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Wednesday, December 23, 2015

  Schwab Market Update

    Posted: 4:15 PM ET

    Santa Claus Rally Arrives

    The U.S. equity markets finished out the last full trading session for the year in this holiday-shortened week solidly higher on the heels of a flood of mostly upbeat economic data, and as a jump in crude oil prices on a bullish inventory report gave energy stocks a boost. Volume was on the lighter side as traders prepare for a shortened session tomorrow and as the U.S. and most international markets will be closed on Friday in observance of the Christmas holiday. Treasuries were lower, as was gold, while the U.S. dollar was higher. Earnings results dominated a fairly quiet day in equity headlines.

    The Dow Jones Industrial Average (DJIA) jumped 185 points (1.1%) to 17,602, the S&P 500 Index rallied 25 points (1.2%) to 2,064, and the Nasdaq Composite advanced 45 points (0.9%) to 5,046. In moderate volume, 825 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil jumped $1.36 to $37.50 per barrel and wholesale gasoline added $0.07 to $1.24 per gallon, while the Bloomberg gold spot price declined $2.83 to $1,069.60 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 98.35.

    After the closing bell yesterday, Dow member NIKE Inc. (NKE $129) reported fiscal 2Q earnings per share (EPS) of $0.90, topping the FactSet $0.86 estimate, while revenues rose 4.1% year-over-year (y/y) to approximately $7.7 billion. The company announced a two-for-one split of both NIKE Class A and Class B common stock on November 19, and expects its common stock to begin trading at the split-adjusted price tomorrow. As the common stock is not yet trading on a post-split basis, the above per share amounts are presented on a pre-split basis. NKE offered Q3 guidance growth that was viewed as solid for the top-line, but its gross margin is expected to be down as the company clears through excess inventory in North America. Shares of NKE gave up early gains and were lower.

    Micron Technology Inc. (MU $14) announced adjusted fiscal 1Q EPS of $0.24, beating the FactSet forecast of $0.22 , while revenues dropped 26.7% y/y to approximately $3.4 billion. Micron CEO Mark Durcan noted that "while conditions in some market segments are challenging, we believe long-term industry fundamentals are healthy, and we remain focused on the deployment of our advanced DRAM and 3D NAND technologies and products." MU finished to the downside. 

    Deluge of data mostly upbeat

    Personal income (chart) was 0.3% higher month-over-month (m/m) in November, besting Bloomberg's forecast of 0.2%, while October's 0.4% increase was unrevised. Personal spending ticked 0.3% higher m/m last month, matching expectations, while October's 0.1% gain was unadjusted. The November savings rate as a percentage of disposable income dipped to 5.5% from the 5.6% posted in October. The PCE Deflator was flat m/m, compared to the forecasted 0.1% gain, with the prior month's 0.1% increase unadjusted. Compared to last year, the deflator was 0.4% higher. Excluding food and energy, the PCE Core Index was 0.1% higher, matching expectations, and the index was 1.4% higher y/y.

    Durable goods orders (chart) were unchanged m/m in November, compared to the estimated decline of 0.6%, with October's 2.9% increase unrevised. Ex-transportation, orders dipped 0.1% m/m, versus the flat forecast, and October's 0.5% gain was unrevised. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, slipped 0.4%, compared to projections of a 0.2% decrease, and following the downwardly revised 0.6% gain in the month prior, from an initially reported increase of 1.3%.

    As noted in the recent Schwab Market Perspective: What Was, What Is, and What May Be, the U.S. consumer looks to be in good shape heading into the New Year. But one thing we will continue to watch in 2016 is the potential of a "smarter" American consumer that is unwilling to pile on consumer debt and looks to save more money. The savings rate dipped to 5.5% from 5.6%, the highest reading since 2012, but should these levels continue, it could mean slightly slower but more sustainable growth for the U.S. economy. And consumers haven’t completely closed their checkbooks. Auto sales continue to move higher, while early holiday reports are that modest physical retail sales are being met with strong online sales, indicating a shift in method—not necessarily attitude—among U.S. consumers. Read more at, and follow us on Twitter: @SchwabResearch.

