The Rally Resumes

Charles Schwab: On the Market

Posted: 2/17/2016 4:15 PM ET

The Rally Resumes

U.S. equities finished a third–straight session with solid gains following their European counterparts, amid an increase in crude oil prices, some upbeat economic news, and after the Fed minutes potentially dampened rate hike expectations. Treasuries finished lower following stronger-than-expected reads on domestic industrial production and wholesale price inflation, as was the U.S. dollar, while gold was higher.

The Dow Jones Industrial Average (DJIA) jumped 257 points (1.6%) to 16,454, the S&P 500 Index advanced 31 points (1.7%) to 1,927, and the Nasdaq Composite rallied 98 points (2.2%) to 4,534. In heavy volume, 1.2 billion shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.62 to $30.66 per barrel and wholesale gasoline increased $0.03 to $1.00 per gallon, while the Bloomberg gold spot price gained $9.81 to $1,210.25 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—inched 0.1% lower to 96.79.

Express Scripts Holding Co. (ESRX $69) reported 4Q earnings-per-share (EPS) ex-items of $1.56, in line with the FactSet estimate, as revenues declined 0.5% year-over-year (y/y) to $26.2 billion, below the expected $26.6 billion. The company issued softer-than-expected 1Q EPS guidance, while raising its full-year profit forecast. Shares were higher.

Priceline Group Inc. (PCLN $1,236) posted 4Q profits ex-items of $12.63 per share, above the forecasted $11.81, with revenues rising 8.7% y/y to $2.0 billion, roughly in line with estimates. The travel booking site said it finished with a strong quarter, reporting accelerating growth in hotel room nights booked. PCLN's 1Q guidance came in mostly below expectations. Shares rallied.

Dr Pepper Snapple Group Inc. (DPS $89) announced 4Q earnings ex-items of $1.00 per share, one penny above expectations, with revenues increasing 2.5% y/y to $1.6 billion, versus the forecasted $1.5 billion. DPS issued 2016 EPS guidance that missed expectations. Shares were lower. 

Industrial production and PPI top forecasts, housing data mixed, Fed shows concern

Industrial production (chart) jumped 0.9% month-over-month (m/m) in January, versus the Bloomberg estimate of a 0.4% increase, while December's 0.4% decline was revised to a 0.7% fall. Manufacturing production rose 0.5%—the highest since July 2015—and utilities output surged 5.4%, while mining production was flat. Capacity utilization rose to 77.1% from December's downwardly revised 76.4% rate, and versus projections of 76.7%. Capacity utilization is 2.9 percentage points below its long-run average.

Schwab's Chief Investment Strategist, Liz Ann Sonders notes in her article, Changes: Turn and Face the Strange (Market), historically, if the annual average of industrial production is down for an entire year, weakness spreads to the broader economy. We have yet to see that kind of weakness, but it’s on our watch list. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Housing starts (chart) for January declined 3.8% m/m to an annual pace of 1,099,000 units, compared to forecasts of a 1,173,000 unit rate. December's starts were downwardly revised to an annual pace of 1,143,000. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, dipped 0.2% m/m in January to an annual rate of 1,202,000, after December's downward revision to a 1,204,000 rate, but above the expected annual pace of 1,200,000 units.

The Producer Price Index (PPI) (chart) in January was up 0.1% m/m, compared to expectations of a 0.2% decline, while December's 0.2% decrease was unrevised. The core rate, which excludes food and energy, rose 0.4% m/m, well above forecasts of a 0.1% advance, and December's 0.1% increase was adjusted to a 0.2% gain. Y/Y, the headline rate declined 0.2%, versus projections of a 0.6% drop, and the core PPI was up 0.6% last month, above estimates of a 0.4% advance. In December, producer prices were down 1.0% and up 0.3% y/y for the headline and core rates, respectively.

