Gains Fade Following Fed

Charles Schwab: On the Market

Posted: 6/15/2016 4:15 PM ET

Gains Fade Following Fed

U.S. stocks lost gains in the final hour of trading and closed lower on the heels of the conclusion of the Federal Reserve's two-day monetary policy meeting, where the Central Bank left rates unchanged and issued updated economic projections. Treasuries and gold were higher and the U.S. dollar and crude oil prices were lower. In domestic economic news, producer price inflation was hotter than expected, industrial production declined and manufacturing output from the New York region unexpectedly moved into expansion territory.

The Dow Jones Industrial Average (DJIA) lost 35 points (0.2%) to 17,640, the S&P 500 Index declined 4 points (0.2%) to 2,072, and the Nasdaq Composite finished 9 points (0.2%) lower at 4,835. In moderately-higher volume, 886 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.48 to $48.01 per barrel and wholesale gasoline declined $0.02 to $1.50 per gallon, while the Bloomberg gold spot price increased $8.02 to $1,293.73 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 94.66.

Whole Foods Market Inc. (WFM $31) saw some pressure, possibly due to the Food and Drug Administration (FDA) citing the company for several food safety violations at its manufacturing facility in Massachusetts in a June 8 letter that was revealed yesterday. Also, today WFM was downgraded to sell from neutral by Northcoast Research.

Bob Evans Farms Inc. (BOBE $41) reported fiscal 4Q earnings-per-share (EPS) ex-items of $0.48, above the $0.43 FactSet estimate, as revenues rose 4.0% year-over-year (y/y) to $346 million, roughly in line with forecasts. 4Q same-store sales fell 3.0% y/y, versus the expected 2.0% decline. BOBE issued current year EPS guidance that came in below forecasts. Shares closed sharply lower.

Wholesale price inflation hotter than expected, Fed maintains current policy

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in May rose 0.4% month-over-month (m/m), versus the Bloomberg expectation of a 0.3% increase, and compared to April's unrevised 0.2% gain. The core rate, which excludes food and energy, grew 0.3% m/m, above forecasts of a 0.1% rise, and April's unadjusted 0.1% increase. Y/Y, the headline rate dipped 0.1%, matching projections, and the core PPI was up 1.2% last month, topping estimates of a 1.0% gain. In April, producer prices were flat and up 0.9% y/y for the headline and core rates, respectively.

Industrial production (chart) declined 0.4% m/m in May—the third decline in the past four months—versus estimates of a 0.2% decrease, and following April's downwardly revised 0.6% increase. Manufacturing production declined 0.4% and utilities output dropped 1.0%, while mining production ticked 0.2% higher. Capacity utilization declined to 74.9% from April's downwardly revised 75.3%, and compared to projections for a 75.2% rate. Capacity utilization is 5.1 percentage points below its long-run average.

The Empire Manufacturing Index showed output from the New York region unexpectedly moved into expansion territory (a reading above zero) for June. The index jumped to 6.0 from May's unrevised -9.0 level, with forecasts calling for a rise to -4.9.

The MBA Mortgage Application Index declined 2.4% last week, after jumping 9.3% in the previous week. The decrease came as a 0.7% decline for the Refinance Index was met with a 4.9% drop for the Purchase Index. The average 30-year mortgage rate fell 4 basis points (bps) to 3.79%.

At 2:00 p.m. ET, the Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, where the Fed kept its policy stance unchanged at a targeted range of 0.25%-0.50% for the Fed funds rate. The Committee recognized that since its last meeting in April, the pace of improvement in the labor market has slowed, while growth in economic activity appears to have picked up. It was also noted that "the committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run." The Committee also released updated economic projections, slightly increasing their current year forecasts for inflation and mildly decreasing estimates for output for this year, while it held current year projections for the federal funds rate, but decreased estimates for the rate in 2017 and 2018. In her scheduled press conference after the statement, Chairwoman Janet Yellen reiterated the need to maintain the Fed's current policy, and also noted in the ensuing Q&A session that it was fair to say Brexit concern was one factor in the decision.

