Opening Market Update

(Thursday market open) Attention initially shifted overseas Thursday, where fresh data hinted at surprising vigor from China while the Bank of England signaled it might cut rates this summer. U.S. stocks struggled for a foothold earlier, thanks partly to rising Treasury yields following China's report.

However, yields soon backtracked and stocks clawed back some of their earlier losses after a surprising spike in U.S. Weekly Initial Jobless Claims that, along with last week's April jobs report, appeared to signal a slower labor market. Claims bumped up to 231,000 from 209,000 the prior week, hitting the highest level since last August.

Continuing claims of 1.785 million remained low but rose from 1.768 million the prior week. The 10-year yield slipped back below 4.5% after the news, and this appeared to reduce pressure on stocks.

The U.S. data came after China reported solid gains in April imports and exports, helping markets there continue their rally. Imports rose 8.4%, almost doubling analysts' expectations, while exports climbed 1.5%. Crude oil rose on the news, and the tidings might have initially lifted U.S. yields as well, sending the benchmark 10-year Treasury note yield back above 4.5% earlier today before the jobless claims data sent it back below 4.5%.

Along with data, focus could turn toward shakiness in the U.S. tech sector. Intel (INTC) shares fell after the company warned that it could see sales drop after the U.S. revoked some of the chipmaker's export licenses for China, Reuters reported. Most major mega-cap U.S. tech firms are under pressure this morning in premarket trading, which could signal tough sledding ahead.

Futures based on the S&P 500^® index (SPX) were down 0.03% shortly before the close of overnight trading and futures based on the Nasdaq-100^® (NDX) climbed 0.04%. Futures based on the Dow Jones Industrial Average^® ($DJI) fell 0.14%.

• The 10-year U.S. Treasury yield (TNX) was unchanged after the jobless claims report at 4.48% after earlier topping 4.5% on China's data.
• The U.S. Dollar Index ($DXY) inched lower to 105.40.
• The Cboe Volatility Index^® (VIX) rose slightly to 13.17 but remains near one-month lows.
• WTI Crude Oil (/CL) climbed 0.7% to $79.56 a barrel following solid Chinese data.
• Bitcoin (BTC) fell 1.2% to $61,472.

Jobs check: Today's weekly Initial Jobless Claims data could get more attention than usual following last week's April Nonfarm Payrolls report that showed a bit more softness than expected in key labor metrics, including a smaller rise in wages and employment. Today's report had been expected to show weekly claims historically low at 213,000, Briefing.com said.

While higher unemployment isn't good for workers or necessarily the economy, any signs of this sudden spike continuing in coming weeks could help the inflation outlook and weigh on Treasury yields, as lower employment would likely reduce wage pressure that can lead to rising prices. However, today's figure is just one week and not a trend. Investors will likely keep a close eye on tomorrow's consumer sentiment data (see more below) for more insight into how people feel about the economy.

Rates review: Earlier today, the Bank of England (BoE) left rates unchanged. However, Andrew Bailey, the bank's governor, suggested a summer rate cut could occur if inflation readings stay tame, the Financial Times reported. Twelve-month Consumer Price Index (CPI) inflation there is expected to return close to the BoE's 2% target "in the near term," the BoE said in its press release. Two members of the BoE voted to cut rates 25 basis points today, though seven voted to keep rates unchanged.

Sweden's central bank cut rates Wednesday following a rate cut recently in Switzerland, and the European Central Bank (ECB) has hinted a rate cut could occur in June. With no expectation of any Fed rate cuts until possibly July if not later, the spread between U.S. and international rates could grow even stronger, propping the dollar. A stronger dollar would make U.S. products more expensive overseas, potentially hurting U.S. multinational firms doing business abroad. Already, some U.S. companies have reported currency-related pressures rising.

However, if international rates do fall thanks to rate cuts abroad, widening the spread versus U.S. rates, it's possible that could attract more investors to U.S. Treasuries and their relatively high yields, eventually giving Treasuries a lift and sending yields lower.

