Fed Minutes Awaited as Stocks Stumble on Yields

**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 Lansford, and here is Schwab's Look at the Markets for Wednesday, August 19
Minutes from the Federal Reserve's last meeting arrived late today with the markets at a crossroads. The long summer rally ran into a buzz saw of climbing yields in oil this week that it could no longer ignore, mainly because there's no sign of progress in the Middle East as the ceasefire ends. Weakness accelerated Tuesday as yields in oil kept spinning higher, raising borrowing costs for companies and investors. Chips took the brunt of the blow. The 30-year bond yield hit a 19-year high, while the 10-year yield approached highs last hit in early 2025 The 2023 high of almost 5% isn't far off. While stocks staged long rallies in the 1990s with yields at these levels, it generally was accompanied by cheap crude. Today's combination could be a tougher challenge, raising the cost of borrowing energy at the same time. This has implications for heavy-spending growth companies and for consumer spending, which accounts for 70% of gross domestic product or GDP. Next week's update on second-quarter spending and growth could be useful, though oil prices and yields were generally lower than compared to now. Also, minutes due at 2 p.m. Eastern Time reflect conditions when the Fed met in late July, several weeks before the ceasefire expired, and when there was more hope of an end to the war. That could have affected the debate. Three policy makers voted to raise rates, and nine voted to leave them unchanged. Week July jobs and retail sales data seemed to temporarily discourage market participants from expecting a September hike, with chances for one that month recently below 35%, according to the CME FedWatch tool. Hike chances accelerate from there to almost 70% by year end. Rising US yields also could draw investors towards bonds and away from stocks, thanks to what might be perceived as enticing returns. Bond yields and stocks now have the most negative correlations since 1997, meaning when one goes up, the other goes down. This implies that the bond market is keying more off inflation data than growth data, giving inflation the upper hand when it comes to equities, said Kevin Gordon, head of Macro Research and Strategy at the Schwab Center for Financial Research. The long stock rally this summer took place when market participants seemed relatively sure the war would soon end. Now that's unclear and could explain recent stumbles. Rising yields partially reflect rising oil prices, which climbed 0.5 percent Tuesday to nearly $85 per barrel. There's growing concern about falling strategic reserves, which countries might eventually need to refill. That kind of demand would compete with normal transportation and heating needs, keeping prices up for longer. Still, longer-term oil futures trade below spot prices. The market anticipates US crude to fall below $79 per barrel by next winter, though that could reflect traditionally weaker winter demand. There is no sign of progress re-opening the Strait of Hormuz, and only one ship made the transit in the 24 hours before Tuesday's market closed, Strait Monitor said.
Amid all the hand-wringing over yields and oil, this week is big for retailers, and it started with Good News Tuesday from Home Depot. Home Depot's earnings and revenue topped consensus, even as executives said customers mostly avoided large do-it-yourself purchases. The company reaffirmed its fiscal 2027 earnings and revenue guidance, easing minds. Lowes and Target report today, and Walmart comes to bat tomorrow. In other home-related development, July housing starts and building permits data looked mixed. Permits, a leading economic indicator, rose 5% monthly, topping estimates at a seasonally adjusted annual rate of $1.44 million. Starts missed consensus at $1.24 million. The relatively weak data helped ease treasure yields from early peaks Tuesday. In another data, industrial production rose 0.2% monthly in July, short of the 0.3% briefing.com consensus.
Target and Lowe's both report this morning, with Lowe's likely now expected to impress after Home Depot's solid outing. Target spent most of the year rallying, though it put on the brakes after last week's poor US. July retail sales report. Concerns about possible consumer caution put Target and Walmart in the spotlight, with Walmart reporting Thursday morning. Consensus for Target is $2.33 per share on revenue of $26.1 billion, up 3.7% year-over-year. Target beat estimates last time and sales at stores open a year or more, which had slumped, rebounded an impressive 5.6% annually. Growth was strong across most categories and customer traffic rose. This puts pressure on Target to share similarly impressive results today. The solid results from Home Depot appeared to help consumer sectors, including Staples and Discretionary, Credit Card and Pet Supply, and Athletic Gear and Soft Drink Companies were among the leaders on Wall Street Tuesday.