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Tuesday, March 15, 2016

Uncertainty Remains Ahead of Fed

Charles Schwab: On the Market
Posted: 3/15/2016 4:15 PM ET

Uncertainty Remains Ahead of Fed

U.S. stocks finished another choppy session mixed following some divergent domestic economic reports and with caution remaining high ahead of tomorrow's Fed monetary policy decision. Retail sales for February were mixed, while a read on regional manufacturing activity surprisingly moved into expansion territory. Treasuries were nearly unchanged, as was the U.S. dollar, while gold and crude oil prices were lower. Equity news centered on some second-tier earnings results, while Eli Lilly gave an update on one of its drug trials.

The Dow Jones Industrial Average (DJIA) rose 22 points (0.1%) to 17,251, the S&P 500 Index declined 4 points (0.2%) to 2,016, while the Nasdaq Composite lost 22 points (0.5%) to 4,729. In moderate volume, 831 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.79 to $36.34 per barrel, wholesale gasoline was $0.01 lower at $1.41 per gallon and the Bloomberg gold spot price lost $2.18 to $1,233.09 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was unchanged at 96.61.

Valeant Pharmaceuticals International Inc. (VRX $34) reported preliminary 4Q earnings-per-share ex-items of $2.50, below the $2.62 FactSet estimate, on revenues of $2.8 billion, which were roughly in line with forecasts. The company issued much softer-than-expected 2016 EPS and revenue guidance. VRX said the challenges of the past few months are not yet behind it. The company added, "We have assumed lower growth in our U.S. dermatology, gastrointestinal, and woman's health portfolios, as well as certain geographies like Western Europe, while keeping our expenses largely unchanged." Shares fell over 50%.

Diversified global manufacturer, Dover Corp. (DOV $61), warned that it expects its 1Q results will be well below its prior expectations, entirely driven by its businesses with exposure to U.S. oil & gas markets. In response DOV said it is increasing its restructuring and cost management activities. DOV was lower.

Shares of Eli Lilly and Co. (LLY $71) finished lower after the drugmaker changed the primary goal of a test of its potential Alzheimer's disease drug to focus solely on cognition instead of also function, which will be the key secondary endpoint for the study. LLY said it is important to note that the change affects the study's data analysis but does not affect anything related to the actual conduct of the trial.

February retail sales report headlines mixed domestic economic docket

Advance retail sales (chart) for February were down 0.1% month-over-month (m/m), versus Bloomberg's forecasted 0.2% decline, while January's 0.2% gain was adjusted to a 0.4% decline. Also, sales ex-autos dipped 0.1% m/m, versus the expected 0.2% decrease, while January's 0.1% gain was revised to a 0.4% fall. Sales ex-autos and gas were higher by 0.3% m/m for February, versus the anticipated 0.2% increase, while January's 0.4% gain was revised to a 0.1% dip. The retail sales control group, a figure used to help calculate GDP, came in flat, compared to the projected 0.2% gain, and down from the prior month's negatively revised 0.2% increase. A solid drop in sales at gasoline stations weighed on the report, while sales at furniture, motor vehicle, electronics & appliances, and grocery store outlets all dipped. However, sales of building materials & gardening, clothing, sporting goods, health & personal care, and food services all posted solid gains.

As noted in the Schwab Market Perspective: Neutral Does Not Mean Boring, investors are trying to get a handle on domestic economic growth vs. the risk of a recession. We remain in the no recession camp, but the domestic economic picture is muddled and concerning. We continue to recommend that investors have a neutral allocation toward equities in their portfolio. Read more at, and follow us on Twitter: @schwabresearch.

The Producer Price Index (PPI) (chart) showed February prices at the wholesale level were down 0.2% m/m, matching expectations, while January's 0.1% increase was unrevised. The core rate, which excludes food and energy, was flat m/m, compared to forecasts of a 0.1% advance, and January's 0.4% increase was unadjusted. Year-over-Year (y/y), the headline rate was unchanged, versus projections of a 0.1% rise, and the core PPI was up 1.2% last month, in line with estimates. In January, producer prices were down 0.2% and up 0.6% y/y for the headline and core rates, respectively.

The Empire Manufacturing Index showed March output from the New York region unexpectedly moved modestly into expansion territory (a reading above zero), jumping to 0.6 from February's unrevised -16.6 level. Forecasts called for an improvement to -10.5.

