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Thursday, June 02, 2016

Caution Prevails Ahead of Labor Report

Charles Schwab: On the Market
Posted: 6/2/2016 4:15 PM ET

Caution Prevails Ahead of Labor Report

U.S. equities were able to come off the lows of the day and finish higher, albeit near the flatline, as the caution was palpable ahead of tomorrow's May nonfarm payroll report. Meanwhile, crude oil prices reversed course to end slightly higher, despite a hyped-up meeting between OPEC members concluding with nothing of substance, and equity news was sparse. Treasuries were higher, even though jobless claims fell and private sector payrolls reported by ADP were above forecasts. Gold was lower, while the U.S. dollar gained ground.

The Dow Jones Industrial Average (DJIA) rose 49 points (0.3%) to 17,839, the S&P 500 Index added 6 points (0.3%) to 2,105, and the Nasdaq Composite gained 19 points (0.4%) to 4,971. In moderately-heavy volume, 958 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude inched $0.16 higher to $49.17 per barrel, wholesale gasoline was up $0.01 at $1.63 per gallon, and the Bloomberg gold spot price fell $1.53 to $1,211.45 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 95.54.

Dow member Johnson & Johnson (JNJ $114) announced an agreement to acquire privately-held hair care and personal care products maker Vogue International for about $3.3 billion in cash. JNJ said upon closing of the deal, which is subject to antitrust clearance, the transaction is not expected to impact its 2016 sales or earnings guidance ranges announced on April 19. JNJ traded higher.

Ciena Corp. (CIEN $20) reported fiscal 2Q earnings-per-share (EPS) ex-items of $0.34, above the $0.27 FactSet estimate, as revenues grew 3.1% year-over-year (y/y) to $641 million, topping the expected $631 million. The network specialist company issued 3Q revenue guidance with a midpoint above forecasts. Shares rallied over 12%.

L Brands Inc. (LB $71) posted flat y/y May same-store sales, compared to the expected 2.9% decline, as a solid gain in sales at Bath & Body Works offset a decline at Victoria's Secret. Shares were nicely higher.

Jobless claims dip and ADP jobs release matches forecasts ahead of tomorrow's labor report

Weekly initial jobless claims (chart) declined by 1,000 to 267,000 last week, versus the Bloomberg estimate calling for claims to increase to 270,000, as the prior week's figure was unrevised at 268,000. The four-week moving average declined by 1,750 to 276,750, while continuing claims rose 12,000 to 2,172,000, north of the estimated level of 2,150,000.

The ADP Employment Change Report showed private sector payrolls rose by 173,000 jobs in May, matching forecasts, while April's gain of 156,000 jobs was revised to a 166,000 rise. Today’s ADP data, which does not include government hiring and firing, comes ahead of tomorrow's broader May nonfarm payroll report, expected to show an increase of 160,000 jobs, while private sector payrolls are expected to rise 150,000 (economic calendar). The unemployment rate is forecasted to dip to 4.9% from 5.0% and average hourly earnings are projected to rise 0.2% month-over-month (m/m).

Tomorrow, we will also get the releases of the ISM and Markit's reports on services sector activity, with both expected to show continued expansion for May, the trade deficit, projected to widened slightly in April, and factory orders, which are forecasted to rise solidly by 1.9% m/m in April.

Schwab's Chief Investment Strategist, Liz Ann Sonders notes in her article, Sympathy for the Devil in the Details of Wage Growth, the Fed appears itchy to raise rates again, but concerns about sluggish wage growth remain pervasive, while apples-to-apples wage growth measures show a healthier picture. 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. Read more at www.schwab.com/marketinsight and follow Liz Ann and Schwab on Twitter: @lizannsonders and @schwabresearch.

Treasuries finished higher, as the yield on the 2-year note declined 1 basis point (bp) to 0.89%, the yield on the 10-year note decreased 3 bps to 1.80%, and the 30-year bond rate dropped 4 bps to 2.58%. 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.

Europe and Asia mixed following ECB decision and as OPEC concludes with no action

European equities finished mixed, with the European Central Bank (ECB) leaving its monetary policy stance unchanged, as expected, while crude oil prices were lower earlier to weigh on the energy sector ahead of the meeting between the Organization of the Petroleum Exporting Countries (OPEC) which concluded with no agreement on coordinated action. The ECB gave some details of its recently expanded stimulus measures, noting that corporate bond purchases will begin on June 8, while its new series of Targeted Longer-Term Refinancing Operations will commence on June 22. Schwab's Fixed Income Director Collin Martin's, CFA, discusses The ECB's Latest Plan: What Does It Mean for U.S. Corporate Bonds?, at www.schwab.com/marketinsight.

The euro lost ground versus the U.S. dollar and bond yields in the region were mixed. The British pound rebounded modestly versus the U.S. dollar from its two-day selloff that has come from flared-up concerns about the possibility that the U.K. could vote to leave the European Union (EU), known as a Brexit. For analysis on the issue read our article, Brexit: Will the UK Leave the EU?, at www.schwab.com/insights and Schwab's Chief Global Investment Strategist, Jeffrey Kleintop's, CFA, article, Brexit: 5 Things Investors Need to Know, at www.schwab.com/oninternational, and be sure to follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed with Japanese markets extending yesterday's drop, while traders awaited the monetary policy decision from the ECB and today's OPEC meeting. Japanese equities fell sharply, with the yen adding to yesterday's jump that followed the highly-anticipated announcement of another delay to its sales-tax hike from Prime Minister Abe from 2017 to 2019. The postponement caused concerns to flare-up regarding its fiscal impact, while skepticism also resurfaced in regard to the effectiveness of the government's stimulus measures. For more on Japan see Schwab's Chief Global Investment Strategist, Jeffrey Kleintop's, CFA, article, Japan: Another Recession Coming?.

Mainland Chinese stocks and those traded in Hong Kong gained ground, rebounding from yesterday's sluggishness that followed mixed reads on the nation's business activity in the manufacturing and services sectors for May, but Australia's markets fell, led by weakness in financials and basic materials stocks, and as reports showed the country's trade deficit came in smaller than expected and retail sales were softer than anticipated in April.

South Korean securities ticked higher after the nation revised its 1Q GDP growth higher to a 0.5% quarter-over-quarter rate, from the preliminary estimate of 0.4%, where it was expected to remain. Growth decelerated from the 0.7% expansion registered in 4Q. Finally, Indian stocks advanced, returning to a seven-month high that has been aided by this week's upbeat GDP report and continued forecasts for above average rainfall for the nation's monsoon season. For our latest analysis of the global economic front, see Jeffrey Kleintop's, CFA article, Five ways investors can make the most of slower growth. You can read both of Jeff's articles at www.schwab.com/oninternational, and be sure to follow Jeff on Twitter: @jeffreykleintop.

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