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Thursday, May 26, 2016

A Pause from the Recent Run

Charles Schwab: On the Market
Posted: 5/26/2016 4:15 PM ET

A Pause from the Recent Run

U.S. equities finished mixed and near the unchanged mark, with financials giving back some of their recent gains and energy stocks losing some steam amid a pause in the recent rally in crude oil prices. News on the equity front centered on some upbeat earnings reports from the retail sector. Treasuries finished higher following a mixed read on U.S. durable goods orders, while the U.S. dollar and gold were lower.

The Dow Jones Industrial Average (DJIA) fell 23 points (0.1%) to 17,828, the S&P 500 Index was nearly unchanged at 2,091, while the Nasdaq Composite ticked 7 points (0.1%) higher to 4,902. In moderate volume, 780 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude fell $0.08 to $49.48 per barrel, wholesale gasoline was $0.02 lower at $1.63 per gallon, and the Bloomberg gold spot price declined $4.08 to $1,220.33 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 95.17.

Costco Wholesale Corp. (COST $150) reported fiscal 3Q earnings-per-share (EPS) of $1.24, two cents north of the FactSet estimate, as revenues increased 2.6% year-over-year (y/y) to $26.8 billion, below the projected $27.1 billion. 3Q same-store sales were flat y/y, versus the expected 0.7% gain, while excluding the negative impacts from gasoline price deflation and foreign exchange, sales were up 3.0%. Shares were nicely higher.

Williams-Sonoma Inc. (WSM $52) posted 1Q EPS ex-items of $0.53, above the estimated $0.50, as revenues grew 6.5% y/y to $1.1 billion, roughly in line with forecasts. Same-store sales rose 4.5% y/y, compared to the estimated 4.4% increase. WSM issued full-year guidance that was mostly in line with expectations. WSM finished slightly higher.

PVH Corp. (PVH $94) achieved 1Q profits ex-items of $1.50 per share, topping the expected $1.43, with revenues rising 2.0% y/y to $1.9 billion, roughly in line with forecasts. The parent of Tommy Hilfiger and Calvin Klein raised its full-year EPS outlook. Shares moved solidly higher.

Dollar Tree Inc. (DLTR $89) announced 1Q EPS ex-items of $0.89, above the forecasted $0.81, as revenue surged 133.6% y/y to $5.1 billion, roughly in line with expectations, boosted by results from Family Dollar. DLTR upped its full-year profit outlook and shares rallied.

Durable goods orders mixed, jobless claims fall more than expected

April preliminary durable goods orders (chart) jumped 3.4% month-over-month (m/m), compared to Bloomberg's estimate of a 0.5% increase and March's upwardly revised 1.9% gain. The volatile headline figure was bolstered by a surge in non-defense aircraft. Ex-transportation, orders rose 0.4% m/m, versus the 0.3% forecasted increase, and March's positively revised 0.1% gain. Computers and electronic products showed solid growth. However, orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, declined 0.8%, compared to projections of a 0.3% increase, and following the downwardly revised 0.1% dip in the month prior.

As noted in the Schwab Market Perspective: Corporate Caution…Global Recession?, the manufacturing side of the U.S. economy continues to flirt with a recession. There are many theories about why productivity has disappointed during this recovery, but a contributor seems to be companies being willing to add to labor but not spend money on equipment or technology that could help to boost productivity. This is the component we would like to see turn in order to fuel the next equity move higher. If corporate confidence improves, it should lead to increased capital expenditures, which should lead to an increase in productivity, and in turn economic activity. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Weekly initial jobless claims (chart) fell by 10,000 to 268,000 last week, versus estimates calling for claims to decrease to 275,000, as the prior week's figure was unrevised at 278,000. The four-week moving average rose by 2,750 to 278,500, while continuing claims increased 10,000 to 2,163,000, north of the estimated level of 2,142,000.

Pending home sales jumped 5.1% m/m in April, versus projections of a 0.7% rise and following the upwardly revised 1.6% gain registered in March. Compared to last year, sales were 2.9% higher, versus forecasts of a 0.2% increase. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which rose slightly more than expected in April.

The Kansas City Fed Manufacturing Activity Index for May unexpectedly declined to -5 from April's -4 level, and compared to the projected rise to -3, with a reading south of zero depicting contraction.

Treasuries were higher, with the yield on the 2-year note declining 5 basis points (bps) to 0.88%, while the yields on the 10-year note and the 30-year bond fell 4 bps to 1.83% and 2.63%, respectively. For our latest analysis on a potential Fed rate hike, see our article, What If the Fed Raises Interest Rates?, at www.schwab.com/insights. Be sure to follow Schwab on Twitter: @schwabresearch. Also, Schwab's Chief Investment Strategist, Liz Ann Sonders discusses why the Fed appears itchier than ever to raise rates again in her article, Sympathy for the Devil in the Details of Wage Growth, at www.schwab.com/marketinsight, and follow Liz Ann on Twitter: @lizannsonders.

Please note: the U.S. bond markets will close early at 2 p.m. ET in observance of the upcoming Memorial Day holiday.

For tomorrow, investors will get a second look (of three) at 1Q GDP, forecasted to be revised to a 0.9% annualized quarter-over-quarter (q/q) rate of expansion, while personal consumption is expected to be readjusted higher to a 2.1% q/q increase. As well, the final University of Michigan Consumer Sentiment Index is anticipated to tick lower to a level of 95.4 (economic calendar).

Europe and Asia tick higher as global markets continue to rise

European equities finished modestly higher, extending their rally to three days, with basic materials stocks rising on strength in mining issues and automakers gaining noticeable ground. However, financials saw pressure, and energy issues lagged as crude oil prices dipped after their recent run. The euro was higher and the British pound dipped versus the U.S. dollar, while bond yields in the region were mixed. The pound has rallied as of late on growing optimism the U.K. will vote next month against leaving the European Union (EU), known as a Brexit. In economic news, U.K. 1Q GDP was unrevised at a 0.4% quarter-over-quarter pace of expansion, as expected, but down from the 0.6% growth seen in 4Q. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses in his article,  Brexit: 5 Things Investors Need to Know, and how Eight Years Later: Europe's Economy is Back and its Stocks are Leading Global Markets. Read both articles at www.schwab.com/oninternational, and be sure to follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished modestly higher, with the global markets continuing to chug higher on improved sentiment regarding a potential rate hike in the U.S., while the energy sector has been buoyed by the recent rally in crude oil prices. Japanese securities ticked slightly higher, giving up early gains as the yen jumped late in the session. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers analysis of Japan in his latest article, Japan: Another Recession Coming?, at www.schwab.com/oninternational.

Mainland Chinese stocks rose modestly, snapping a two-session losing streak, and those traded in Hong Kong ticked higher ahead of a read on the region's trade balance. After the closing bell, Hong Kong's April trade deficit narrowed by a larger-than-expected amount with both exports and imports falling at slower rates than anticipated. Australian equities gained modest ground, led by basic materials and oil & gas issues, and India's markets rallied, aided by the recently improved global sentiment and forecasts of higher-than-average rainfall in the monsoon season, while South Korean listings declined.

Items set for release on the international economic calendar tomorrow include: PPI from Japan, industrial profits from China, consumer confidence from France, trade data from Spain, as well as consumer and business confidence from Italy.

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