Stocks Finish Higher Ahead of Jobs Report

Charles Schwab: On the Market

Posted: 3/3/2016 4:15 PM ET

Stocks Finish Higher Ahead of Jobs Report

U.S. stocks pared early losses and finished the trading day higher ahead of tomorrow's release of the widely watched labor report for February. Crude oil prices oscillated around the unchanged mark before ultimately finishing mildly to the downside, while the U.S. dollar was also lower and Treasuries and gold were higher. In economic news, traders digested the ISM's services sector report which showed continued expansion despite hitting a two-year low. On the equity front, consumer staples faced a bit of a headwind, courtesy of some disappointing results from Costco and Kroger.

The Dow Jones Industrial Average (DJIA) rose 45 points (0.3%) to 16,944, the S&P 500 Index was 7 points (0.4%) higher at 1,993, and the Nasdaq Composite added 4 points (0.1%) to 4,707. In heavy volume, 1.2 billion shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.09 to $34.57 per barrel and wholesale gasoline ticked $0.01 lower to $1.30 per gallon, while the Bloomberg gold spot price gained $21.67 to $1,261.65 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.7% lower at 97.54.

Costco Wholesale Corp. (COST $152) reported fiscal 2Q earnings-per-share (EPS) of $1.24, below the $1.28 FactSet estimate, as revenues rose 2.6% year-over-year (y/y) to $28.2 billion, versus the forecasted $28.5 billion. 2Q same-store sales grew 1.0% y/y, compared to the projected 0.9% increase. Additionally, COST said its February same-store sales were flat y/y, below forecasts calling for a 1.7% gain. Shares moved lower.

American Eagle Outfitters Inc. (AEO $15) posted 4Q EPS of $0.42, matching expectations, as revenues rose 3.0% y/y to $1.1 billion, roughly in line with estimates. Same-store sales grew 4.0% y/y, versus the projected 4.1% increase. The company's gross margin severely missed the Street's expectations, due to higher markdowns, and shares traded lower, even as it issued stronger-than-expected 1Q earnings and same-store sales guidance.

Kroger Co. (KR $38) announced 4Q profits of $0.57 per share, north of the anticipated $0.54, with revenues rising 6.5% y/y to $26.2 billion, south of the estimated $26.3 billion. Same-store sales increased 3.9% y/y, versus the forecasted 4.4% increase. KR's full-year EPS outlook came in mostly in line with forecasts. Shares closed sharply lower.

ISM services sector activity report signals continued expansion

The Institute for Supply Management (ISM) non-Manufacturing Index (chart) dipped to 53.4 in February—the lowest since February 2014— from 53.5 in January, but Bloomberg forecasted a decline to 53.1 and a reading above 50 denotes expansion for the all-important services sector. Growth in business activity/production accelerated, though new order expansion decelerated and employment fell into contraction territory. The ISM said respondents projected slight optimism regarding the overall economy.

The report likely gave the markets a relative sigh of relief as recessionary talk has gotten louder as of late. Schwab's Chief Investment Strategist Liz Ann Sonders notes in in her latest article, Good Times Bad Times…and Lots in Between, apocalyptic scenarios abound, but investors who have defaulted to optimism historically have been rewarded. We expect continued bouts of volatility and greater frequency of corrections. But the glass is not empty. The story almost no one is telling is that the glass is at least half full. Read more, including her top-10 list of signs that the landscape may be improving at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

The final Markit U.S. Services PMI Index was revised to 49.7 in February from the preliminary level of 49.8, versus expectations of an upwardly revised 50.0, and down from the 53.2 reading registered in January. A reading below 50 denotes contraction. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently.

Weekly initial jobless claims (chart) grew by 6,000 to 278,000 last week, versus estimates calling for 270,000 as the prior week's figure was unrevised at 272,000. The four-week moving average declined by 1,750 to 270,250, while continuing claims rose by 3,000 to 2,257,000, north of forecasts of 2,250,000.

Final 4Q nonfarm productivity (chart) was revised to a 2.2% decline on an annualized basis, from the preliminary 3.0% drop, versus expectations of a revised 2.9% decrease. 3Q productivity was revised lower to a 2.0% increase. Also, unit labor costs were adjusted to a 3.3% rise, from the 4.5% increase initially reported, and compared to forecasts calling for a revision to a 4.3% gain. Unit labor costs rose by a downwardly revised 0.4% in 3Q.

