Charles Schwab: On the MarketPosted: 5/31/2016 4:15 PM ET
Stocks Close Last Day in May Mixed
U.S. stocks came off the lows of the day to allow for a mixed finish among the major domestic equity indexes as Fed rate hike expectations remained elevated throughout the session. Ahead of Friday's jobs report, a busy domestic docked was highlighted by a solid personal income and spending report. Treasuries were higher, while traders will receive another heavy dose of economic data tomorrow. Gold and the U.S. dollar gained ground and crude oil prices were lower.
The Dow Jones Industrial Average (DJIA) decreased 86 points (0.5%) to 17,786, and the S&P 500 Index shed 2 points (0.1%) to 2,097, while the Nasdaq Composite gained 15 points (0.6%) to 4,948. In heavy volume, 1.4 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude declined $0.23 to $49.10 per barrel, wholesale gasoline was $0.3 lower at $1.61 per gallon, and the Bloomberg gold spot price increased $10.07 to $1,215.02 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 95.86.
Medtronic PLC. (MDT $80) reported fiscal 4Q earnings-per-share (EPS) ex-items of $1.27, one penny above the FactSet estimate, as revenues rose 4.0% year-over-year (y/y) to $7.6 billion, north of the expected $7.5 billion. MDT issued softer-than-expected earnings guidance for the current year. Shares finished lower.
Great Plains Energy Inc. (GXP $29) announced an agreement to acquire Westar Energy Inc. (WR $56) for $60.00 per share in cash and stock, with an equity value of about $8.6 billion. GXP traded lower, while WR gained solid ground.
Personal income and spending rise to kick off busy day/week
Personal income (chart) was 0.4% higher month-over-month (m/m) in April, matching the Bloomberg forecast and March's unrevised increase. Personal spending came in 1.0% higher m/m last month, above expectations of a 0.7% increase, and versus April's downwardly revised flat reading. The April savings rate as a percentage of disposable income declined to 5.4% from March's upwardly revised 5.9% rate. The PCE Deflator rose 0.3% m/m, matching forecasts. Compared to last year, the deflator was 1.1% higher, in line with estimates. Excluding food and energy, the PCE Core Index was 0.2% higher m/m, matching expectations, and the index was up 1.6% y/y, in line with estimates.
The Consumer Confidence Index (chart) unexpectedly declined to 92.6 in May from the upwardly revised 94.7 level in April, and compared to the estimated rise to 96.1. This was the lowest level since November as sentiment toward the present situation dropped m/m, while expectations of business conditions dipped. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—declined to -0.1 from the 1.4 posted last month.
The Chicago Purchasing Managers Index (chart) fell into contraction territory (below 50), declining to 49.3 in May from 50.4 in April, and versus expectations of a modest rise to 50.5.
The Dallas Fed Manufacturing Index fell to -20.8 for May from April's unrevised -13.9 level with economists forecasting an improvement to -8.0. A reading below zero denotes contraction.
The 20-city composite S&P/Case-Shiller Home Price Index showed a gain in home prices of 5.4% y/y in March, versus expectations of a 5.2% rise. M/M, home prices were up by 0.9% on a seasonally adjusted basis for March, topping forecasts of a 0.8% increase.
Treasuries ticked higher, with the yield on the 2-year note declining 3 basis points (bps) to 0.88%, while the yields on the 10-year note and the 30-year bond dipped 1 bp to 1.84% and 2.64%, respectively. Bond yields have jumped as of late amid resurfaced Fed rate hike expectations bolstered by Friday's speech by Federal Reserve Chairwoman Janet Yellen, where she reiterated that it's appropriate for the Central Bank to gradually and cautiously increase the overnight interest rate and that in the coming months such a move would possibly be appropriate.
For our latest analysis on the bond markets amid the heightened Fed rate hike expectations 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?, and follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick. Also check out our article, What If the Fed Raises Interest Rates?, and follow Schwab on Twitter: @schwabresearch. Get the video and article at www.schwab.com/insights.
