Fed Meets, Retail Sales Loom with Geopolitics Eyed

**Collette Auclair** (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 Collette Eau Claire, and here is Schwab's Early Look at the Markets for Tuesday, June 16th. The main event this holiday shortened week could occur Friday, when US markets are closed for Juneteenth. That's the day the Trump administration says the deal will be signed re-opening the Strait of Hormuz, possibly allowing ships to safely carry oil and other commodities through that narrow passage for the first time in almost four months. Nothing is certain, however, and a lot can happen in the Middle East over any three-day period. Even if the deal gets signed Friday, it's unclear how quickly crude supplies and prices can return to normal. Still, US investors greeted the news positively Monday, sending major indexes up sharply and US crude down 5 percent, to the lowest point in almost two months at just above $81 per barrel. That's still up about 20 percent from prices before the war. Futures trading projects crude to fall about 10 percent from current levels to near $72 per barrel by next winter. Turning away from geopolitics, the Federal Reserve meeting starts today and wraps up tomorrow with what's expected to be Fed Chairman Kevin Warsh's first press conference. It's unclear if he'll hold one because he hasn't made it official and he's expressed concern about a Fed he thinks communicates too much. We expect no change to Fed policy, with the Fed funds rates staying in the 3.5 percent to 3.75 percent range, said Colin Martin, Head of Fixed Income Research and Strategy at the Schwab Center for Financial Research or SCIFR. We expect the easing bias to be removed from the statement, but we don't necessarily expect it to be replaced with a tightening bias. A bias toward easing is what led to three dissents the last time the Fed met with those policymakers saying they want the bias removed.
While there's no change likely in interest rates tomorrow, Warsh's words will be examined closely for clues on how he'll oversee the dual mandate of stable prices and maximum employment. Heading into the week, odds of the Fed standing pat on rates tomorrow stood at 99% according to the CME FedWatch tool. Looking farther out, future trading puts chances of a hike by the end of the year near 60%. That's down slightly from last week before news of the possible peace deal. Overnight, the Bank of Japan, or BOJ, announced its rate decision. Amid a weak Yen and rising inflationary pressures, analysts broadly projected an increase to 1.00%. This would be the highest reading since 1995 Very few companies of consequence are on this week's earnings calendar, and the start of second quarter earnings season is still a month away. Often, an earnings pause can intensify market focus on outside events, particularly geopolitics. A handful of firms worth watching this week include Kroger, Accenture, and CarMax. S&P 500 earnings growth is seen at 21.9% year-over-year in the second quarter, facts that said. That's down from 28.8% in the first quarter, which in turn was double the estimate going into that quarter's earnings season. For the calendar year, analysts expect 23.2% earnings growth. May housing starts and building permits are due ahead of the open today. Analysts are expecting a slight decline from the previous month's results. However, last week's report on existing home sales topped estimates. Retail sales for May are due tomorrow morning, and should provide insight into whether higher gas prices are cutting into spending in other areas. A decline in consumer spending would be a drag on economic growth. However, analysts expect a 0.5% monthly rise in headline retail sales, helped partly by rising inflation, which isn't adjusted for in this report. That means even if the rise is robust, it might reflect inflation as much or more than it reflects thicker consumer wallets.
In Data Monday, May industrial production etched up less than expected at just 0.1%. Consensus was for a 0.3% gain. However, this might reflect the natural pullback after April's sharp 0.9% rise, and no single month is a trend. Industrial production is a key metric for assessing recession risk. In Monday's market action, the Dow Jones Industrial Average rang up new record highs, while chip strength drove the NASDAQ composite to 3% gains. Small caps trailed, but still rose. The rally was relatively broad, with 7 of 11 S&P 500 sectors rising, including solid gains for discretionary, industrials and materials. Those are sectors that tend to do well in a growing economy. Tech led with a 3% increase, while defensive sectors including staples, real estate and the health care lagged. Market prep continued to improve Monday, suggesting strength across sectors beyond InfoTech. About 63% of S&P 500 stocks now trade above their 50-day moving averages, up from about 45% a month ago. Some sectors seeing improved breadth include financials and discretionary.