Core Inflation Rose in May, Indexes Near High

(Friday market open) After missing a record-high close by a whisker Thursday, Wall Street starts today focused on the latest inflation data. May Personal Consumption Expenditures (PCE) price growth was in line with analysts' headline expectations of 0.1%, but core PCE excluding volatile food and energy prices rose by 0.2%, above the 0.1% consensus, and prices rose more than expected annually. "It makes the case for a July rate cut less likely," said Cooper Howard, director, fixed income strategy at the Schwab Center for Financial Research.

The S&P 500 index closed just three points from its all-time high of 6,144 yesterday in a broad rally not dominated by any one sector. Falling Treasury yields, strong durable goods data, and solid Micron (MU) results keyed the rally. Jobless claims yesterday reinforced ideas the labor climate might be weakening, but it would likely take a very disappointing nonfarm payrolls report next week to tilt the Federal Reserve toward a summer slice.

In overnight news, there's long-awaited progress on trade as a U.S.-China trade deal signed two days ago includes a pledge by Beijing to deliver rare earth materials, Bloomberg reported. Additionally, the Trump administration said deals with 10 other countries are "imminent" and the July 9 deadline for reciprocal tariffs "is not critical." All this helped lift stock index futures overnight, including the sizzling semiconductors sector, and Asian and European stocks also climbed.

1. Annual PCE rose but personal spending, consumption skid: Though headline May PCE came in as expected, there were developments under the hood that might make investors less sanguine about inflation and consumer confidence, though there's no need for alarm bells. Specifically, headline annual PCE rose to 2.3% from 2.1%, while annual core PCE was 2.7% versus expectations of 2.6%. Both moved further from the Fed's 2% goal. In addition, today's personal spending and income data for May fell 0.1% and 0.4%, respectively, when analysts had expected both to rise. "The consumer looks to be weaker," Schwab's Howard said. On a related note, while yesterday's final first quarter gross domestic product (GDP) report got greeted as old news by Wall Street, one number related to spending stuck out. Personal consumption, a key economic driver, was revised down to 0.5% from an initial 1.2%. All this could weigh on consumer discretionary stocks if the trend continues, and ultimately slow GDP. Final June University of Michigan Consumer Sentiment data is due after the open, with headline consensus at 60.5, in line with the preliminary June figure but up from 52.2 in May.
    
2. Dovish rate climate weighs on greenback: The U.S. Dollar Index hit a new three-year low below 98 yesterday, possibly on ideas the Fed might be more prone to lower rates sooner. The dollar is already down more than 10% this year and could provide a tailwind for U.S. companies by making their products cheaper overseas. That's not a slam dunk, however, as the trade war has soured some foreign customers on U.S. goods. The dollar's skid this week also could reflect a Wall Street Journal report that President Trump might announce his pick to replace Federal Reserve Chairman Jerome Powell by September or October. That person would become in effect a "shadow" Fed chair and would likely be dovish, providing a counterpoint to the more hawkish Powell until Powell's term ends next May. Treasury yields fell on the report as well, with the 10-year yield down four basis points to 4.25% yesterday, the lowest close since May 1, but popped slightly this morning as trade news lifted economic prospects.
    
3. Stress test results for banks can reflect consumer, business health: Today, the Fed is scheduled to release its 2025 "stress test" results for the biggest U.S. banks. The stress test subjects banks to hypothetical strains on the market and sudden economic downturns to see how well their businesses can handle trouble and protect clients. All 31 banks tested last year easily passed, demonstrating that they could maintain minimum capital at required levels in a difficult climate, such as rising unemployment or a sudden drop in home prices. Though it can seem arcane, one thing to monitor is how much banks' aggregate capital falls in the stress test. It slid 2.8% last year, up from the year before. This can reflect market conditions. For instance, the Fed said the bigger drop last year reflected the industry holding more consumer credit card loans and more corporate bonds that had been downgraded. In this sense, stress tests can give investors insight into the health of consumers and businesses that borrow from big banks. Passing the tests allows banks to announce share buybacks and boost dividends, potentially helping their shares.

• Nike (NKE) rallied more than 9% as investors digested its latest earnings data released late Thursday. The giant retailer narrowly beat analysts' earnings and revenue estimates and forecast smaller-than-expected drops in sales and profit while reporting declines in North America and China revenue. Analysts had expected a relatively weak quarter and Nike said it expects "headwinds to moderate from here."
   
• Nvidia (NVDA) climbed nearly 1% ahead of the open after four straight winning sessions and a new record high. Semiconductor stocks like Nvidia could get a boost from today's news of a U.S.-China trade deal. Broadcom (AVGO), Palantir (PLTR), and Advanced Micro Devices (AMD) also climbed about 1% ahead of the open.
   
• For tech stocks, Thursday was a banner day as 36% of the names in the S&P 500 Technology Select Sector Index made new highs.
   
• Core Scientific (CORZ) climbed 7.3% as The Wall Street Journal reported that CoreWeave (CRWV) is in talks to buy the digital infrastructure company. Today's gains built on a 33% rise yesterday. CRWV shares rose 2%.
   
• Amazon (AMZN) rose 1.3% ahead of the open following an upgrade from BNP Paribas Exane to Outperform from Neutral.
   
• Boeing (BA) got a 1.2% lift early today after Rothschild & Co Redburn upgraded shares to Buy from Neutral, saying the company appears healthier.
   
• Circle Internet Group (CRCL) jumped another 3% following a 7.6% gain yesterday on continued investor enthusiasm around stablecoins.
   
• Steel firms including Alcoa (AA) and Cleveland-Cliffs each were up more than 0.5% before the open. Both rose sharply Thursday in what appeared to be hopes for strong demand as durable goods data advanced. But gold miner Newmont (NEM) lost 2.3% as gold prices fell.
   
• As of early Friday, odds of a July rate cut were 22%, according to the CME FedWatch Tool. The likelihood of at least one rate cut by September was 92%.

Updates on tariffs, Middle East, and D.C.: The latest On Investing podcast from Schwab features insights from Schwab experts on subjects including the market's reaction to last weekend's U.S. bombing of Iran, the recent tech rally, the possible impact of tariffs on inflation, and the scene in Washington, D.C., as budget negotiations approach the July 4 deadline.

Copper futures (/HG—candlesticks) hit nearly three-month highs yesterday above $5 per pound amid worries about shortages. Gold (/GC—purple line) had been the dominant metal from a price standpoint most of the quarter, but copper is now up more than 20% from its April lows, and gold has leveled off somewhat. Copper is an important industrial metal, and prolonged strength could become a problem for many manufacturers. Copper topped $5 earlier this year and last year, but those rallies didn't last. However, it hasn't come back to the $2 to $3 level it traded in most of the time from 2015-2020.

Check out the Investors' Calendar for a summary of the top economic events and earnings reports on tap this week.

June 30: No major earnings or data expected.
July 1: May construction spending, June ISM Manufacturing, May Job Openings and Labor Turnover Survey (JOLTS), and expected earnings from Constellation Brands (STZ).
July 2: June Challenger job cuts report and ADP National Employment Report.
July 3: June nonfarm payrolls, June unemployment, June ISM Services, May factory orders.
July 4: Markets closed for Independence Day.