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Wednesday, May 18, 2016

Stocks Pull Back From Highs Following Fed Minutes

Charles Schwab: On the Market
Posted: 5/18/2016 4:15 PM ET

Stocks Pull Back From Highs Following Fed Minutes

U.S. stocks finished the trading session mostly flat as mild gains evaporated on the heels of the afternoon release of the minutes from the Federal Reserve's most recent monetary policy meeting, which showed the Central Bank hadn't ruled out the possibility of a June rate hike. Treasuries, gold and crude oil prices were lower, while the U.S. dollar was higher. In equity news, pressure persisted on the retail sector following the release of Target's quarterly earnings report which revealed disappointing sales and a softer-than-expected 2Q profit outlook.

The Dow Jones Industrial Average (DJIA) declined 3 points to 17,527, the S&P 500 Index was nearly unchanged at 2,048, and the Nasdaq Composite gained 23 points (0.5%) higher to 4,739. In moderately-heavy volume, 766 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil dipped $0.12 to $48.19 per barrel, wholesale gasoline increased $0.02 to $1.65 per gallon, and the Bloomberg gold spot price lost $22.20 to $1,256.74 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.7% higher at 95.18.

Target Corp. (TGT $68) reported 1Q earnings-per-share (EPS) ex-items of $1.29, above the $1.19 FactSet estimate, as revenues decreased 5.4% year-over-year (y/y) to $16.2 billion, versus the projected $16.3 billion. 1Q same-store sales rose 1.2% y/y, south of the expected rise of 1.6%. TGT issued softer-than-expected 2Q profit and same-store sales outlooks as its results "have been tempered by the recent slowdown in consumer trends," but it noted that it believes full-year EPS within its prior guidance range is achievable. Shares fell.

Lowe's Companies Inc. (LOW $79) posted 1Q EPS of $0.98, above the forecasted $0.85, with revenues rising 7.8% y/y to $15.2 billion, above the estimated $14.9 billion. Same-store sales grew 7.3% y/y, versus the expected 4.7% gain. The home improvement retailer said it saw strength in indoor and outdoor categories, and its transaction and average ticket both grew. LOW raised its full-year earnings outlook, while it reaffirmed its revenue and same-store sales guidance. Shares were solidly higher.

Staples Inc. (SPLS $8) achieved 1Q profits ex-items of $0.17 per share, one penny north of forecasts, as revenues decreased 3.1% y/y to $5.1 billion, roughly in line with expectations. SPLS issued 2Q earnings and same-store sales guidance that mostly matched estimates. North American same-store sales declined 4.0% y/y, compared to projections of a 2.9% decrease. SPLS ticked lower.

Hormel Foods Corp. (HRL $35) reported fiscal 2Q EPS of $0.40, one cent above estimates, as revenues increased 0.9% y/y to $2.3 billion, roughly in line with forecasts. HRL raised its full-year earnings outlook. Shares traded noticeably lower as the company's profit margin shrank at its refrigerated-foods division. Separately, HRL announced an agreement to acquire nut butter-based snacking product company, Justin's, LLC. Terms were not disclosed.

Dow member JPMorgan Chase & Co. (JPM $64) raised its quarterly dividend by 9.1% to $0.48 per share, payable on July 31 to shareholders of record on July 6. JPM finished nicely higher.

Fed minutes leave open possible June hike, Mortgage applications decline

At 2:00 p.m. ET the Federal Open Market Committee (FOMC) released the minutes from its April monetary policy meeting, after which the Central Bank left its policy stance unchanged. The report showed that a number of participants in the Committee judged that with inflation continuing to run below the 2% objective it would be appropriate to proceed cautiously in removing policy accommodation. However, participants noted they will continue to assess developments carefully as consistent with setting policy in a data-dependent manner and left open the possibility of an increase in the federal funds rate at the June FOMC meeting. Nine of the Committee members voted in favor of leaving policy unchanged, while Ms. Esther George was the lone dissenter because she believed that a 25 basis point (bp) increase in the federal funds target range was appropriate at this meeting.

As noted in the Schwab Market Perspective: Corporate Caution…Global Recession?, the Fed appears stuck, as the economy has recovered, employment has improved, housing has bounced back, and asset prices have appreciated. However, the economy is still not firing on all cylinders. As has been the case over the past couple of years, we expect economic activity to pick up in the second quarter from the weak first quarter, but whether it will be enough to allow the Fed to raise rates again, it’s too soon to tell. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

The MBA Mortgage Application Index decreased 1.6% last week, after rising 0.4% in the previous week. The decline came as a 1.4% rise for the Refinance Index was more than offset by a 5.8% drop for the Purchase Index. The average 30-year mortgage rate remained at 3.82%.

Treasuries were lower, with the yields on the 2-year note and the 30-year bond rising 6 basis points (bps) to 0.89% and 2.66%, respectively, while the yield on the 10-year note advanced 8 bps to 1.85%. For our latest analysis on 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. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick. Also check out Schwab's Kathy Jones' article, Mixed Signals From the Bond Market: Something's Got to Give, at www.schwab.com/marketinsight.

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.

Tomorrow, the U.S. economic calendar will begin with weekly initial jobless claims, forecasted to have decreased to 275,000 from the prior week's 294,000 level. We'll also receive the Philly Fed Manufacturing Index, forecasted to move back into expansion territory to 3 for May from -1.6 in April, where a level of zero represents the demarcation point between expansion and contraction in activity. Shortly after the opening bell, the Index for Leading Economic Indicators (LEI) will be released, with economists anticipating a 0.4% m/m increase for April following the 0.2% rise seen in March.

Europe shows some resiliency, Asia mostly lower

European equities overcame early pressure and finished mostly higher, showing some resiliency in the face of resurfaced U.S. Fed rate hike concerns that were fostered by recent commentary from Central Bank officials ahead of today's release of the FOMC's April meeting minutes. Financials got a lift from the Fed rate hike focus, while technology issues also gained ground, overshadowing continued dampened sentiment toward the retail sector. The British pound rallied versus the U.S. dollar as recent polls are indicating 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, the U.K. employment change in March unexpectedly rose, while eurozone consumer price inflation matched expectations for April. The euro traded lower versus the U.S. dollar, while bond yields in the region gained ground.

Stocks in Asia finished lower amid lingering uncertainty regarding the timing of the next rate hike in the U.S., festering Chinese growth concerns, and volatility for the Japanese markets in the wake of its 1Q GDP report. Japanese equities dipped in choppy trading as traders assessed the implications of a stronger-than-expected 1Q GDP report. The nation's GDP expanded by 0.4% quarter-over-quarter, versus expectations of a 0.1% rise, with government and consumer spending more than offsetting a decline in capital spending.

Japan's economy rebounded from the downwardly revised 0.4% decline posted in 4Q, avoiding a technical recession of back-to-back quarters of contraction. The yen rose initially after the report, but reversed to the downside to close out the session, as traders grappled with what the reading means for a planned sales tax increase and further stimulus measures from the Bank of Japan. 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.

Chinese stocks fell on the festering economic growth concerns and U.S. monetary policy uncertainty overshadowing another upbeat read on the nation's home prices. Australian securities declined with technology issues seeing pressure to more than offset a modest gain in basic materials. Finally, equities trading in South Korea and India finished lower.

Tomorrow, Japan will highlight the international economic docket as the island nation will release reports on housing loans and machine orders as well as the country's All Industry Activity Index. Releases from across the pond will include the unemployment rate from France, the current account for the Eurozone and retail sales for the U.K.

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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