increases funding for defense and border security while making significant cuts to other programs, including Medicaid and food stamps. It raises the debt ceiling by $4 trillion, which would take one worry out of the market.

The rise in deficit spending likely means more issuance of treasuries, which can drive prices lower and raise yields. It also might exacerbate worries that overseas investors would look beyond the U.S. for fixed income assets.

The fiscal policy contributes to the growing feeling around the world that the U.S. may not be the most reliable partner anymore, said Michael Townsend, managing director, legal and government affairs at Schwab. We'll be watching upcoming Treasury auctions and other signs to see if the bond market continues to show signs of stress.

The countdown won't last long, with several auctions scheduled this coming week. It starts Tuesday with three-month and six-month bill auctions, along with a two-year note auction. A five-year note auction follows Wednesday. Weak demand likely would be noticed on Wall Street and could cause Treasury yields to rise and weigh on stocks.

Though yield worries hurt the U.S. dollar, along with Treasuries earlier this week, consumer spending appears relatively solid following earnings from large retailers. Urban Outfitters and Ralph Lauren impressed with their results, and Walmart had a good quarter. Target disappointed. Best Buy and Macy's report next week. The concern is that rising yields could eventually raise borrowing costs to levels where consumer spending, the economy's main engine, sputters.

Turning to data, analysts expect April new home sales, due soon after the open, to total a seasonally adjusted annual rate of 679,000, a significant retreat from 724,000 in March.

Next week, shortened by Monday's U.S. holiday, brings a second government estimate of U.S. first-quarter gross domestic product, or GDP, after the first estimate came in at an annually adjusted rate of minus 0.3%.

U.S. preliminary May manufacturing and services data from S&P Global released Thursday each were 52.3, above the 50 needed to show expansion, and a slight surprise for analysts who'd worried manufacturing might slip back into contraction.

But in news that wasn't so good for the economy, April existing home sales fell to a seasonally adjusted annual rate of $4 million, the lowest for the month since 2009.

Investors have the chip sector in mind as they gear up for AI giant NVIDIA's earnings report next Wednesday, 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.

This weekend features Fed Chairman Jerome Powell delivering baccalaureate remarks at Princeton University, his alma mater. It's unlikely Powell would use this type of speech to make any policy predictions.

Stocks spent Thursday fighting back from Wednesday's sharp losses, but in the end mostly failing to significantly advance. The late weakness might reflect selling as participants depart for the weekend and suggest people might be worried about carrying long positions when so much uncertainty continues.

The consumer discretionary sector, which tends to do best when investors expect a strong economy, led gains on solid performances from Nike, Tesla, Macy's, and Target. The retail earnings also helped that sector. Tech also had a decent day as yields fell, helping the Nasdaq Composite outpace the broader market.

Weakness in health care continued Thursday as Humana and UnitedHealth Group dove, while alternative energy shares took it on the chin as the Republican budget bill removed credits for clean energy. This hurt the utility sector.

The 10-year yield ended up falling by five basis points to 4.55 percent on Thursday, with underlying treasuries, which move inversely to yields, gaining from short covering and the weak existing home sales report, Briefing.com said.

The Dow Jones Industrial Average finished almost flat Thursday, falling 1.35 or 0.00% to 41,859.09. The S&P 500 Index fell 2.6 points or 0.04% to 5,842.01. And the Nasdaq Composite added 53.09 points or 0.28%

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