Yields, Broadcom in Focus as Busy Data Week Ends
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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 Colette O'Clare, and here is Schwab's early look at the markets for Friday, December 13th. A brisk weekly rally in treasury yields and investor reaction to Broadcom's in-line results and firm outlook might help set the tone for stocks today after Thursday's pullback.

Yesterday's 3% annual increase in the November headline producer price index, or PPI, was the highest since February 2023, while weekly initial jobless claims of 242,000 were the heaviest in two months. This mix of sticky prices and a cooling labor market didn't receive a warm greeting from Wall Street, though claims data can be volatile week to week and don't necessarily represent a trend.

While rates fell overseas this week, U.S. Treasury yields continued climbing and are up sharply from recent six-week lows amid concern over inflation and mostly strong economic data. Next week's Federal Reserve meeting approaches with expectations firm in the futures market for a 25 basis point rate cut. Odds of a trim stood at 98% as of late Thursday, according to the CME FedWatch tool. The

The Fed could deliver what some call a hawkish cut, in which it trims rates and simultaneously talks down the chance of future cuts, perhaps citing stubborn inflation and economic vigor.

The futures market now sees high odds of just one to three cuts next year, with the highest chance of two. That would bring the Fed's target range to between 3.75% and 4% a year from now, well above the average Fed projection of 3.4% issued in September.

We expect the Fed to cut next week, but almost more important will be what they signal, said Cooper Howard, director, fixed income strategy at the Schwab Center for Financial Research. We expect they'll project fewer cuts, as well as a higher terminal rate. The terminal rate is where Fed policymakers expect rates to be when the current trimming cycle ends.

Stocks suffered modest losses Thursday as yields climbed following PPI. While the data weren't bullish, there isn't enough evidence to draw any conclusions about either potential deterioration in the labor market or inflation. Inflation has been sticky, but that was known before Thursday.

For the remainder of the month, the path of least resistance still seems to be higher, driven by performance chasing, bullish seasonality, and bullish technical momentum, said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. Yes, the potential for some mid-month mean reversion is present, but there seems to be a bid beneath the market, as evidenced by Thursday's price action.

Still, climbing Treasury yields form a bearish backdrop. The 10-year Treasury note yield is up 18 basis points week-to-date, a very quick acceleration. A 30-year bond auction yesterday, the last auction of a busy week, saw relatively soft demand, hurting the long end of the curve and pushing yields up further.

In earnings action, semiconductor giant Broadcom and retailer Costco both reported after Thursday's close, and Broadcom's results could help set the tone Friday thanks to the chip sector's large influence on Wall Street.

Broadcom's quarterly scorecard was mixed, with the company slightly exceeding analysts' average earnings estimate but falling just short on revenue. However, Broadcom's fiscal first-quarter revenue outlook exceeded the average Wall Street expectation, giving shares a small lift in pre-market trading. AI revenue grew 220 percent year-over-year in the quarter, Broadcom said.

Volatility kicked higher yesterday as the SIBO Volatility Index, or the VIX, flirted with 14 amid Wall Street's weakness. Cyclical sectors that often perform well in a growing U.S. economy, including consumer discretionary, industrials, and materials, all finished with moderate losses, while defensive sectors like staples and utilities led the way Thursday.

Tech fell after Wednesday's sparkling rally, and small caps fell sharply as investors grappled with the yield increase. The S&P 500 index slid 32.94 points, or 0.54%, Thursday to 6,051.25.

The Dow Jones Industrial Average dropped 234.44 points, or 0.53%, to 43,914.12. And the Nasdaq Composite dropped 132.05 points, or 0.66%, to 19,902.84. This has been the Schwab Market Update Podcast.

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