Tomorrow, the U.S. economic calendar will continue to be robust, headlined by national reads on the manufacturing sector for May, courtesy of the ISM Manufacturing Index and Markit's Manufacturing PMI Index, with both expected to cling to expansion territory (above 50) at 50.3 and 50.5, respectively. Also, the day will culminate with the afternoon release of the Federal Reserve's Beige Book, a read on economic activity across the nation that the Central Bank uses as tool to prepare for its next two-day meeting set to end with its monetary policy decision on June 15. Other reports on Wednesday's docket include: construction spending, May auto sales, and MBA mortgage applications.
As noted in the Schwab Market Perspective: Stocks Stuck in the Muck, the U.S. economy will likely be buoyed by a perking up consumer and the continued improvement in the labor market, which is also starting to support wage growth. We continue to view one or two hikes this year as the most likely scenario, but have our eye on both the rise in wages and the bump up in inflation. If inflation were to surprise on the upside, the Fed could be forced to be more aggressive, leading to more consternation for investors. But for now, we continue to believe the Fed will be slow and methodical in their quest to return rates to a more “normal” level, which could help to support equities in the second half of the year. Read more at www.schwab.com/marketinsight.
Europe snaps winning streak, Asia finishes mixed
European equities finished lower, with the Stoxx Europe 600 Index snapping a five-session winning streak amid some weakness in financials. Traders may have treaded cautiously ahead of this week's host of data in the U.S., where rate hike expectations are running high, and as the European Central Bank is set to deliver its monetary policy decision on Thursday. Also, the energy markets awaited this week's meeting for the Organization of the Petroleum Exporting Countries (OPEC), while focus remained on whether the U.K. will leave the European Union (EU), known as a Brexit.
Opinion polls ahead of the June 23 referendum showed support for a Brexit increased, per Bloomberg, to weigh on the British pound, which fell versus the U.S. dollar. For analysis on the issue read the article, Brexit: Will the UK Leave the EU? at www.schwab.com/insights. In economic news, German retail sales surprisingly fell in April and the nation's unemployment change declined slightly more than expected in May. For the eurozone, lending to households held steady, while borrowing from non-financial businesses accelerated slightly in April. Moreover, the eurozone consumer price inflation estimate dipped 0.1% y/y in May, matching forecasts and compared to the 0.2% decline in the month prior. The euro was little changed versus the U.S. dollar, while bond yields in the region mostly declined.
Stocks in Asia finished mixed, with Japanese listings finding support from some upbeat economic reports, and mainland Chinese markets rallying amid a report from Goldman Sachs that raised expectations the region's stocks will be included in the MSCI Indexes. Equities trading in Japan rose, with the yen holding onto its recent losses, while reports suggested a highly-anticipated sales tax hike delay could be announced tomorrow. Also, data showed the country's industrial production unexpectedly grew and household spending declined by a smaller amount than anticipated for April. 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, and follow Jeff on Twitter: @jeffreykleintop.
Stocks in mainland China and Hong Kong advanced, with Goldman raising its forecast from a 50% chance to 70% that the nation's A-shares will get inclusion into MSCI Inc's global benchmark indexes, when a June 15 review concludes. However, oil & gas issues weighed on Australian listings despite an unexpected rise in the nation's building approvals for April. Indian securities pulled back modestly from a seven-month high, ahead of the release of the nation's 1Q GDP report. After the closing bell, India's 1Q GDP accelerated to a 7.9% y/y pace of growth, from 7.3% rate of expansion in 4Q and compared to expectations of a 7.5% rise. Finally, South Korean stocks were higher, shrugging off a larger-than-expected drop in April industrial production.
The international economic docket for tomorrow will deliver reports on manufacturing and non-manufacturing PMIs from China and the Nikkei manufacturing PMI, vehicle sales and capital spending from Japan. Releases from across the pond will include final Markit Manufacturing PMIs for Germany, France, Italy and the Eurozone, while the U.K. will release reports on consumer credit and housing data.