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Tuesday, May 17, 2016

Markets Fall Back from Yesterday's Rally

Charles Schwab: On the Market
Posted: 5/17/2016 4:15 PM ET

Markets Fall Back from Yesterday's Rally

Despite upbeat economic data and solid results from Dow component Home Depot, U.S. equities finished with solid losses, erasing yesterdays' gains. Treasuries were mixed, crude oil and gold prices were higher, while the U.S. dollar was modestly lower.

The Dow Jones Industrial Average (DJIA) fell 182 points (1.0%) to 17,529, the S&P 500 Index lost 20 points (0.9%) to 2,047, and the Nasdaq Composite declined 60 points (1.3%) to 4,716. In heavy volume, 1.0 billion shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.59 to $48.31 per barrel, wholesale gasoline increased $0.02 to $1.63 per gallon, and the Bloomberg gold spot price gained $4.33 to $1,278.49 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 94.50.

Dow member Home Depot Inc. (HD $132) reported 1Q earnings-per-share (EPS) ex-items of $1.44, above the $1.35 FactSet estimate, as revenues grew 9.0% year-over-year (y/y) to $22.8 billion, compared to the forecasted $22.4 billion. 1Q same-store sales rose 6.5% y/y, north of the projected 5.2% gain, with U.S. sales increasing 7.4%. The company said its stronger-than-expected start to the year came as it saw broad-based growth across the store in a quarter marked by week-to-week demand spikes caused by weather variability. HD raised its full-year EPS and revenue guidance. Shares were lower despite the results, as some analysts were disappointed as the company said on a conference call that April same-store sales growth was 4.3%, a continued slowdown from the 6.7% growth in March and the 10.2% gain in February.

TJX Companies Inc. (TJX $76) posted 1Q profits of $0.76 per share, above the estimated $0.71, as revenues increased 10.0% y/y to $7.5 billion, compared to the projected $7.3 billion. Same-store sales rose 7.0% y/y, versus the forecasted 3.2% increase. TJX raised its full-year guidance. Shares were modestly higher.

Agilent Technologies Inc. (A $44) achieved fiscal 2Q EPS ex-items of $0.44, topping the expected $0.39, as revenues grew 6.0% y/y to $1.0 billion, north of the anticipated $983 million. The company raised its full-year guidance. Shares finished nicely higher.

Housing construction and inflation rise, industrial production rebounds

Housing starts (chart) for April rose 6.6% month-over-month (m/m) to an annual pace of 1,172,000 units, compared to the Bloomberg forecast of a 1,125,000 unit rate. March's starts were upwardly revised to an annual pace of 1,099,000. Building permits gained 3.6% m/m in April to an annual rate of 1,116,000, after March's downward revision to a 1,077,000 rate, and below the expected annual pace of 1,135,000 units.

The Consumer Price Index (CPI) (chart) was up 0.4% m/m in April—the biggest gain since February 2013—above forecasts of a 0.3% increase, while March's 0.1% rise was unrevised. The core rate, which strips out food and energy, gained 0.2% m/m, matching expectations, and compared to March's unrevised 0.1% gain. Y/Y, prices were 1.1% higher for the headline rate, up 2.1% for the core rate, both matching projections. March's y/y figures showed an unrevised 0.9% rise and an unadjusted 2.2% increase for the headline and core rates respectively.

The report adds to a recent string of data that has suggested inflation may be beginning to bud and is moving toward the Fed's projected target. However, in its statement following the April monetary policy meeting, which tomorrow we will get the minutes from, the Fed noted that inflation has continued to run below its longer-run objective. For more on the Fed and the bond markets see the video by Schwab's Chief Fixed Income Strategist, Kathy Jones and Managing Director of Trading and Derivatives, Randy Frederick, titled Is the Market Underestimating the Fed?, at www.schwab.com/insights. Also check out Kathy Jones' article, Mixed Signals From the Bond Market: Something's Got to Give, at www.schwab.com/marketinsight. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick.

