Morning in Arizona

Morning in Arizona

The Headline Animator

Friday, April 21, 2017

Financial Review

C’est l’├ęconomie stupide

Podcast: Play in new window | Download (Duration: 20:24 — 11.7MB)

DOW – 30 = 20,547
SPX – 7 = 2348
NAS – 6 = 5910
RUT – 4 = 1379
10 Y – .01 = 2.24%
OIL – 1.17 = 49.54
GOLD + 2.20 = 1284.90

For the week, the Dow Industrials were down 3 days and up 2, but the 2 gainers were big. The S&P 500 managed to notch its first weekly gain in three. For the week, the Dow rose 0.5 percent, the S&P gained 0.8 percent and the Nasdaq advanced 1.8 percent, notching a record high along the way. Small caps in the Russell 2000 provided out-sized gains of 2.6% on the week.

Oil prices dropped more than 2 percent today, notching the biggest weekly decline in more than a month on mounting evidence that US production and inventory growth were offsetting OPEC’s attempts to reduce the global crude glut. WTI crude lost 6.7 percent for the week.

The U.S. Commodities Future Trading Commission showed total long positions in U.S. crude rose in the week to April 18 to their highest in more than a month at 355,077 contracts. But oil has sagged in recent days, much as it did in March. Many in the market still expect OPEC to renew its production cuts for another six months. Still, shipment data shows more oil transiting world oceans than when cuts were put in place.

According to AAA, 43 states have seen prices at the pump increase over the past week. The national average is $2.42 a gallon, which reflects an increase of 13 cents in the last month, and 30 cents (or around 14%) compared to last year. A bump in gas prices is typical around this time of year, as oil refineries switch over from their winter blend to the summer blend.

The United States currently has an oversupply of gas, and as the weather warms up, demand will likely rise in June, sapping up supply and pushing prices up. AAA expects the national average for gas to peak at around $2.70 a gallon in June. In 2016, summer gas prices peaked at an average of $2.38 a gallon.

Johnson says that a handful of states will even see gas prices over $3 a gallon this summer, especially on the West Coast. In fact, two states already hit that benchmark this week: Hawaii ($3.06) and California ($3.01). The cheapest gas in the nation can currently be found in South Carolina ($2.13).

Of the 95 companies in the S&P 500 that have reported earnings through Friday morning, about 75 percent have topped expectations, according to Thomson Reuters data, above the 71-percent average for the past four quarters. Overall, profits of S&P 500 companies are estimated to have risen 11.2 percent in the quarter, the most since 2011.

Markets were hesitant today, in advance of Sunday’s French elections; this is just the first round of elections, winnowing a field of 11 candidates down to 2, who will face off in 3 weeks. Still, a lot is at stake. We’ll dive into details in just a bit.

President Trump told the Associated Press he’ll unveil a tax-reform package next week and promised a “massive tax cut” for individuals and businesses. He said it would be released “Wednesday or shortly thereafter” but declined to give details. He said the cuts will be “bigger I believe than any tax cut ever.”

The Tax Policy Center in Washington says, “The plan would cut taxes at every income level, but high-income taxpayers would receive the biggest cuts, both in dollar terms and as a percentage of income.”

Treasury Secretary Steven Mnuchin reiterated the administration is planning to unveil its tax reform plan in the near future. He said the administration is “very close” to releasing a proposal. Mnuchin said corporate inversions will be part of an overall review of tax regulations. Inversions involve US firms that move their legal address abroad to cut their tax bills through mergers with foreign companies.

President Trump’s budget director Mick Mulvaney said the administration plans to include $200 billion for new infrastructure spending in its full fiscal year 2018 budget. In a moderated discussion at the Institute of International Finance conference, Mulvaney said this is all the money needed to fund $1 trillion in projects, if leveraged properly. Mulvaney said there will not be any specific votes on infrastructure spending until the fall.

The White House ordered federal agencies to begin preparations for a potential partial government shutdown; it shouldn’t come to that but they need to be prepared. The White House said it wants to see money for Trump’s border wall included in the spending bill Congress must pass next week.

Democrats are opposed to the wall and consider including it in the budget bill to be something of a poison pill. The Senate needs 60 votes to pass the budget. Look for a possible short-term extension while they work it out. The push to reach an agreement on spending is complicated by White House efforts to try again for a House vote on replacing Obamacare next week.

If ongoing congressional budget battles force a government shutdown next week, home-buyers and sellers could be subject to more headaches than usual before their deals close.  That’s because buyers looking for mortgage approval could hit paperwork roadblocks if the shutdown furloughs workers at the IRS or Social Security Administration.

