Investors Mull Fed Projections, Watch Middle East
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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 is Schwab's early look at the markets for Friday, June 20th. But first, an important note. This was recorded after the market closed on Wednesday, June 18th.

If the situation in the Middle East changes or escalates while U.S. markets are closed for the Juneteenth holiday, today's market open may be impacted. Stay tuned to Schwab for the latest details. The Federal Reserve left rates unchanged Wednesday and still expects two rate cuts this year. The market got a day off for Juneteenth, and investors have just one session to trade this news and the latest war developments before the weekend.

While the Fed's target range remains between 4.25% and 4.5%, and the so-called dot plot still telegraphs two or more rate cuts this year, policymakers' projections could be a bigger story that didn't sound all that bullish.

Below the surface, there are now seven members that project no rate cuts this year, said Colin Martin, director of fixed income strategy at the Schwab Center for Financial Research. Updated economic projections point to higher unemployment and higher inflation, putting the Fed in a difficult place that puts the components of its mandate in conflict. As a reminder, the Fed's mandate is to maintain maximum employment and keep prices stable.

The Fed now sees both unemployment and inflation rising more by the end of this year than it did in March when it last offered projections. It now expects core personal consumption expenditures, or PCE, inflation to rise 3.1% this year, up from its March projection of 2.8%. It expects unemployment to end the year at 4.5%, up from the March projection of 4.4%.

Gross domestic product is seen up 1.4%, down from the previous 1.7%. The Fed still sees the federal funds rate ending the year at 3.9%, unchanged from the March projection, but fewer policymakers penciled in rate cuts in their DOTS plot of rate projections, and Fed Chairman Jerome Powell sounded no urgency to cut rates. This appeared to limit buying interest in stocks and treasuries after the decision.

The inflation revisions were more significant than the unemployment revision, suggesting the Fed may focus more on inflation over the short run, Schwab's Martin said. The GDP projection was revised even lower, meaning stagflation is likely to continue as a buzzword going forward. Stagflation, characterized by weak growth and rising prices, is the Fed's trickiest challenge.

In such a climate, raising rates to fight inflation could slow the economy even more, but lowering rates to improve growth would risk even higher prices. That could explain why the central bank remains cautious, presumably not wanting to rock the boat. Powell, in his post-meeting press conference, said the economy remains strong but vulnerable to possible tariff-driven inflation.

He said current Fed policy levels are in a good place for any needed adjustments once the central bank has a better understanding of how tariffs might affect prices. Increases in tariffs this year are likely to push up prices and weigh on economic activity, Powell said. This could be short-lived or more persistent. We are well positioned to wait to learn more about the likely course of the economy before considering any adjustments in our policy stance.

He added that uncertainty has eased over the last few months, but tariffs will have to be paid by someone, whether it's exporters, importers, businesses, or consumers. It could be a combination. Still, business executives who speak with the Fed seem more positive and constructive, Powell said.

Odds of a rate cut in July fell under 11% Wednesday after the Fed meeting, down from 16% the day before, according to the CME FedWatch tool. Chances of a cut in September rose slightly to around 66%. A 10-year Treasury note yield didn't budge much Wednesday, but settled one basis point higher at 4.4%, up from midday lows as the Fed outlined a cautious stance toward rate cuts.

Volatility could flare today as the week winds down and Middle East uncertainty continues. Last Friday, there was little buying enthusiasm ahead of the weekend due to the war. It could be interesting to see if today brings a repeat. Major indexes barely moved Wednesday afternoon following the Fed meeting and were hardly changed from a week ago.

Another batch of relatively soft data arrived just before the Fed decision. Initial jobless claims slipped to 245,000 while housing starts and building permits fell. U.S. May housing starts of 1.256 million on a seasonally adjusted annual basis and building permits of 1.393 million compared with consensus of 1.36 million and 1.41 million respectively.

Both were down from April, with housing starts particularly light. The U.S. market week was shortened by Thursday's holiday, and today is so-called triple witching day when stock index futures, stock index options, and stock options expire. Traditionally, volatility climbs on such days and likely would be elevated anyway with investors having one day before the weekend to react to both Fed projections and war developments.

Accenture and Kroger both report today. Next week brings Nike, Micron, and FedEx, a trio that could provide insights into retail demand, the trade war, and semiconductor trends. Next week also includes a few key data measures, including personal consumption expenditures, or PCE, prices for May, the final government estimate for first quarter gross domestic product growth, and June consumer confidence.

Crude oil stayed relatively subdued Wednesday after President Trump said Iran wants to negotiate, though Iran denied that. Beyond oil, the U.S. stocks also showed some resiliency following Tuesday's geopolitical sell-off, and major indexes remain close to all-time highs despite the global uncertainty.

Volatility stayed elevated and market breadth remained mostly bullish, with 68% of S&P 500 stocks trading above their respective 50-day moving averages. Sector-wise, the market stayed in a tight range Wednesday, with no single sector climbing or falling much more than 0.4%. Defensive areas like utilities and real estate led gains, but cyclical sectors like infotech and consumer discretionary stayed above the waterline.

Energy lost the most ground. A handful of technology names like Marvell Technology, Intel, Super Microcomputer, and Oracle had strong sessions. The Nasdaq Bank Index climbed in the wake of the Fed meeting. That said, some of the momentum seems to be fading, judging from a decline in the S&P 500's Relative Strength Index, or RSI.

And a 30-day and 90-day hedging activity has picked up, a possible sign of investors expecting turbulence ahead. All this points to a market that's in wait-and-see mode, but prepared for downside risk should the geopolitical outlook worsen in coming days and weeks.

The Dow Jones Industrial Average fell 44.14 points Wednesday, or 0.10%, to 42,171.66. The S&P 500 Index slipped 1.85 points, or 0.03%, to 5,980.87. And the Nasdaq Composite gained 25.18 points, or 0.13%, to 19,546.27.

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