Factory orders (chart) rose 1.6% month-over-month (m/m) in January, versus expectations of a 2.1% gain, while January's 2.9% drop was unadjusted. January durable goods orders—preliminarily reported last week—were revised to a 4.7% rise from the originally reported 4.9% jump.

Treasuries were higher, with the yield on the 2-year note flat at 0.84%, while the yield on the10-year note declined 1 basis point (bp) to 1.83%, and the 30-year bond rate decreased 3 bps to 2.66%. For more on the bond markets see Schwab's Chief Fixed Income Strategist, Kathy Jones', article, Don't Look Back: Surviving in a Low-Yield World, at www.schwab.com/marketinsight, and follow Kathy on Twitter: @kathyjones.

Tomorrow, the robust U.S. economic calendar will culminate with the release of the February nonfarm payroll report, projected to show job growth of 195,000, following the 151,000 gain posted in January. Private sector payrolls are anticipated to rise by 188,000 jobs, after the prior month's 158,000 increase. The unemployment rate is projected to remain at 4.9%, while average hourly earnings are estimated to grow 0.2% m/m, on the heels of January's 0.5% jump.

As noted in the Schwab Market Perspective: Confidence is Key, at this point the leading economic indicators continue to point to a decent U.S. economic picture. Further, other indicators are not consistent with an impending recession. U.S. consumers continue to improve their financial position and represent 69% of US GDP. The low unemployment rate and continued historically low initial claims for unemployment may finally be pressuring wages higher. This should help to boost consumer spending, illustrated by a nice 0.4% m/m gain in retails sales, which doesn’t foretell a coming recession. Read more at www.schwab.com/marketinsight, and follow us on Twitter: @schwabresearch.

The other report on tomorrow's docket is the January trade balance, projected to show the deficit widened to $44.0 billion, from $43.4 billion in December.

Europe rests after five-day rally, Asia mostly higher

European equities traded mostly lower, with the Stoxx Europe 600 Index halting a five-day rally ahead of tomorrow's February U.S. labor report, though industrials gained ground, along with oil & gas and mining stocks as the groups continued to recover. The euro was higher versus the U.S. dollar and bond yields in the region saw some pressure. Earnings reports came in mostly below expectations to weigh on the markets, while uncertainty regarding the future of the U.K. in the European Union festered on the heels of a softer-than-expected read on the nation's services sector activity for February. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses the possible implications of a U.K. exit in his article, Brexit: 5 Things Investors Need to Know, at www.schwab.com/marketinsight. Also, follow Jeff on Twitter: @jeffreykleintop. In other economic news, the Markit's final Eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—was revised higher to 53.0 in February, from the initial 52.7 reading, where economists had expected it to remain. A reading above 50 denotes growth, though the index was down from January's 53.6 level. Finally, eurozone retail sales rose more than expected for January.

Stocks in Asia finished mostly to the upside, with the markets in the U.S. and Europe posting a string of gains yesterday as economic data in those regions, along with the recoveries for commodity prices, have helped improve global growth sentiment. Japanese equities advanced for a third-straight session as the yen gave back some of late-yesterday's increase and banking stocks showed some strength. Australian securities increased, amid gains for basic materials and financial stocks, while a gauge of the nation's services sector activity moved back to a level depicting expansion for February. Indian equities rallied for a third day, as the initial disappointment regarding the nation's federal budget released over the weekend appeared to have turned to optimism upon further review. South Korean stocks finished higher, despite a hotter-than-expected read on the nation's February consumer price inflation.

Finally, Chinese stocks finished mixed, with the Shanghai Composite Index rising and the Hong Kong Hang Seng Index declining, as traders grappled with lingering optimism of further stimulus measures and a report suggesting a slowdown in growth out of the country's services sector. The Caixin/Markit China PMI Services Index declined to 51.2 for February, from 52.4 in January, but a reading above 50 denotes expansion. Schwab's Director of International Research, Michelle Gibley, CFA, offers analysis on China in her article, 5 Reasons China Won't Crash the Global Economy in 2016, at www.schwab.com/oninternational, and follow Schwab on Twitter: @schwabresearch.

The international economic docket for tomorrow will include the current account from India and Markit Retail PMIs for the eurozone, Germany, France and Italy, while Italy will also release 4Q GDP.

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.