Rally Holds as Yields, Oil, Data Spark Debates

Every morning before the opening bell, the Schwab Market Update sets the stage for the day ahead, covering key market movers, economic developments, and emerging themes. Each edition includes "Three things to watch" while Thursdays feature a weekly section, "Crypto currents." This recap revisits select items for those who may have missed them, helping traders head into the weekend better informed.

The rally to record highs reflected corporate strength investors knew about heading into the month. Its ultimate fate could hinge on factors out of companies' control. Amazon (AMZN) and Microsoft's (MSFT) strong results, the evidence they showed of AI monetization, and their guidance for acceleration in cloud services growth initiated the snap back rally in tech and the AI complex, noted Nathan Peterson, director of derivatives research and strategy at the Schwab Center for Financial Research (SCFR). The technical picture has also improved, with the Nasdaq Composite^® and Nasdaq-100^® (NDX) recently pushing above their 50-day moving averages. "Is it all clear from here? Of course not," Peterson said. "The Iran conflict and oil prices are still an unknown, as are the trajectory of yields and Fed policy. August and September seasonality is bearish, but the strong earnings and AI monetization 'healing' trumps those concerns, at least for now." One possible hindrance is that the earnings calendar now begins to slow quite rapidly with only Nvidia (NVDA) left to report among the Magnificent Seven. The rally has been earnings-driven.

Everyone from Kevin Warsh to John Q. Investor is focused on the latest numbers out of Washington. But how much confidence can be placed in today's reports? Michael Townsend, managing director of legislative and regulatory affairs at Schwab, said this is a question he's heard frequently since last summer's ousting of Erika McEntarfer from her role as head of the Bureau of Labor Statistics (BLS). Her dismissal came on the heels of a weak monthly jobs report. Since then, the agency has been led by an interim head who had been McEntarfer's deputy. "To his and the agency's credit," Townsend said, "the BLS has been consistently producing data that has neither caused the president nor the markets to believe the data is being manipulated in either direction to tell a particular story about the economy." The full Senate will soon vote on the nomination of Brett Matsumoto to lead the BLS full-time. Assuming he's confirmed, he'll head up an agency that Townsend says "needs to rebuild trust with the markets and with investors."

Oil prices have been a wild card for the Fed. Policymakers generally "look through" such supply shocks—until they can't. The trick is deciding when they can't. For at least one dissenter at last week's Fed meeting, that time may be now. In a statement last Friday, Minneapolis Fed President Neel Kashkari said he increasingly believes that monetary policy has a role to play in addressing supply shocks, especially a series of supply shocks such as the one seen over the past six years: COVID-19 supply chain disruptions, the war in Ukraine, U.S. tariffs, and the Iran war. For comparison, he pointed to the 1970s, when the Fed raised rates in response to a series of shocks. "If inflation remains elevated, in my view, a potential series of small policy moves would be better than waiting and eventually concluding that even bolder actions were necessary," he said.

Recent yield strength has bullish and bearish elements. While war-related inflation worries and the Fed's more dovish tone last week raised bond market concern, jobs and manufacturing numbers have generally impressed. Keep in mind that yields can rise on inflation concerns as well as on economic strength. The Atlanta Fed's GDPNow indicator—which tracks data as it arrives and isn't an estimate—is 6.2% for third quarter gross domestic product, or GDP. Yields are slightly lower this week amid peace hopes and lower oil, but solid jobs growth in the future could keep them elevated. One wild card is productivity. ADP's July private sector jobs reported that manufacturers added just 2,000 jobs. When output grows with fewer employees, that can be positive for GDP without as much inflation impact, possibly checking yields. Some good news came on that front Thursday morning as preliminary second quarter productivity climbed 1.4% from the prior quarter versus the 0.8% consensus, and the government upwardly revised first quarter productivity growth to 0.8% from 0.3%. Though bond yields didn't slide immediately, it could be positive for the Treasury market, appearing to give Federal Reserve Chairman Kevin Warsh's theory about AI-boosted productivity gains a modest boost.

As of Tuesday, bitcoin treasury companies, once considered "buyers of last resort," had added only 720 bitcoins over the previous 30 days, according to Glassnode data. That's the smallest 30-day net total since November 2024, and only 1.7% of the total as of June 1. What's going on? The basic premise behind crypto treasury companies is that crypto prices will keep rising. Things get tricky when prices are falling or languishing near the bottom of a bear market range. See Strategy's (MSTR) $8.2 billion second-quarter loss, which prompted the company to sell more than 3,500 bitcoin in July to help cover dividend and debt payments, abandoning founder Michael Saylor's "never sell" pledge. And other treasury companies are doing the same. So for now, bitcoin holders will have to look elsewhere for the market catalyst they crave, while perhaps drawing some comfort from the fact that the price has held up even as treasury companies have stepped away.