Posted: 4/13/2016 4:15 PM ET
Markets Notch a Second Day of Solid Gains
Despite a slate of somewhat disappointing economic data, U.S. equities rallied for a second-straight day following a broad-based jump in Europe, with global sentiment getting a boost from another favorable Chinese economic report, and results from Dow member JPMorgan Chase & Co's bolstering financials. Treasuries were mixed, and gold was lower, while the U.S. dollar rallied.
The Dow Jones Industrial Average (DJIA) jumped 187 points (1.1%) to 17,908, the S&P 500 Index increased 21 points (1.0%) to 2,082, and the Nasdaq Composite rallied 75 points (1.6%) to 4,947. In heavy volume, 987 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.41 to $41.76 per barrel, wholesale gasoline was unchanged at $1.53 per gallon and the Bloomberg gold spot price declined $13.41 to $1,242.22 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.9% higher at 94.75.
Dow member JPMorgan Chase & Co. (JPM $62) reported 1Q earnings-per-share (EPS) of $1.35, above the $1.26 FactSet estimate, as revenues declined 3.0% year-over-year (y/y) to $24.1 billion, versus the expected $23.4 billion. JPM posted better-than-expected fixed income and equity trading revenue, along with improved net interest income, which was bolstered by the December Fed rate hike. The company's Chief Executive Officer Jamie Dimon said even in a challenging market, "clients continue to turn to us in the global markets." He added that the U.S. consumer remains healthy and consumer credit trends are favorable. Shares traded nicely higher. JPM's 2016 outlook was received positively by analysts, but they did caution that the company's results may not provide a strong read-through for others in the banking sector, which have yet to report.
CSX Corp. (CSX $26) posted 1Q EPS of $0.37, roughly in line with forecasts, with revenues declining 14.0% y/y to $2.6 billion, compared to the forecasted $2.7 billion. The rail company said while it delivered strong efficiency gains in 1Q, it continues to expect full-year EPS to decline in 2016 as a result of ongoing coal headwinds combined with other market fundamentals. CSX was higher.
March retail sales miss forecasts
Advance retail sales (chart) for March declined 0.3% month-over-month (m/m), versus the Bloomberg forecast of a 0.1% gain and February's adjusted flat reading. Also, last month's sales ex-autos rose 0.2% m/m, versus expectations of a 0.4% increase and the previous month's revised flat reading. Sales ex-autos and gas ticked 0.1% higher m/m for March, versus the anticipated 0.3% increase and February's upwardly revised 0.6% rise. Finally, the retail sales control group, a figure used to help calculate GDP, increased 0.1%, compared to the projected 0.4% gain and the prior month's upwardly revised 0.1% rise. Auto sales fell solidly, while clothing and restaurant sales moved lower. However, building materials and gasoline station sales moved higher.
Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest Schwab Sector Views: What's Wrong with Health Care?, data on retail sales and consumer confidence suggest a still-cautious shopper, but we think these reports underestimate what is actually occurring. Our marketperform rating remains in place for the consumer discretionary sector, as the American consumer continues to present a mixed picture. Schwab's Chief Investment Strategist Liz Ann Sonders notes in her article, Recession: Your Time is Gonna Come … But Not Yet, although we’re unlikely to exit from a muddle-through state, the risk of recession is objectively low. Read more at www.schwab.com/marketinsight and follow Schwab and Liz Ann on Twitter: @schwabresearch and @lizannsonders.
The Producer Price Index (PPI) (chart) in March dipped 0.1% m/m, versus expectations of a 0.2% increase and February's unrevised 0.2% decline. The core rate, which excludes food and energy, dipped 0.1% m/m, compared to forecasts of a 0.1% advance and February's unadjusted flat reading. Y/Y, the headline rate was 0.1% lower, versus projections of a 0.3% rise, and the core PPI was up 1.0% last month, compared to estimates of a 1.3% increase. In February, producer prices were flat and up 1.2% y/y for the headline and core rates, respectively.
Business inventories (chart) dipped 0.1% m/m in February, matching forecasts, and versus January's negatively revised 0.1% decline. Sales fell 0.4% m/m, and the inventory-to-sales ratio—the time it would take to deplete inventories at the current sales pace—held at January's upwardly revised 1.41 pace.