Returning to China's data and its possible impact, the economy there has been sleepy the last year or two, but a resurgence might signal stronger demand from the United States and Europe for products made there and rising Chinese output that could lift commodity prices. These would potentially make the U.S. inflation fight harder, which could explain why yields initially rose on today's news. However, it's just one report, not a trend.

Crude and Treasury auction review: Looking back at yesterday, the government said U.S. crude oil stocks fell the previous week. That came as a surprise for the market, which expected stocks to build, and crude quickly gained back early losses that had taken the front-month U.S. futures contract below $77 per barrel at its low this week.

In other news, the Treasury Department's $42 billion 10-year note auction yesterday went about as expected, though the offering attracted slightly less demand than the 3-year auction the day before, Briefing.com noted. A $25 billion 30-year bond auction is on today's calendar. Each auction has a chance to influence closely watched Treasury yields, making them important for anyone trading equities.

Remarks from several Federal Reserve speakers Wednesday also held no surprises. "The message continues to be 'patience,'" said Kathy Jones, chief fixed income strategist at Schwab. "The Fed is waiting for more data to gain confidence that it can cut rates." Next week's April inflation numbers loom large.

Next week, get ready for the retail portion of earnings season. It's a long simmer over the second half of the month, beginning with Home Depot (HD) this coming Tuesday and followed next Thursday, a week from today, by Walmart (WMT) and Under Armour (UAA). Other big boxes like Target (TGT), Lowe's (LOW), and Best Buy (BBY) are on the calendar in the following weeks and together could provide insight into consumer trends.

Earnings to date brought some trepidation about consumer health, particularly on the lower half of the income scale. Companies ranging from McDonald's (MCD) to Etsy (ETSY) referred to a challenging discretionary environment as customers wrestle with inflation and high borrowing costs. The housing market also ran into pressure this spring as home starts dropped in March.

Speaking of housing, the big home improvement retailers Home Depot and Lowe's are good barometers for housing in general, whether it's home construction or renovation trends.

Stocks on the move:

• Arm (ARM) fell nearly 8% in early trading Thursday despite the semiconductor firm beating analysts' estimates on both earnings per share (EPS) and revenue. It also issued better-than-expected fiscal first-quarter guidance. The tipping point could be its outlook for full-year fiscal 2025 revenue of between $3.8 billion and $4.1 billion. The FactSet consensus was $3.98 billion, so the lower figure in the guidance could be disappointing investors.
• Shopify (SHOP) rose 1% in premarket trading after receiving two analyst upgrades. Subscription price increases on tap are a positive development, according to one analyst. The company reported an earnings per share beat but plunged 18% yesterday on what analysts called weak guidance.
• Airbnb (ABNB) plunged 8% ahead of the open even though the travel firm beat analysts' quarterly revenue and EPS estimates. Weaker-than-expected guidance tripped up shares even as the company highlighted "robust" travel demand.

Sentiment time: Friday brings the preliminary University of Michigan May Consumer Sentiment Index, which could attract closer attention than usual following a surprisingly weak April Consumer Confidence report from the Conference Board that was the third straight decline and the lowest reading since July 2022.

Friday's sentiment data, due soon after tomorrow's open, is expected to show a headline figure of 76.5, Briefing.com said, down from April's 77.2. Keep an eye on expectations, which slipped in April. Also, one-year inflation expectations rose to 3.2% in April from 2.9% in March, making the May preliminary reading worth a look.

Inflation data ahead: This week's reports were just the appetizer. The main course arrives next week with U.S. Producer Price Index (PPI) and CPI data for April, both elemental to the Fed's thinking on inflation. PPI kicks things off Tuesday, following 0.2% headline and core monthly increases in March. Core strips out volatile food and energy prices. CPI is on Wednesday.

"The inflation reports are expected to indicate some modest improvement, with core CPI coming in at 3.4% year over year," said Schwab's Jones.

Retail sales data for April are due next Wednesday. "Consensus expectations for retail sales are for a smaller increase of 0.4% after last month’s large gains," Schwab's Jones said. She added yields are likely to remain rangebound ahead of next week's data.