That’s what happened in October 2013, the last time budget gridlock forced a 16-day shutdown that sent millions of government workers on furlough and gummed up the works of the U.S. housing market.

The National Association of Realtors says existing-home sales ran at a seasonally adjusted annual rate of 5.71 million, a 4.4% monthly increase. That was the strongest selling pace since February 2007 and was 5.9% higher than a year ago.

Tight inventory is still the biggest factor in the marketplace: supply was 6.6% lower compared to a year ago. That nudged the national median sales price to $236,400 – a 6.8% gain compared to a year ago. March’s price increase marks the 61st consecutive month of year-over-year gains.

Unemployment rates were lower in March in 17 states and stable in 33 states.  Colorado had the lowest unemployment rate in March, 2.6 percent. New Mexico, at 6.7%, had the highest state unemployment rate. Arizona’s seasonally adjusted unemployment rate decreased from 5.1% in February to 5.0% in March.

The U.S. seasonally adjusted unemployment rate decreased from 4.7% in February to 4.5% in March. A year ago, the Arizona seasonally adjusted rate was 5.4% and the U.S. rate was 5.0%. The Private Sector gained 11,200 jobs; government cut 2,400 jobs, for a net gain of 8,800. The sector with the strongest growth was Leisure and hospitality.

Federal Reserve Vice Chairman Stanley Fischer isn’t worried about the economy. In an interview today, Fischer said weak growth in the US economy in the first quarter will likely be temporary and interest-rate hikes should be able to proceed as planned. The Fed has penciled in two more rate hikes this year and Fischer said this remains his forecast, depending on data, of course.

In the past few years, the economy has shown weakness in the first quarter, followed by stronger growth in the second and third quarters. First quarter growth was probably running at 1%. The government will release an advance estimate of first-quarter GDP April 28. Economists expect a rebound to a 2.7% rate in the second quarter.

The United States will not make an exception for American companies, including Exxon Mobil, seeking to drill in areas prohibited by U.S. sanctions on Russia. The United States and European Union imposed economic sanctions on Russia over its annexation of the Crimea region in 2014 and its role in the conflict in eastern Ukraine.

The sanctions forced Exxon to wind down drilling in Russia’s Arctic in 2014. Exxon had asked for and received in 2015 and 2016 waivers to operate a joint venture with Russian oil producer Rosneft in Russia. European Union sanctions do not keep European oil companies from operating in Russia, a point of annoyance for Exxon.

In recent months, Exxon applied for a Treasury Department waiver to drill with Rosneft – and today the waiver request was denied.

A federal judge in Detroit sentenced Volkswagen to three years’ probation for the German automaker’s diesel emissions scandal as part of a $4.3 billion settlement announced in January. The plea agreement called for “organization probation” in which the company would be overseen by an independent monitor.

General Electric reported quarterly sales and adjusted earnings results that beat analysts’ estimates, but its shares fell on concerns about some of its industrial businesses and its $1.6 billion in negative cash outflow. Adjusted earnings of 21 cents a share were unchanged from a year ago and beat analyst estimates of 17 cents. Revenue fell 1 percent to $27.66 billion. GE down 2.4%.

Subway Restaurants closed 359 U.S. locations in 2016, the first time that Subway had a net reduction. The store count dropped 1.3 percent to 26,744, but Subway remains the nation’s most ubiquitous eatery. Subway is coping with sub-par sales in the U.S., made worse by the emergence of newer fast-casual rivals and the industry’s heavy reliance on discounts and promotions.

Subway also has lost some of its luster as a healthier-food option. Sales fell 1.7 percent last year to about $11.3 billion. Subway is still growing internationally, though. Last year, sales outside the U.S. rose 3.7 percent to $5.8 billion as it continued to open locations.

Stocks off Lows, but Stay Red on Close

Charles Schwab: On the Market
Posted: 4/21/2017 4:15 PM ET

Stocks off Lows, but Stay Red on Close

U.S. stocks finished lower with financial stocks leading the decline, while an extension of recent losses for crude oil prices also weighed on the energy sector. Traders were likely exercising some caution ahead of this weekend's first round of a key French Presidential election. In economic news, existing home sales hit the fastest annual pace in over a decade and business activity reports missed forecasts. In other developments, President Trump stated that there will likely be an announcement on tax reform next week on Wednesday or shortly thereafter. Treasury yields were mixed and the U.S. dollar and gold were higher.

