Here is Schwab's early look at the markets for Tuesday, July 8:
Treasury auctions join trade on the market's to-do list today, followed by minutes tomorrow from the Federal Reserve's last meeting. All this could help shape the path of Treasury yields, which climbed the ladder Monday following Thursday's better-than-expected June nonfarm payrolls report and passage by Congress of President Trump's budget, which is projected to raise the national debt.
"Over time, there’s hasn’t been much of a relationship between the amount of U.S. debt outstanding and the level of Treasury yields, but that could change as the debt continues to grow," said Collin Martin, director, fixed income strategy, at the Schwab Center for Financial Research. "We don’t expect yields to necessarily rise much further, but those budget concerns may keep the 10-year Treasury yield in the 4.25% to 4.5% area."
The 10-year note yield climbed a moderate four basis points to 4.39% on Monday, close to the middle of its near-term range. Rising yields likely factored into yesterday's Wall Street softness, though tariffs also played a role. It was the worst day since mid-June for the major indexes.
A 3-year note auction arrives today, followed by a 10-year note offering tomorrow, and both could affect yields. Weak demand for either might send yields higher, possibly hurting stocks. The 4.5% level for the 10-year note is likely a place to watch on the charts. Anything above that might raise concerns and potentially put a brake on the stock market rally.
The payrolls report, which showed unemployment remaining low but labor participation falling, likely means no rate cuts for the present.
"With a stable market, the Fed shouldn’t be in a hurry to do anything right now," Schwab's Martin said. "The Fed funds futures market agrees as the implied probability of a rate cut later this month is less than 5%."
In other debt-related news, the budget bill's $5 trillion increase in the debt ceiling is expected to ensure that this debate remains off the table until sometime in 2027—after the midterm elections and a new Congress is seated, said Michael Townsend, managing director, legislative and regulatory affairs at Schwab.
"While the markets will cheer the resolution of the debt ceiling issue ahead of the deadline, bond investors continue to be concerned about the bill's overall impact on federal deficits and the national debt," Townsend noted.
The economic calendar is light this week beyond auctions and Fed minutes. Next week brings June inflation and retail sales data along with the unofficial start of earnings season.
Turning to equities, next week's bank earnings could set the tone. Big bank stocks have been on a roll since late June, helped by a favorable yield curve and the major banks passing the Fed's annual "stress tests." This allowed them to announce new share buybacks and raise dividends in some cases.
Major indexes surrendered some of last week's gains Monday as President Trump sent letters to several countries saying their products would be subject to 25% to 40% tariffs by Aug. 1 if they don't reach deals by then. Japan and South Korea were on the 25% list.
No letter went to the European Union, which brought the market some relief at midday before selling picked up again. There was a report in The Wall Street Journal that the U.S. and EU could be nearing a deal that will maintain tariffs at 10%. Ultimately, tariff costs will be paid by consumers and companies either through lower corporate margins or higher cost of goods and services.
Though it's easy to blame Monday's losses on tariffs, the drop from record highs could also reflect "sell the news" sentiment after the last two weeks saw geopolitical risk retreat and stocks hit record highs. The U.S. budget passed before many had expected, removing the debt ceiling as a concern for two more years – though not the concern of debt itself. And the Middle East has calmed.
While tariffs remain in the picture and likely will emerge from the long back-and-forth at much higher levels than the 3% they were heading into the year, the actual tariff levels promised by Trump yesterday remove some uncertainty. Many market participants also seem to think that if negotiations continue, deadlines could be softened beyond Aug. 1.
In corporate news, Tesla shares dove about 7% yesterday after CEO Elon Musk announced he plans a new political party. Investors, who'd responded well recently when Musk left Washington to focus more on the company, reacted poorly to this news, and to new tension between Musk and Trump. The budget bill approved by Congress last week arguably hurts Tesla and other EV companies on the tax credit front.
Also, shares of Core Scientific fell 17% on news that CoreWeave would buy it in a $9 billion all-stock deal. The all-stock nature of the purchase – which had been discussed in the media before Monday – appeared to disappoint investors.
Beneath the surface, not much hedging occurred recently and participants don't appear to expect big market moves in either direction. There has been a lot of "buy the dip" action, so consider checking for any sign of that today after Monday's sell-off.
The weakness Monday wasn't too surprising considering that the momentum-tracking Relative Strength Index (RSI) for the S&P 500 had climbed all the way to 75 during last week's market "melt-up."
"The SPX does not tend spend a lot of time above 75 before encountering some type of consolidation move lower," said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. RSI has only topped 80 three times in the last half decade. "An overbought RSI reading doesn't mean that a pullback is imminent, but it does suggest that some mean reversion could be approaching."
RSI dropped to 66.7 by late Monday, still near the 70 level that traditionally is associated with overbought conditions.
Only one sector managed a gain yesterday—utilities. Staples, also a traditionally defensive sector, was second but lost ground. Financials, energy, and consumer discretionary formed the rear, with consumer discretionary weighed on by Tesla.
However, breadth started the week in good shape, often a signal of widespread positive sentiment. About 73% of S&P 500 stocks traded above their 50-day moving averages as of late Monday, and leading sectors on that metric included a variety beyond those dominated by the "Magnificent 7."
Info tech is indeed among the leaders in breadth, but so are materials, industrials, and even consumer discretionary despite the Tesla impact. And the S&P 500 found buyers in the final half hour yesterday to finish off its lows, possibly a sign of momentum into Tuesday.
The Dow Jones Industrial Average® ($DJI) dropped 422.17 points Monday (-0.94%) to 44,406.36; the S&P 500 index (SPX) lost 49.37 points (-0.79%) to 6,229.98, and the Nasdaq Composite® ($COMP) stepped back 188.59 points (-0.92%) to 20,412.52.
