Weekly Digest: Powell Exits and Mag 7 Reports

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 also includes "Three things to watch." This recap revisits select items for those who may have missed them, helping traders head into the weekend better informed.  

About 55% of S&P 500^® Index stocks now trade above their 50-day moving average, down from 63% just over a week ago, representing a decline in market breadth. Last week saw just 188 S&P 500 stocks climb, down from 406 during the first week of April when rising waves lifted far more boats. The narrowing suggests mega-cap and large-cap tech continue to be the main drivers of the recent bull run. Typically, broader participation suggests healthy investor sentiment and supportive technicals. Participation is just one metric useful for sensing where stocks might be headed. The current level near 73 for the Relative Strength Index (RSI) of the S&P 500 Index also raises concern. Readings above 70 typically signal overbought conditions.

Released Thursday, the March Personal Consumption Expenditures (PCE) price index rose 0.7%, a bit above consensus, but core PCE excluding food and energy rose 0.3%, as expected. PCE is the Fed's favored inflation reading. The government also pegged first-quarter gross domestic product (GDP) growth at 2% on an annualized basis, below the 2.1% Briefing.com consensus. Annual PCE of 3.5% for headline and 3.2% for core were largely in line but well above the Fed's targets. "I think a higher-for-longer inflationary environment is largely expected given the spike in energy," said Nathan Peterson, director of derivatives research and strategy at the Schwab Center for Financial Research, or SCFR. He added that a 2% GDP reading reaffirms the notion of a resilient economy. "This follows strong retail sales and ISM manufacturing data, though perhaps some war-induced inventory building is contributing to the strength," Peterson said. In other data, employment costs rose 0.9% sequentially in the first quarter, a bit above the 0.8% consensus, while weekly initial jobless claims descended to a new cycle low of 189,000. This could reflect a smaller supply of workers due to tighter immigration enforcement.

Alphabet (GOOGL), Amazon (AMZN), Meta Platforms (META), and Microsoft (MSFT) earnings arrived at an auspicious time following The Wall Street Journal's report Tuesday that ChatGPT developer OpenAI missed its internal projections for revenue and usage. This raised questions about overall AI demand and whether alleged problems at OpenAI are isolated to it or industry wide. OpenAI, for its part, called the article "ridiculous". While AI spending plans may be the driving factor and grab headlines when mega-caps report, each company increasingly swims in its own AI pool, meaning different fundamentals apply. "Investors still appear to be relatively forgiving toward rampant AI infrastructure spending, but the days of treating Mag 7 as a bullish monolithic trade appear to be over," Peterson said in Schwab's tech earnings preview.

Though few expected four dissents, including one from a policymaker who wanted to cut rates, the main Fed surprise Wednesday was Powell's decision to remain as governor after his chairmanship ends. Powell said he'd keep a low profile but will stay until he's convinced the administration's criminal investigation into him is over. His term as governor ends in early 2028. This has market implications, "pushing back the potential for the committee to run a bit more dovish when the administration would prefer to replace him with someone who prefers lower rates," said Collin Martin, head of fixed-income research and strategy at SCFR. The hawkish dissents may make that a moot point for now, as the committee already has a large hawk contingent. Those dissents "suggest that there is chatter about potential rate hikes, despite what the statement says," Martin said.

Traditionally, crude oil and the dollar mix like oil and water, often traveling separate ways. That's not the case recently, with front-month crude oil futures and the U.S. Dollar Index ($DXY) at around 0.75 on a correlation scale of -1% to 1%, well above the average of around 0.13 over the last year. One factor keeping the dollar strong is relatively firm U.S. Treasury yields, which reflect the rally in crude that's reduced odds of near-term rate cuts. The three different markets are holding each other up, and if the conflict eases, all three might fall. The oddball here is the dollar, which typically eases amid inflation, but may be getting some strength from market participants jumping in for perceived geopolitical "safety." Ideas that the trio might relax some of their strength could be contributing to bullish ideas in equities. On the other hand, persistent oil firmness could keep this triple threat elevated, eventually weighing more on stocks. If the correlation starts to unwind, it may be a sign that investors were correct to get bullish this month, and that the market might return to more traditional ways of trading.