The Dow Jones Industrial Average (DJIA) declined 31 points (0.2%) to 20,548, the S&P 500 Index decreased 7 points (0.3%) to 2,349, and the Nasdaq Composite shed 6 points (0.1%) to 5,911. In moderate volume, 931 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil declined $1.09 to $49.62 per barrel and wholesale gasoline was $0.02 lower at $1.65 per gallon. Elsewhere, the Bloomberg gold spot price increased $2.92 to $1,284.82 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 99.91. Markets were higher for the week, as the DJIA advanced 0.5%, the S&P 500 Index gained 0.9%, and the Nasdaq Composite rallied 1.8%.

Dow member General Electric Co. (GE $30) reported 1Q earnings-per-share (EPS) of $0.10, or $0.21 ex-items, compared to the FactSet estimate of $0.17, as revenues declined 1.0% year-over-year (y/y) to $27.7 billion, versus the projected $26.4 billion. The company said it expects cash flow to improve throughout the remainder of the year, while reaffirming its 2017 guidance. Shares closed lower amid analyst concerns about the company's cash that came in weaker than expected.

Dow component Visa Inc. (V $91) posted fiscal 2Q earnings of $0.18 per share, or $0.86 ex-items, compared to the projected $0.79, with revenues rising 23.0% y/y to $4.5 billion, above the estimated $4.3 billion. The company reaffirmed its full-year revenue outlook, while announcing a new $5.0 billion share repurchase program. V finished flat. 

Mattel Inc. (MAT $22) announced a 1Q loss of $0.33 per share, or a loss of $0.32 ex-items, versus the expected shortfall of $0.17, as revenues declined 15.0% y/y to $736 million, below the forecasted $794 million. The company said its softer-than-expected results were due to a retail inventory overhang coming out of the holiday period, but it remains encouraged by strong performance at retail for its key core brands. Shares fell.

Honeywell International Inc. (HON $127) reported 1Q EPS of $1.71, or $1.66 ex-items, above the expected $1.62, as revenues were flat y/y to $9.5 billion, topping the forecasted $9.3 billion. HON finished nicely higher.

Existing home sales hit fastest pace in over a decade, business activity slips

Existing-home sales in March rose 4.4% month-over-month (m/m) to a 5.71 million annual rate—the fastest pace since February 2007—compared to the Bloomberg forecast of a 5.60 million pace. February's figure was revised to a 5.47 million annual rate. Sales of single-family homes rose 4.3% m/m and purchases of condominium and co-op units grew 5.0%. The median existing-home price was up 6.8% y/y at $236,400. Housing supply came in at a 3.8-month pace at the current sales rate, and the inventory of homes for sale is down 6.6% y/y. Sales grew in all regions except for the West. Existing home sales are based on contract closings instead of signings and account for the majority of the housing sales market.

National Association of Realtors (NAR) Chief Economist Lawrence Yun said, "The early returns so far this spring buying season look very promising as a rising number of households dipped their toes into the market." Yun pointed out that finding available properties to buy continues to be a strenuous task, and sales will go up as long as inventory does.

Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Housing—Building Bubble or Growing Trouble?, discusses the constrained supply in the housing market, which is conspiring with price gains, an uptick in mortgage rates, and modest wage gains to decrease affordability for homebuyers. Brad concludes that we believe the housing market is a modestly positive contributor to overall U.S. economic activity. Read more on the Markets & Economy page at www.schwab.com. Follow Schwab on Twitter: @schwabresearch.

The preliminary Markit U.S. Manufacturing PMI Index came in at 52.8 for April, below March's final read of 53.3, and compared to estimates calling for an improved level of 53.8. The preliminary Markit U.S. Services PMI Index for April declined to 52.5 from March's reading of 52.8, versus forecasts of an improvement to 53.2. Readings above 50 for both reports denote expansion in activity.

Treasuries straddled the unchanged mark, with yield on the 2-year note dipping 1 basis point (bps) to 1.18%, the yield on the 10-year note flat at 2.23% and the 30-year bond rate gaining 1 bp to 2.89%. 

For analysis of the moves in the bond and currency markets see Schwab's Vice President of Trading and Derivatives, Randy Frederick's and Senior Fixed Income Research Analyst, Collin Martin's, CFA, video What's Driving the Ongoing Drop in Long-Term Bond Yields? on the Insights & Ideas page at www.schwab.com. Follow Randy on Twitter: @randyafrederick. Also, Schwab's Chief Fixed Income Strategist, Kathy Jones discusses, Three Reasons to Own Bonds When the Fed is Raising Interest Rates on the Markets & Economy page at www.schwab.com. Follow Kathy on Twitter: @kathyjones.