    The final December University of Michigan Consumer Sentiment Index (chart) was revised higher to 92.6 from the preliminary level of 91.8, and compared to economists' expectations of a slight improvement to 92.0, with an upward adjustment for the current economic conditions outlook and a slight downward revision to the economic outlook. The 1-year inflation projection ticked lower to 2.6% from November's 2.7% level, while the 5-10 year inflation outlook remained at 2.6%.

    New home sales (chart) grew 4.3% m/m in November to an annual rate of 490,000 from October's downwardly revised 470,000 pace, and compared to forecasts of 505,000. The median home price increased 0.8% y/y at $305,000. The supply of new home inventory dipped to 5.7 months from 5.8 months in October as sales grew m/m in the South and West regions. New home sales are based on contract signings instead of closings.

    The MBA Mortgage Application Index jumped 7.3% last week, after declining 1.1% in the previous week. The upward move came as a 10.8% gain in the Refinance Index was met with a 4.1% increase for the Purchase Index, while the average 30-year mortgage rate gained 2 basis points (bps) to 4.16%.

    Treasuries were lower, as the yield on the 2-year note gained 1 basis point (bp) at 0.99%, the yield on the 10-year note advanced 2 bps at 2.26% and the 30-year bond rate increased 3 bps to 2.98 %.

    The only report of note on tomorrow's economic calendar is weekly initial jobless claims, forecasted to tick slightly lower to a level of 270,000 from the prior week's 271,000.

    Please note: All U.S. markets will trade in an abbreviated session tomorrow, and will be closed on Friday in observance of the Christmas holiday.

    Europe rallying ahead of holiday, Asia mixed

    European equities rallied nicely, riding the global wave of recent gains and as crude oil prices continued to move higher. In economic news in the region, the U.K. economy expanded less than estimated with a report showing its 3Q GDP annualized rate of growth at 2.1%, missing the Bloomberg forecast of 2.3%, while a measure of total business investment matched expectations of a 2.2% increase for 3Q. Schwab's Chief Global investment Strategist, Jeffrey Kleintop, CFA, offers some analysis in his recent article, How Rate Hikes Impact International Stock Markets, that despite the fact that the U.K. economy was one of the best performers in Europe in 2015, the U.K. stock market was one of the worst performers due to a high concentration in the energy sector and very low weighting in technology, the worst and best performing global sectors, respectively. While the U.K. economy seems well prepared for the rate hikes the Bank of England may undertake in 2016, the U.K. stock market may continue to lag reflecting our outlook for lingering weakness in energy and continued strength in technology. Read more at, and follow Jeff on Twitter: @JeffreyKleintop. Meantime, Italy announced industrial orders rose 4.6% m/m for October after declining 2.0% the month prior, however, a read on the nation's retail sales disappointed, showing a m/m decline of 0.3% versus expectations of a 0.3% rise. Also, France reported its 3Q GDP was mostly in line with estimates, though it also announced a surprising decline in consumer spending for November.

    Stocks in Asia finished mixed on the heels of the rally in the U.S. yesterday and as oil prices recovered from recent lows. Even though mainland Chinese equities lost ground in the final hour of trade to close lower, the Shanghai Composite is on pace for the biggest gain among global benchmark measures this quarter, per Bloomberg, after the government took actions to prop up equities and cut interest rates six times within a year. Schwab's Jeffrey Kleintop, CFA, notes in his recent article, Decoding Devaluations: What do Currency Moves Mean for Your Money?, in response to Fed rate hikes prompting capital outflows from China, we expect China to continue to lower interest rates and the reserve requirement ratio in 2016 to help boost liquidity. China’s economy is likely to continue to slow in 2016, but the shift in currency away from the rising dollar along with rate cuts from the central bank may lend some support to the economy and stocks next year. Read more at, and follow Jeff on Twitter: @JeffreyKleintop. Meanwhile, stocks in Hong Kong advanced solidly. India's S&P BSE Sensex 30 Index was nicely higher, despite some risks to the banking sector as the Reserve Bank of India reported that loan growth at domestic banks slowed in the six months through September and bad loans rose, signaling increased risks to lenders. Elsewhere, equities traded in South Korea and Australia gained ground, while markets in Japan were closed for the Emperor's birthday holiday.

    Tomorrow's international docket will be very light, with consumer sentiment from Korea the only item of note.

    Schwab Center for Financial Research - Market Analysis Group

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    Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

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