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Tuesday, June 14, 2016

Stocks Close Red as Focus Moves to Fed

Charles Schwab: On the Market
Posted: 6/14/2016 4:15 PM ET

Stocks Close Red as Focus Moves to Fed

U.S. stocks closed with losses, continuing their recent decline, as Brexit worries remained and investors await tomorrow's conclusion of the Fed's two-day monetary policy meeting, while the Bank of Japan and Bank of England will be delivering decisions on Thursday. Treasuries shed early gains as bond yields ticked higher in afternoon action, crude oil prices were lower and the U.S. dollar and gold advanced. In economic news, a better-than-expected read on advance retail sales headlined a relatively busy domestic docket.

The Dow Jones Industrial Average (DJIA) lost 58 points (0.3%) to 17,675, the S&P 500 Index shed 4 points (0.2%) to 2,075, and the Nasdaq Composite finished 5 points (0.1%) lower at 4,844. In moderately-higher volume, 892 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.39 to $48.49 per barrel and wholesale gasoline declined $0.02 to $1.54 per gallon, while the Bloomberg gold spot price increased $1.96 to $1,285.82 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.6% higher at 94.95.

Alibaba Group Holding Ltd. (BABA $78) gained solid ground after China's largest e-commerce company offered stronger-than-expected revenue growth guidance for the current year, while also offering upbeat longer-term outlooks for consumers on its site and transactions volume.

May retail sales solid for second-straight month, Fed begins its two-day meeting

Advance retail sales (chart) for May rose 0.5% month-over-month (m/m), versus the Bloomberg forecast of a 0.3% gain, and April's unadjusted 1.3% rise. Also, last month's sales ex-autos were up 0.4% m/m, matching expectations, and compared to the unrevised 0.8% rise in the previous month. Sales ex-autos and gas grew 0.3% m/m, in line with estimates, while April's 0.6% increase was unadjusted. Finally, the retail sales control group, a figure used to help calculate GDP, gained 0.4%, compared to the projected 0.3% rise, and the prior month's upwardly revised 1.0% increase. Most categories saw increased sales, paced by nonstore retailers—which includes online sales—sporting goods, clothing and food services & drinking places, while building materials fell.

Following a sluggish 1Q, the second-consecutive month of solid retail sales growth in 2Q adds credence to our view in the Schwab Market Perspective: Summer of Discontent?, that positive signs are emerging. The strength to-date in the job market may be leading to an acceleration in consumer spending. It’s much too early to call this a trend, but today's report and April's largest monthly increase since 2009 in personal spending are positive signs and what we have been expecting given the strength in the job market and the lagged impact of lower oil prices. A more confident consumer should be supported by an improving housing market, which should also support business confidence and the economy more broadly. Read more at www.schwab.com/marketinsight.

The Import Price Index (chart) increased 1.4% m/m for May, compared to projections of a 0.7% increase, and April's upwardly revised 0.7% gain. Y/Y, prices were down by 5.0%, versus the 5.9% forecasted drop, and following April's upwardly revised 5.3% fall.

The National Federation of Independent Business (NFIB) Small Business Optimism Index for May rose to 93.8 from April's 93.6 level, where economists had expected it to remain.

Business inventories (chart) ticked 0.1% higher m/m in April, below forecasts of a 0.2% rise, and versus March's downwardly revised 0.3% gain. Sales rose 0.9% m/m, and the inventory-to-sales ratio—the time it would take to deplete inventories at the current sales pace—dipped to 1.40 months from March's 1.41 pace.

Treasuries ticked lower, with the yields on the 2-year and 10-year notes, as well as the 30-year bond rate, all gaining 1 basis point to 0.72%, 1.62% and 2.43%, respectively. Bond yields have been mostly on the decline as uneasy global sentiment has ramped up as of late, amid 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. The Federal Open Market Committee (FOMC) began its two-day monetary policy meeting today, which will culminate with tomorrow's statement.

As noted in our article,  Where Will the Fed Go from Here? the Fed's post-meeting statement may leave the door open to a rate hike in July, but given weak global economic growth, low or even negative interest rates abroad, and recent signs of weakness in the U.S. job market, it's unclear when the Fed will raise rates again. The markets will be watching for any time reference in the statement about the next rate hike, while also scrutinizing the Fed's updated economic projections and the press conference by Fed Chairwoman Janet Yellen released shortly after the statement. Read the rest of the article at www.schwab.com/insights. Also, check out Schwab's Fixed Income Director Collin Martin's, CFA, article, Waiting for a Fed Rate Hike: Bond Investments That May Make Sense Now at www.schwab.com/marketinsight. Be sure to follow Schwab on Twitter: @schwabresearch.

In addition to the aforementioned conclusion of the Fed's FOMC policy meeting, tomorrow, the U.S. economic calendar will commence with the Producer Price Index, expected to have increased 0.3% for May after rising 0.2% the month prior, and the Empire Manufacturing Index, which is anticipated to improve to -4.50 in June from the -9.02 level the month prior, with a reading below zero denoting contraction. Also, the Federal Reserve will release its industrial production and capacity utilization report for May, with production forecasted to decline 0.2% m/m after the prior month's 0.7% increase, and utilization is projected to dip to 75.2% from 75.4%.

Pressure persists for stocks in Europe and Asia

European equities traded lower, with the Stoxx Europe 600 Index posting its worst five-day plunge since February, per Bloomberg. Global sentiment remained hampered by growth concerns and caution ahead of monetary policy decisions out of the U.S., U.K., and Japan. For more on international investing amid this backdrop, see Schwab's Chief Global Investment Strategist, Jeffrey Kleintop's, CFA, article Five ways investors can make the most of slower growth, at www.schwab.com/oninternational, and be sure to follow Jeff on Twitter: @jeffreykleintop.

More polls exacerbated concerns regarding the possibility of a U.K. Brexit, and the British pound fell versus the U.S. dollar. 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 Jeffrey Kleintop, discusses in his article, Brexit: 5 Things Investors Need to Know, at www.schwab.com/oninternational.

The euro also lost solid ground to the U.S. dollar, while bond yields in the region were mixed. However, the recently ramped up flight-to-safety in the global markets took the German 10-year benchmark bond yield below zero for the first time ever to amplify the uneasy sentiment. Financials saw pressure as the recent drop in global bond yields continued to weigh on the sector, while energy issues fell to pace the broad-based decline. In economic news, U.K. consumer price inflation came in slightly below expectations for May, while eurozone industrial production for April rose more than expected.

Stocks in Asia finished mostly to the downside, with risk aversion festering to apply pressure on global bond yields, which is causing some concerns. The uneasy global sentiment is being fostered by lingering growth concerns being met with caution ahead of monetary policy decisions this week out of the U.S., U.K., and Japan, while uncertainty remains regarding next week's vote on a U.K. Brexit. For analysis ahead of the Bank of Japan'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.

Japanese equities declined as the yen continued to rise, while Australian stocks were also lower, after returning to action following yesterday's holiday, with financials, technology and oil & gas issues under pressure. Stocks trading in South Korea and Hong Kong also declined, while Indian listings finished flat amid choppy action. Bucking the trend, mainland Chinese equities rose as volatility ramped up ahead of tomorrow's decision by MSCI Inc. on whether to include mainland shares in its global benchmark indexes.

The international economic docket for tomorrow is expected to include the Leading Index from China and machine tool orders from Japan, while reports from across the pond are anticipated to include CPI from France, employment data from the U.K. and the trade balance for the Eurozone.

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