Fed Awaited After Yields Top 5%, Oil Spins Higher

Keith Lansford (0:05)

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 Lanceford, and here is Schwab's early look at the markets for Tuesday, September 15th. The Federal Reserve begins its two-day meeting today with investors widely expecting a rate hike tomorrow afternoon. This comes as inflation remained above the Fed's 2% target for several years and failed to improve monthly in August. The last hike was in mid-2023, followed by a series of cuts that took rates from above 5% to the current 3.5% to 3.75%.

Failure to hike now after the August Core Monthly Consumer Price Index, where CPI rose a higher than expected 0.3% excluding food and energy, would potentially mean even higher yields. Fed Chairman Kevin Warsh sounded hawkish in his Jackson Hole speech last month, and with CPI and employment both remaining relatively high, he might risk market credibility if he doesn't follow up words with action. Meanwhile, Schwab experts now expect at least one Fed rate hike this year, with the first likely this week. As of Monday, odds of a 25 basis point hike were above 92 percent, up from 59 percent a week ago, according to the CME FedWatch tool. Tomorrow may be the last chance to hike at a regularly scheduled meeting until December, as next month's meeting precedes November's midterm elections, making a rate hike then more politically difficult. Besides rates, some numbers to watch tomorrow include the Fed's inflation expectations, which it raised sharply back in June to 4.4 percent and 3.3 percent, respectively, for headline and core personal consumption expenditures, or PCE price growth this year. The previous ones were 3.6 percent and 2.7 percent, respectively. Focus could turn to the Fed's 2027 PCE projections, which were 2.3 percent for headline and 2.5 percent for core in the June report. Any rise would likely have futures traders consider a higher-for-longer rate picture that might unsettle the market. Though inflation hasn't reached the Fed's goal, it could be argued that core CPI has been steadily declining on an annual basis, reaching 2.4 percent last month. That was the lowest in five years and one possible argument against a rate hike.

Monday was pick-your-poison on Wall Street, thanks to the combined blow of rising crude prices and comments from AI industry leaders about needing to slow the technology. This came after industry insiders warned of possible dire consequences from unchecked AI. OpenAI's leader said the firm is likely to postpone a planned public offering until next year. That said, Anthropic appears to be moving ahead with its initial public offering, selecting NASDAQ as the exchange. Also, NVIDIA hasn't apparently seen a need to slow down. It's in talks to invest in Anthropic's IPO, Reuters reported Monday. AI was the main tailwind for tech and the broader economy over the last four years. If it slows, effects could reverberate beyond the big AI stocks, hitting firms involved in the data center buildout. This could mean miners extracting copper, construction companies building data centers, and energy firms providing power to run the data centers. It also brings up a more near-term question as to which sectors might take the baton if tech gives it back. Recently there had been sector rotation into energy and away from recent leaders like health care and financials. Even so, the latter two had been ascendant for some time. With the market breath dwindling, there's not necessarily a lot to fall back on.

Away from tech, oil prices spiked Monday thanks to intensified fighting in the Gulf, attacks that will shut a major Saudi pipeline for weeks, and postponed talks between Iran and the Gulf states. As oil climbed, the 10-year Treasury Note yield traded north of 5% on Monday for the first time since late 2023 Monday's intraday high above 5.01% was a level last seen in 2007 Rising yields make it more costly for consumers and businesses to borrow money. However, the yields backtracked after President Trump noted that Russia and the Ukraine are open to stopping strikes against each other's infrastructure and Iran wants a deal. There were no immediate responses from the other countries. The Bank of Japan meets later this week and analysts expect to hike. Rising rates there can be bearish for US assets, sparking concern of the yen carry trade breaking down and investors shifting from US to Japanese assets due to rising Japanese yields. Data is light this week besides tomorrow's US. August retail sales. Analysts expect a solid 0.9% monthly increase, briefing.com said, but that follows a sharp 0.6% drop in July, making for an easy comparison. Control Group Retail Sales, excluding Gasoline and some other items, might be the number to watch tomorrow. It feeds into Gross Domestic Product or GDP and fell 0.4% in July.