The MBA Mortgage Application Index rose 8.2% last week, after gaining 9.3% in the previous week. The solid advance came as a 16.0% jump in the Refinance Index more than offset a 3.7% decline for the Purchase Index. The average 30-year mortgage rate fell 8 basis points (bps) to 3.83%.

Treasuries were lower, as the yield on the 2-year note rose 3 bps to 0.75%, while the yields on the 10-year note and the 30-year bond advanced 4 bps to 1.81% and 2.68%, respectively. For more on the bond markets see Schwab's Director of Income Planning, Rob Williams', latest article, Low Rates, Volatile Markets: Income Investing Outlook 2016, at www.schwab.com/marketinsight and follow us on Twitter: @schwabresearch.

Later this morning, the U.S. economic calendar will bring the Federal Reserve's January industrial production and capacity utilization report, with production projected to rise 0.4% m/m, after decreasing by the same amount in December, and capacity utilization expected to tick higher to 76.7% from 76.5%.

Finally, at 2:00 p.m. ET the Federal Open Market Committee (FOMC) released the minutes from its January monetary policy meeting, after which the Central Bank left its policy stance unchanged. The report showed that policymakers voiced concerns over the recent turmoil in the markets, indicating that the overall implications of such for the outlook for domestic economic activity was unclear, and that "many saw these developments as increasing the downside risks to the outlook." Members also expressed concern over the slowdown in China and any potential "drag" on the U.S. economy. As noted in the Schwab Market Perspective: Watching and Waiting, the Fed faces a conundrum. The latest statement issued by the FOMC noted several risks to growth and getting inflation closer to its 2% target; but kept the possibility of further rate hikes this year on the table due to the strength in the labor market. A majority of the Fed seems to still want to move toward normalization, but they also don’t want to have to undo actions that may be premature. A lot can and will happen between now and the Fed’s March meeting but it seems increasingly likely that it will remain on hold at least through the first quarter. Read more at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

Economic data will continue to pour in tomorrow, beginning with the Philly Fed Manufacturing Index, forecasted to show a slight improvement to a level of -3.0 for February from the -3.5 in January, but a level below zero denotes contraction in activity, as well as weekly initial jobless claims, with economists expecting a reading of 275,000, above the 269,000 posted the week prior. Also, the Index of Leading Economic Indicators for January will be released, forecasted to match December's 0.2% m/m decline, as well as MBA Mortgage Applications.

Europe higher as miners rebound and financials get a boost, Asia finishes mostly lower

European equities moved broadly higher, buoyed by a rebound in mining stocks and as crude oil prices showed some resiliency to support oil & gas issues in the face of yesterday's disappointing oil production agreement that caused a downside reversal for oil prices.  In economic news, the U.K. unemployment rate came in slightly higher than expected, while eurozone construction output declined. The euro dipped versus the U.S. dollar and bond yields in the region were mixed. For more on the recent wild swings in the markets, see the Schwab Center for Financial Research's article Market Volatility: What Investors Should Know, at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Stocks in Asia finished mostly to the downside, despite the solid gains in the U.S. yesterday, which caught up to the rest of the world's rally that occurred on Monday when the U.S. markets were closed for Presidents' Day. Pressure on commodity stocks weighed on the markets in the region, with crude oil prices giving up an early gain yesterday to finish lower as an agreement between major world oil producers failed to deliver a hoped-for output cut. Also, global growth concerns continued to weigh on sentiment. Stocks in Australia, South Korea, and Hong Kong fell, while another rise in the yen snapped a solid two-day winning streak in Japan, and despite a report that showed the Asian nation's December machine orders rebounded by 4.2% m/m, after falling 14.4% in the prior month. However, mainland Chinese stocks gained amid reports that the government is accelerating efforts to support its slowing economy, while Indian securities also bucked the trend and advanced, buoyed by a rebound in the rupee from near a record low.

Tomorrow's international economic calendar will hold trade data from Japan, employment statistics from Australia, CPI and PPI from China, CPI from France, and the current account balance from the eurozone.

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.