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month held at February's 58 level—the lowest since May 2015—versus estimates calling for 59. However, builder confidence remained above 50, which separates good and poor conditions, for the twenty-first straight month. The NAHB noted the report indicates the single-family market continues to make slow but steady progress, though builders continue to report problems regarding a shortage of lots and labor.

Business inventories (chart) ticked 0.1% higher m/m in January, versus the forecasted flat reading, and December's 0.1% rise was revised to unchanged. Sales declined 0.4% m/m, and the inventory-to-sales ratio—the time it would take to deplete inventories at the current sales pace—rose to 1.40 from December's 1.39 pace.

Treasuries finished unchanged, as the yields on the 2-year note and the 10-year notes, along with the 30-year bond, were flat at 0.97%, 1.97% and 2.73%, respectively. For our latest commentary on the wild swings in the markets, see Schwab's Director of Income Planning, Rob Williams', article, Market Volatility: What If You Don't Have Time to Recover?, at and follow us on Twitter: @schwabresearch.

Tomorrow, the U.S economic calendar will remain robust, with MBA mortgage applications and housing starts and building permits giving us a look at the housing market. Starts are expected to rise 4.6% m/m in February to an annual rate of 1,150,000 units and permits are anticipated to dip 0.2% to an annual rate of 1,200,000 units. Also, the Federal Reserve will release its February industrial production and capacity utilization report, with production forecasted to decline 0.3% m/m after the prior month's 0.9% gain, and utilization is projected to dip to 76.9% from 77.1%. Moreover, the other half of the February inflation picture will be developed with the release of the Consumer Price Index, with the headline rate estimated to decline 0.2% m/m after being flat in January, and the core rate projected to rise 0.2%, following the prior month's 0.3% increase.

However, the headlining report will be the afternoon Federal Open Market Committee's (FOMC) monetary policy decision. The Fed will deliver updated economic projections and Chairwoman Janet Yellen will conduct her press conference following its statement. The Fed is not expected to change its stance but its statement could be poised to command attention for clues on the Central Bank's outlook given the tough backdrop of heightened global volatility, signs of rising inflation, and the continued improvement in the labor market. As noted in the Schwab Market Perspective, the roller coaster ride in stocks is reflected in the mixed readings among recent economic releases. This, combined with signs some inflation has re-emerged, complicates the Fed’s upcoming decisions on rates and adds to uncertainty. The Fed has been put into a bit of a pickle and is still biased toward normalizing policy, but the market may be underestimating the chances of further hikes this year. Read more at, and follow us on Twitter: @schwabresearch.

Europe and Asia lower ahead of Fed decision

European equities finished lower, amid some likely caution ahead of tomorrow's monetary policy decision from the Fed in the U.S., while the Bank of Japan expectedly kept its policy stance unchanged. Traders also digested the mixed economic reports out of the U.S., while recent pressure on crude oil prices weighed on oil & gas issues. The euro traded slightly lower versus the U.S. dollar, while bond yields in the region rose.

Stocks in Asia finished mostly to the downside, with traders likely treading cautiously ahead of tomorrow's monetary policy decision out of the U.S., while digesting the announcement from the Bank of Japan (BoJ) to maintain its policy stance. Japanese equities declined, with the yen showing some strength late in the session on the heels of the BoJ's expected decision to keep its asset purchases unchanged and its negative interest rate policy (NIRP) unadjusted. The BoJ's late-January decision to adopt a NIRP and last week's move by the European Central Bank to go further into negative interest rate territory and expand its stimulus measures have been met with mixed responses, fostering volatility in the global markets. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers analysis of the global monetary policy landscape in his articles, Negative Interest Rate Policy Adds Up To Less than Zero for Investors and Central Banks to the Rescue?, at Also, follow Jeff on Twitter: @jeffreykleintop.

Australian securities fell, as lower oil prices weighed on the energy sector, and as financials and basic materials issues also saw some pressure, while South Korean listings dipped, and India's market pulled back from its recent rally in the wake of the BoJ's decision. Stocks in Hong Kong traded lower, but those traded in mainland China showed some late-day resiliency to close higher, amid suspected buying from state-backed funds and reports that the People's Bank of China drafted rules for a so-called Tobin tax that would help curb currency speculation, per Bloomberg. China is set to conclude its National People's Congress tomorrow.

Tomorrow's international economic calendar will be fairly light with reports slated for release to include employment data out of the U.K. and South Korea's unemployment rate.

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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