Broadcom, Layoffs, Claims Data Highlight Busy Day
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Welcome to the Schwab Market Update podcast, where we prepare you for each trading day with a recap of recent news and a look at what's ahead. I'm Keith Lansford, and here is Schwab's early look at the markets for Thursday, June 5th. Broadcom's earnings and jobs data arrived today after a lackluster Wednesday that saw stocks tread water and yields fall in reaction to disappointing U.S. economic news.

Initial weekly jobless claims before the open take on new significance after the previous week's spiked to 240,000, slightly above the near-term range of 220,000 to 230,000. That was followed yesterday by ADP May private sector jobs growth of just 37,000, well below expectations of 115,000 and the lowest in two years.

The market is very sensitive to jobs data, and ADP can often be off by a lot compared with Friday's official nonfarm payrolls report. Analysts expect nonfarm payrolls growth of 130,000 on average, but estimates range from as low as 95,000 up to 175,000. The report has often surprised the upside lately.

Unemployment is seen remaining at 4.2%, with hourly earnings to rise 0.3%, according to Briefing.com. It's due at 8.30 a.m. ET Friday, so barring any major trade developments between now and then, participants will likely clear their decks to focus on this pivotal data. Though inflation readings have been light over the last month, any surprise wage strength in the non-farm payrolls report might raise concerns.

Before that, investors will monitor first quarter unit labor costs due this morning. It's the second estimate by the government after the first surged to 5.7%. Official U.S. May inflation data are due next week. If labor costs rise, even as corporate margins face pressure from tariffs, that may lead to more layoff pressure.

The European Central Bank's policy decision comes this morning. Analysts widely expect a 25 basis point rate cut from the ECB, despite German inflation slowing less than expected in May. This follows a quarter point cut in April and would bring the benchmark down to 2% from a peak of 4% two years ago. The Bank of Canada kept rates paused yesterday, as analysts had expected, noting unpredictable tariff outcomes.

In the Eurozone, core inflation eased to 2.3 percent in the preliminary May release, said Michelle Gibley, director of international research at the Schwab Center for Financial Research. As a result, the ECB is expected to cut rates. However, the next step for the ECB is tougher, and it may pause and only cut one more time this year. Unlike many larger economies, there are forces that could accelerate, not decelerate, growth in the Eurozone in coming months.

It is a quieter week for earnings, but one highlight is semiconductor giant Broadcom this afternoon. Shares of the company hit one-year highs after AI chip giant NVIDIA reported strong demand last week in its quarterly report, and Broadcom announced shipments of its new AI chip. Cybersecurity firm CrowdStrike reported a strong quarter earlier this week, but its revenue forecast appeared to disappoint the market and shares fell sharply Wednesday.

That's something investors might want to keep in mind as Broadcom reports. There's quite a bit of sensitivity around company forecasts. Other earnings today include Lululemon and Sienna. Retail earnings have been mostly solid, and Lululemon is one of the last major companies in that sector to report. Shares rose sharply earlier this week as positive sentiment appeared to build ahead of its report.

Meanwhile, market breadth, a useful indicator of sentiment, remains relatively solid, with 70% of S&P 500 stocks trading above their 50-day moving averages. Sectors with the best breadth include infotech, industrials, and communication services.

Stocks remain buoyant despite Wednesday's weak data, said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. I think the upside bias or bullish momentum is still being fueled by constructive technicals, potentially some underpositioning, and a belief that the economy is strong, the consumer is resilient, and the potential negative impact of tariffs is being overblown. Cooling treasury yields are likely giving the bulls an assist.

Another boost for stocks is what Peterson calls the AI secular growth story and corresponding investment push. However, two of the largest tech stocks, Nvidia and Apple, didn't get much traction Wednesday, even as Broadcom continued to propel higher along with tech names like Marvell Technology and AppLevin.

Homebuilder stocks also found buyers yesterday thanks to lower yields that could point to falling borrowing costs, with expectations that a weak non-farm payrolls report might send yields down even more. Shares of Lenar, KB Home and Toll Brothers all made big gains Wednesday.

Still, major indexes aside from the Nasdaq didn't find much traction Wednesday. A mix of cyclical and defensive sectors kept a major rally from developing as energy, utilities, financials and staples all were weak.

A better than 1% gain in communications services led by Meta Platforms and Alphabet helped keep the S&P 500 index from losing ground. Technically, it was a weak session as the S&P 500 index stopped short of 6,000 once again. However, semiconductors stayed hot, led by Taiwan Semiconductor Manufacturing and Broadcom. NVIDIA climbed again, too.

The PHLX Semiconductor Index, or SOX, is up more than 35 percent from its April low. The Fed's Beige Book out late Wednesday said reports from across the 12 Fed districts indicate that economic activity has declined slightly since the previous report issued in late April.

The S&P 500 index retreated from early highs Wednesday after the ADP report and the May ISM services data came in lighter than expected, with a headline of 49.9 well below the 52.0 consensus and down from 51.6 the prior month. Anything below 50 indicates contraction.

The weak ISM raised new economic slowdown concerns and Treasury yields stayed on the skids. The benchmark 10-year yield dropped a sharp 10 basis points to 4.36 percent, the lowest it's seen since May 9th.

Next week looks busy for fixed income with 10 and 30-year Treasury notes on the block. As Treasury yields fell yesterday, so did the U.S. dollar, again testing its April lows amid the data weakness and worries about U.S. debt. The Congressional Budget Office, or CBO, said Wednesday that the Republican budget bill would increase the deficit by $2.4 trillion over the next 10 years.

However, lower yields didn't change the metrics around Fed rate cut hopes. Futures trading puts odds of a June cut at less than 5% and a July trim at 30%, according to the CME FedWatch tool. Fed speakers have sounded cautious this week and suggested rates may not move anytime soon. The Fed has been pretty clear that they're on hold, said Kathy Jones, chief fixed income strategist at Schwab. They are waiting for clarity about policy.

Still, odds of a September cut ticked up after Wednesday's data to nearly 80 percent, according to the CME FedWatch tool.

The Dow Jones Industrial Average fell 91.9 points Wednesday or 0.22% to 42,427.74. The S&P 500 Index gained 0.44 points or 0.01% to 5,970.81. And the Nasdaq Composite climbed 61.53 points or 0.32% to 19,460.49.

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