Wednesday in review:

Retail and real estate shares were among the weakest areas Wednesday, while banks and utilities were firm. Utility shares extended a nearly month-long rally, which may in part reflect greater expectations for Fed rate cuts. The Dow Jones Utility Average ($DJU) rose 0.5% to end at its highest level since late July and is up 12% from a mid-April low.

Broadly, U.S. equities appear to have recovered from April's downdraft, said Kevin Gordon, director and senior investment strategist at Schwab.

"The frothy sentiment we saw earlier this year has been removed as a large, near-term risk," Gordon said. "While the market's correction since late March hasn't been severe relative to history, it has been enough to wring out excessively optimistic sentiment. As long as inflation data doesn't continue to surprise to the upside and the labor market slows gradually, the background conditions for stocks will remain favorable."

Talking technicals: The SPX knocked on the door of 5,200 the last two days but got turned away both times. That's a big round number, but not significant from a chart standpoint. More important is the all-time high close of 5,254, but with inflation data ahead next week there might not be much appetite to test that level for now. The 50-day simple moving average (SMA) now stands at 5,136, and the SPX has closed above it three days in a row, a positive technical sign. Those two goal posts (5,136 and 5,254) might form opposite ends of a narrow trading field the next few days, barring major unexpected news.

Early today, futures traders place 8.4% chances of a 25-basis-point rate cut at the Federal Open Market Committee's (FOMC's) June 11–12 meeting, rising to roughly 35% for the late-July meeting, based on the CME FedWatch Tool.

Market snapshot: Get the latest perspective on the U.S. stock market and economy from Liz Ann Sonders, Schwab's chief investment strategist, in this monthly video.

Ideas to mull as you trade or invest

Auctions and yields: This week's heavy schedule of Treasury auctions has investors focused again on the massive amount of debt being priced by the U.S. government to fund historically high deficits. Which raises the question of whether all these supplies are going to send Treasury yields higher. The answer is unknown, but history suggests they probably won't. "When it comes to Treasury yields, there's no strong correlation between the amount of debt issued and yields," said Schwab's Jones. "And I know that's counterintuitive. More supply should mean a price change. But when you look at correlations in short-term, intermediate-term, long-term, it's just not there because other factors are at work."

Uncle Sam wants oil: Speaking of transportation, the recent plunge in crude prices could help oil producers, refiners, and pipeline firms. That may sound counterintuitive, but when crude falls, a very large buyer called the U.S. government often shows up, supporting prices. It happened again earlier this week when the Department of Energy announced a "solicitation" of up to 3.3 million barrels of crude for October delivery to the U.S. Strategic Petroleum Reserve (SPR) in October. Recall that the Biden administration emptied the SPR at a frantic pace in 2022 to ease prices after Russia invaded Ukraine. That sent SPR reserves to four-decade lows. Since then, Washington has restocked the SPR generally when crude falls below $80 per barrel.

Credit check: Despite this week's cautious read on quarterly lending from the Fed, credit spreads fell to a more than 2-year low early this week. "While that’s indicative of a healthy economy and rising corporate profits, the most indebted (meaning junk bond issuers) are most at risk of a 'higher for longer' Fed policy as the high borrowing costs eat into their profitability," said Collin Martin, director, fixed income strategy at the Schwab Center for Financial Research. The most indebted companies typically are smaller ones, which could help explain why the small-cap Russell 2000^® Index (RUT) continues to trail gains of its larger-cap rival indexes.

May 10: University of Michigan preliminary May Consumer Sentiment.

May 13: No major earnings or data expected.

May 14: April Producer Price Index (PPI) and core PPI, and expected earnings from Home Depot (HD), and Alibaba (BABA).

May 15: April Consumer Price Index (CPI) and core CPI, April Retail Sales, and expected earnings from Cisco (CSCO).

May 16: April Housing Starts and Building Permits, and expected earnings from Walmart (WMT), Under Armour (UAA), and Applied Materials (AMAT).