Industrial production (chart) grew 0.7% m/m in April, easily topping estimates of a 0.3% rise, and rebounding from March's downwardly revised 0.9% decrease. Manufacturing production increased 0.3% and utilities output jumped 5.8%, while mining production dropped 2.3%. Capacity utilization rose to 75.4% from March's upwardly revised 74.9%, and compared to projections for a 75.0% rate. Capacity utilization is 4.6 percentage points below its long-run average.

Today's rebound in industrial production and stronger-than-expected growth in housing starts are likely welcomed data points amid the backdrop of growing recession concerns. Also, although below expectations, the solid increase in building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, adds credence to Schwab's Chief Investment Strategist Liz Ann Sonders' article, Recession: Your Time is Gonna Come … But Not Yet, where she points out that leading indicators are not signaling a recession. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders. For analysis on the stock markets see our latest article, What Will It Take to Get Stocks to New Highs?, at www.schwab.com/insights. Be sure to follow Schwab on Twitter: @schwabresearch.

Treasuries were mixed, as the yield on the 2-year note rose 4 basis point (bp) to 0.83%, while the yield on the 10-year note was unchanged at 1.76% and the 30-year bond rate dipped 1 bp to 2.58%.

In addition to the aforementioned release of the Fed's meeting minutes, the only other item on tomorrow's economic calendar is MBA Mortgage Applications.

Europe mixed on data and eased Brexit concerns, Asia mostly higher

European equities finished mixed with traders grappling with what some U.S. economic data means for Fed policy. Also, Italian stocks saw pressure on a lowered economic growth forecast by Italy's national statistics institute and festering banking sector uneasiness, while automakers were lower amid analyst downgrades in the sector. The markets digested some earnings and economic data in the region, while U.K. stocks found modest support as polls eased Brexit concerns. The British pound moved higher versus the U.S. dollar as a poll indicated support is growing for the U.K. to stay in the European Union (EU), per Bloomberg. Concerns have grown about the possibility of a U.K. exit from the EU, known as a Brexit, and last week, the Bank of England cut its economic growth forecast and warned that a vote for a Brexit would hamper economic activity. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses the possible implications in his article, Brexit: 5 Things Investors Need to Know. Read more at www.schwab.com/oninternational, and be sure to follow Jeff on Twitter: @jeffreykleintop. In economic news, U.K. inflation came in cooler than expected for April, while the eurozone trade surplus widened more than anticipated for March. The euro ticked higher versus the U.S. dollar, while bond yields in the region were mostly lower.

Stocks in Asia finished mostly to the upside, with the global markets getting a lift from yesterday's extended rally in crude oil prices that boosted the energy sector. Japanese securities advanced, supported by some late-day weakness in the yen, while traders looked ahead to tonight's release of the nation's 1Q GDP, which is expected to show the country narrowly avoided a technical recession of back-to-back quarters of contraction. Japan's 1Q GDP is projected to show a 0.1% quarter-over-quarter (q/q) pace of growth, after 4Q's 0.3% decline. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, notes in his latest article, Japan: Another Recession Coming?, Japan’s economy struggled in the first quarter and the second quarter is not shaping up to be much better. Yet economists expect a sharp rebound in economic growth this year. We see hefty headwinds offsetting the potential positives for Japan. Read more at www.schwab.com/marketinsight, and be sure to follow Jeff on Twitter: @jeffreykleintop. Mainland Chinese stocks declined in choppy action amid festering economic concerns, while those traded in Hong Kong rose amid optimism regarding the nation's economic reforms, per Bloomberg. Australian equities advanced, with oil & gas issues jumping, along with basic materials stocks, more than offsetting a decline in financials, with traders digesting the May meeting minutes from the Reserve Bank of Australia (RBA), where it unexpectedly cut its benchmark interest rate. The report showed the driver of the RBA's decision was the outlook for inflation being revised lower. Lastly, India's markets rose, aided by the strength in the energy sector, while South Korean stocks finished flat.

In addition to Japan's GDP report, other items on the international docket for tomorrow include CPI from the Eurozone, employment data from Germany, and construction output out of Italy.

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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