Look for analysis on the Fed's decision from Schwab experts later today at www.schwab.com/insights, and you can also follow us on Twitter: @schwabresearch.

Treasuries finished higher following the Fed statement, with the yield on the 2-year note declining 5 basis points (bps) to 0.67%, the yield on the 10-year note decreasing 3 bps to 1.58% and the 30-year bond rate dipping 1 bp to 2.42%. Bond yields have been mostly retreating as of late on rising growth concerns, growing uncertainty regarding a U.K. exit from the European Union (EU), known as a Brexit, and as the markets grapple with pushed out Fed rate hike expectations.

Tomorrow, the U.S. economic calendar will include the Consumer Price Index (CPI), forecasted to have increased 0.3% m/m during May, while excluding food and energy, the core rate is expected to have risen 0.2% m/m. We'll also receive the Philly Fed Manufacturing Index, forecasted to move back into expansion territory to 1 for June from -1.8 in May, where a level of zero represents the demarcation point between expansion and contraction in manufacturing activity. Finally, we will receive weekly initial jobless claims, forecasted to have increased to 270,000 from the prior week's 264,000 level.

Europe rebounds ahead of Fed decision, Asia mostly higher despite festering uneasiness

European equities traded higher, with the Stoxx Europe 600 Index rebounding from its worst five-day plunge since February, per Bloomberg, as mining stocks led a broad-based advance. The rebound comes despite today's monetary policy decision in the U.S. and as uncertainty remains regarding the possibility of a U.K. Brexit. The U.K. will hold a referendum on June 23 to determine if it will leave the EU and for analysis on the issue read our article, Brexit: Will the UK Leave the EU? at www.schwab.com/insights. Also, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses, Brexit: 5 Things Investors Need to Know, at www.schwab.com/oninternational. Be sure to follow Jeff on Twitter: @jeffreykleintop.

The global markets appeared to catch their breath after the recent stock selloff and ensuing drop in global bond yields that preceded monetary policy meetings—including tomorrow's decisions out of the U.K. and Japan—and amid Brexit concerns and festering global growth worries. Schwab's Jeffrey Kleintop offers Five ways investors can make the most of slower growth at www.schwab.com/oninternational. The euro and British pound gained ground on the U.S. dollar, while bond yields in the region were mostly lower. In economic news, the U.K. unemployment rate dipped unexpectedly to 5.0% for April, while the eurozone trade surplus surprisingly widened in April.

Stocks in Asia finished mostly higher, despite likely caution ahead of today's monetary policy decision in the U.S., which will be followed by tomorrow's decisions out of Japan and the U.K. Stocks rebounded somewhat from a recent selloff in the global equity markets, courtesy of heightened growth concerns and festering uncertainty of a U.K. Brexit. Japanese equities advanced, with the yen retreating modestly from its recent rally that was spurred by elevated risk aversion as of late, ahead of the Bank of Japan's (BoJ) monetary policy decision. For analysis ahead of the BoJ's monetary policy decision, see Schwab's Jeffrey Kleintop's latest article, What investors need to know about helicopter money, at www.schwab.com/marketinsight.

Mainland Chinese listings rose, showing some resiliency in the face of the decision by MSCI Inc. to delay the inclusion of mainland stocks into its global benchmark indexes. Bloomberg noted that the decision may have sparked speculation that state-backed funds likely stepped in to support the markets. Securities trading in Hong Kong also advanced, while after the closing bell, China reported stronger-than-expected new yuan loans but an unexpected deceleration in aggregate financing—a gauge of total credit issued. Indian stocks gained ground with the reprieve from the global selloff helping the index snap a four-session losing streak. However, stocks in South Korea and Australia declined, with weakness in financials and basic materials issues weighing on the market.

In addition to the aforementioned decisions from the Bank of Japan and the Bank of England, tomorrow's international docket will yield the release of retail sales from the U.K. and CPI for the Eurozone.