The MBA Mortgage Application Index jumped 10.0% last week, after gaining 2.7% in the previous week. The surge came as an 11.3% gain for the Refinance Index was met with an 8.4% increase for the Purchase Index. The average 30-year mortgage rate fell 4 basis points (bps) to 3.82%.
Treasuries were mixed, as the yield on the 2-year note ticking 1 bp higher to 0.75%, while the yields on the 10-year note and the 30-year bond were 2 bps lower at 1.76% and 2.58%, respectively. For more on fixed income investing, see Schwab's Director of Income Planning, Rob Williams', article, How to Build a Bond Portfolio, at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.
The Fed delivered its Beige Book report, a tool summarizing economic activity across the nation used by the Federal Open Market Committee (FOMC) to prepare for its next monetary policy meeting scheduled to end April 27. Within the report, the Fed said that the economy continued to expand moderately in most districts, noting a general pickup in manufacturing, as well as an uptick in overall employment. Additionally, inflation was modestly higher across the majority of districts, with wages rising in all those districts, except for Atlanta. As noted in the Schwab Market Perspective: What a Quarter! What's Next?, the April Fed meeting is not off the table for a hike, but June seems more likely. We continue to believe the FOMC, in general, wants to get to a more “normal” level of interest rates but that they’ll continue to be cautious about how they go about it. As we’ve shown in the past, historically, stock performed much better when the Fed was moving slowly, as will likely be the case this cycle. For more on the Fed, see Schwab's Chief Fixed Income Strategist, Kathy Jones', article, Will Rising U.S. Debt Levels Keep the Fed on Hold?. Read both articles at www.schwab.com/marketinsight, and be sure to follow Schwab and Kathy on Twitter: @schwabresearch and @kathyjones.
Tomorrow's economic calendar will offer investors a look at weekly initial jobless claims, forecasted to increase to a level of 270,000 from the prior week's 267,000, as well as the Consumer Price Index (CPI), with economists expecting a 0.2% m/m increase for March, while excluding food and energy, the core rate is anticipated to also rise 0.2% m/m.
Europe and Asia higher on China data and bank stock rally
European equities finished broadly higher, led by a jump in financials following JPMorgan Chase & Co's upbeat results in the U.S. and on Italy's recent agreement to set up a state-backed fund to help banks combat bad loans. Also, another upbeat Chinese economic report supported global sentiment as it suggested the nation's economy is stabilizing. Basic materials and oil & gas issues got a boost from the China data, which appeared to overshadow some sluggishness in oil prices as the U.S. dollar rallied and headlines that dampened recently renewed optimism that an agreement on a production freeze could come from this weekend's meeting among major oil producers. In economic news, eurozone industrial production declined more than expected m/m in February. The euro fell versus the U.S. dollar and bond yields in the region were mostly lower.
Stocks in Asia finished higher across the board, with the global markets buoyed by the energy sector as crude oil prices rallied yesterday, bolstered by resurfaced optimism a meeting this weekend will yield a production cut. Also, the yen continued its retreat from its recent surge and China delivered another relatively favorable economic report that added to a string of data suggesting the world's second-largest economy is stabilizing. China's March exports rebounded y/y by 11.5%, from February's 25.4% drop, and compared to the expected rise of 10.0%. The upbeat trade data is part of a flood of data out of China slated for this week, headlined by the release of its 1Q GDP report, projected to show growth slowed slightly to 6.7% y/y, from 6.8% in 4Q. Be sure to read Schwab's Chief Global Investment Strategist, Jeffrey Kleintop's, CFA, article, Trust but Verify: Five Independent Indicators of China's Economy, and Schwab's Director of International Research, Michelle Gibley's, CFA, article, 5 Reasons China Won't Crash the Global Economy in 2016, at www.schwab.com/oninternational, and follow Jeff and Schwab on Twitter: @jeffreykleintop and @schwabresearch. However, stocks in South Korea missed out on the action, as markets in the nation were closed for a holiday.
Tomorrow's international economic calendar will offer employment stats from Australia, loan data from China, India's trade balance, and CPI from Italy and the eurozone. In central bank action, the Bank of England will meet, with no change to its monetary policy stance expected.
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.