Fed Cut Seen, but Dissents, Powell, Dot Plot Eyed

0:05Welcome 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.

0:17I'm Keith Lansford, and here is Schwab's early look at the markets for Wednesday, December 10th. Trading is likely to be subdued early today, ahead of the 2 p.m. Eastern Time Federal Reserve rate decision and post-close earnings from Oracle. As of late Tuesday, odds for a rate cut were 87 % according to the CME FedWatch tool. A cut today would make it three meetings in a row, a stretch last seen in 2019. The anticipated 25 basis point cut would take the Fed Fund's target range to a three-year low between 3.5 percent and 3.75 percent. The drama isn't so much the decision, however. It is how many policymakers dissent and what Fed Chairman Jerome Powell says about the rate path.

1:06There were two dissents at the October meeting, and Fed watchers think there could be three or more at this meeting, said Michael Townsend, Managing Director of Legislative and Regulatory Affairs at Schwab. If Powell puts on his hawkish suit and warns of inflation, the market might have an ugly reaction to the expected rate cut. Then again, if Powell leaves the door open for more cuts, the Treasury market might rebel, sending long-term yields higher and weighing on stocks. The long end of the curve, which reflects future inflation and growth expectations has built a premium to shorter-term yields that more directly reflect Fed policy.

1:46Despite high expectations for a 25 basis point rate cut tomorrow from the Fed, the long end of the yield curve has been rising, likely driven by rising Japanese government bond yields and perhaps a more accommodative Fed once Powell steps down, said Nathan Peterson, director of derivatives research and strategy at the Schwab Center for Financial Research, or Skiffer. Powell's term ends next May, and the Trump administration has made clear it wants a Fed chairman who will focus on keeping rates low. Along with the rate move comes the Fed's updated quarterly projections and dot plot of where officials see rates headed.

2:25The median estimate for the September dot plot pegged the Fed fund's target range at between 3.25 percent and 3.5 percent by the end of 2026, slightly under the Fed's June median projection of 3.5 % to 3.75%. However, the September projection, which isn't expected to change today, is just 25 basis points below where rates would be if the Fed cuts this afternoon, leaving investors little in the way of energy dots from the Fed to wet equity market appetites. Market participants see things differently, with wide expectations for rates falling to around 3 percent or even lower by year end. A CME FedWatch tool puts higher than 60 percent odds on at least two more cuts in 2026.

3:17Despite the shutdown delaying November's jobs report, the Fed did get some data before its decision. Tuesday's job openings and labor turnover survey, or JOLTS, came in at 7.7 million for October, well above consensus of 7.2 million. The data the Fed was able to calculate for September came out yesterday as well, with openings also right around 7.7 million. The September count wasn't done under normal procedures due to the shutdown. The job openings rate for the trade, transportation, and utilities sector soared to 4.5 percent in October, the largest jump since April of 2023, said Kevin Gordon, head of macro research and strategy at Skiffer.

4:03The quits rate, which can indicate how easy or hard the job-seeking process might be, fell slightly to 2.9 million in October. Workers are less likely to quit if demand for their services isn't evident or if they feel nervous about job prospects in general. Quits hit a high for the year above 3.31 million back in March. The Joltz layoff rate is back to a cycle high, still low relative to history at 1.2%, Gordon said, but there has been upward momentum. The news didn't have much direct impact on stocks yesterday, but may help explain why the 10-year Treasury yield rose again to two-month highs around 4.18%.

4:48Higher yields are one metric possibly weighing down stocks so far this week. Jolts could help the Fed read the tea leaves, though next Tuesday's November non-farm payrolls will come too late to factor into the central bank's decision. Overall, Jolts appeared to show a slightly better-than-expected jobs market. The Fed has based recent cuts on labor market weakness. These data, along with a recent strong showing from the services sector and slightly better-than-expected early December consumer sentiment, may give the Fed more reason to stay hawkish about rate projections. The SIBO Volatility Index, or VIX, clawed above 17 intraday Tuesday, perhaps conveying some uneasiness around the rate environment.

5:34Anything near 20 might signal rocky times ahead for equities, but VIX has been relatively settled over the last week and trades well below November's peaks. Institutional hedging has backed off quite a bit. Investors get no break after the Fed meeting as Oracle, a major player in AI chips, reports soon after the close, followed Thursday afternoon by chipmaker Broadcom. Adobe, a major software company, also reports later today. Results from Oracle and Broadcom put the spotlight squarely on chip and data-centered demand amid concerns about overspending, circular dealing, and the move from cash financing to heavy debt issuance.

6:18Any stumbles in sales or guidance could hit the Nasdaq and tech stocks in general, raising questions about demand. Oracle's call could offer investors a chance for an update on company spending levels, which helped send shares down from their September peak, and perhaps on its remaining performance obligations. This metric, which rose 359 % euro per year in Oracle's first quarter report, excited investors then. Adobe approaches earnings after a September report that included above consensus guidance. At the time, Adobe cited powerful demand for its AI-influenced annual recurring revenue. Shares are up recently from November's lows, suggesting hopes for a repeat.

7:06Tuesday's trading was characteristically lackluster approaching the Fed meeting, marked by position squaring and lack of direction. The S &P 500 index has been range-bound between 6 ,800 and 6 ,850 early this month, about 1 % below the all-time 6 ,920 high, and apparently awaiting direction from the Fed and this week's AI earnings. A holiday Santa Claus rally can't be ruled out, but isn't a slam dunk either, considering recent reluctance to test the record high. Bullish seasonality and potential performance chasing could be in play, but markets appeared to want a strong economy, lower yields across the curve, an accommodative Fed, and a healthy AI secular growth story, said Schwab's Peterson.

7:56But the Fed doesn't control the long end of the curve, and I think the market's more likely to get a hawkish tone out of the Fed tomorrow rather than a dovish tone. Sector-wise, yesterday was a mixed bag, with six sectors up and five down, but none moving even 1%. Energy led things to a stronger outlook from ExxonMobil and concerns the Ukraine-Russia peace prospects had declined, while Staples, a rate-sensitive area, had a strong Tuesday. The closely watched Infotech and communications services sectors moved little, but Infotech's slight gains edged the Nasdaq into positive territory. Energy and Infotech lead over the last week, with former high-flying health care and utilities at the bottom.

8:46Small caps continue to be buttressed by rate-cut hopes. The Russell 2000 index rose Tuesday and hit an all-time intraday high. Checking individual names, JPMorgan Chase got a 4 % haircut Tuesday after the company said it expects to spend more next year than analysts had expected. The weakness there didn't extend to most of its big bank competitors, however. Broadcom, Adobe, and Oracle all rose ahead of their respective earnings, but NVIDIA slipped despite news it can sell its H200 chips in China. Toll Brothers fell 2 % after reporting earnings per share that missed analysts' consensus, though revenue surpassed Wall Street's expectations.

9:30In its press release, Toll Brothers referred to soft demand across many markets. Competing homebuilder stocks also slipped. Bitcoin climbed more than 2 % yesterday, lifting shares of crypto-related stocks. Many large consumer-oriented stocks, including Tesla, airlines, resorts, and automakers, had a solid day Tuesday, possibly taking their cue from the anticipated rate cut. The Dow Jones Industrial Average shed 179.03 points Tuesday, or 0.38%, to 47 ,560.29. The S &P 500 index fell 6 points or 0.09 % to 6 ,840.51. And the Nasdaq Composite gained 30.58 points or 0.13 % to 23 ,576.49. This has been the Schwab Market Update podcast.

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10:56For important disclosures, see the show notes and schwab.com slash market update podcast.