Europe mixed ahead of French election, Asia diverges amid lingering uncertainty

European equities finished mixed to little changed, with financials extending a recovery as the recent pressure on bond yields continued to show relative signs of lessening, but oil & gas issues fell as crude oil prices added to a weekly slide. The markets appeared cautious in the face of heightened geopolitical and political uncertainty as France heads for the first round of its key Presidential election this weekend, exacerbated by yesterday's terrorist attack in the nation. Also, the U.K. approved an election for June this week and German elections are slated for later this year. For more on the political front in the region, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Randy Frederick's videos, "Brexit" Underway: How Can Investors Prep Now That Article 50 Has Been Triggered? and Why Should the French Presidential Election Be Important to Investors? on the Insights & Ideas page at www.schwab.com. Also, check out our article, Brexit Begins: What's Next for the U.K.?, on the Insights & Ideas page at www.schwab.com, while Director of International Research, Michelle Gibley CFA, offers her article, Europe Votes: Could More Countries Reject the EU? on the International Investing page at www.schwab.com. In economic news, eurozone business activity in the manufacturing and services sectors unexpectedly showed expansion accelerated slightly for April, while U.K. retail sales fell more than expected for March. The euro and British pound were lower versus the U.S. dollar.

Stocks in Asia finished mostly to the upside, on the heels of the solid gains in the U.S. yesterday that were fueled by a plethora of earnings reports that tilted to the positive side and comments that caused U.S. tax reform optimism to resurface. Japanese equities gained ground, with the yen holding onto recent weakness and as a report showed that growth in the nation's manufacturing output accelerated slightly in April. Australian securities advanced and shares trading in South Korea were also higher. However, Indian stocks dipped, while mainland Chinese equities finished flat and Hong Kong listings ticked lower with festering concerns about regulatory crackdowns continuing to hamstring sentiment in the world's second largest economy. Political and geopolitical concerns remained, ahead of this weekend's key French election and amid recent rhetoric from North Korea. For analysis of the global front, see Schwab's Jeffrey Kleintop's, CFA, article, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com, and his article, Top Five Trade Issues Investors Should Be Watching on the International Investing page at www.schwab.com.

Stocks show some resiliency coming out of Easter break

U.S. stocks followed a long holiday weekend with a weekly advance despite lingering headwinds off elevated geopolitical and political concerns, as well as a pullback in crude oil prices on U.S. supply concerns that pressured the energy sector. Earnings season heated up and appeared to provide some support as about 71% of the 94 companies that reported results from the S&P 500 Index topped forecasts and 82% bested earnings estimates, per data compiled by Bloomberg. However, the Dow lagged the major markets, with gains being limited by disappointing earnings reports from International Business Machines Corp. (IBM $161), Verizon Communications Inc. (VZ $48) and Goldman Sachs Group Inc. (GS $217). The markets got a late-week boost by comments from U.S. Treasury Secretary Mnuchin that appeared to foster resurfaced tax-reform optimism. Treasury yields and the U.S. dollar remained in focus, with both extending recent slides but showing modest signs of life as the week matured to help financials rebound, along with upbeat earnings from Morgan Stanley (MS $42), while exacerbating the pressure on crude oil prices.

Looking to next week, along with ramped-up earnings season, the economic calendar will deliver reads on new home sales, durable goods orders, Consumer Confidence and the University of Michigan Consumer Sentiment Index. However, the headlining report will likely be the first look (of three) at 1Q GDP, projected to show growth slowed from a quarter-over-quarter annualized rate of 2.1% in 4Q to 1.3%. The docket will deliver a good mix of "soft" data (confidence/survey-based) and "hard" data, which have diverged to cause some concern in the markets. We note in the latest Schwab Market Perspective: Reassessing Risk and Reflation, that some convergence between the two is expected, and this topic is drilled into by Schwab’s Chief Investment Strategist Liz Ann Sonders in her article, Hard Times: Time for the Hard Data to Catch Up to the Soft Data.

Per the Schwab Market Perspective, investors appear to be shying away from risk, resulting in the recent pullback in stocks. We view this as temporary, although patience will be required and sharper downturns could occur within the ongoing bull market as political and geopolitical uncertainty abounds, while the Fed has begun to address the slow draining of its balance sheet. Global earnings have aided stock market gains, but the expectations bar is getting higher to hurdle. The next several weeks should show whether gains will persist or if expectations may have gone too far. Read both these articles on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

International reports due out next week include: Australia—Consumer Price Inflation (CPI). China—industrial profits. Japan—Bank of Japan monetary policy decision, CPI, retail sales and industrial production. Eurozone—European Central Bank monetary policy decision and CPI, along with German retail sales. U.K.—1Q GDP and consumer confidence.