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Friday, June 03, 2016

Stocks Trim Losses but Finish Lower

Charles Schwab: On the Market
Posted: 6/3/2016 4:15 PM ET

Stocks Trim Losses but Finish Lower

U.S. stocks managed to pare early losses, but ultimately finished below the flatline as a disappointing non-farm payrolls report for May received the lion's share of attention amid a plethora of domestic data. Treasuries and gold rallied on the heels of the employment report, while the U.S. dollar tumbled and crude oil prices were lower.

The Dow Jones Industrial Average (DJIA) declined 31 points (0.2%) to 17,807, the S&P 500 Index shed 6 points (0.3%) to 2,099, and the Nasdaq Composite lost 29 points (0.6%) to 4,943. In moderately-heavy volume, 898 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.55 to $48.62 per barrel and wholesale gasoline was down $0.02 at $1.61 per gallon, while the Bloomberg gold spot price rallied $32.97 to $1,243.97 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—tumbled 1.6% to 94.00. Markets were mixed for the week, as the DJIA decreased 0.4%, the S&P 500 Index was nearly unchanged and the Nasdaq Composite gained 0.2%.

Gap Inc. (GPS $19) reported a 6.0% year-over-year (y/y) decline in May same-store sales, versus the FactSet estimate of an 8.5% drop. Sales at its Gap, Banana Republic and Old Navy stores all decreased during the month. GPS said that while the overall month was challenging, performance improved leading into the Memorial Day holiday weekend. Shares closed higher.

Broadcom Ltd. (AVGO $163) posted fiscal 2Q earnings-per-share (EPS) ex-items of $2.53, north of the projected $2.38, as revenues rose 100% y/y to $3.6 billion, roughly in line with estimates. This is the first quarterly report since Avago Technologies Ltd's February acquisition of Broadcom Corp. The semiconductor device supplier issued 3Q revenue guidance that was mostly above expectations. AVGO traded solidly higher.

Talen Energy Corp. (TLN $14) rallied after announcing an agreement to be acquired by private investment firm, Riverstone Holdings LLC, for $14.00 per share in cash, in a transaction with an enterprise value of about $5.2 billion.

May labor report misses ahead of services sector data

Nonfarm payrolls (chart) rose by 38,000 jobs month-over-month (m/m) in May—the fewest since September 2010—compared to Bloomberg's forecast of a 160,000 increase. April's job growth was revised lower to a gain of 123,000 jobs. The total downward revision to job gains in April and March was 59,000. Excluding government hiring and firing, private sector payrolls increased by 25,000, versus the forecasted gain of 150,000, after expanding by a negatively revised 130,000 in April.

Health care employment rose, while losses in mining continued and jobs declined in construction and manufacturing. Jobs in the information sector decreased, hampered by a worker strike at Verizon Communications. The unemployment rate fell to 4.7% from 5.0%, compared to expectations of a dip to 4.9%, due to a drop in the labor force participation rate. Average hourly earnings grew by 0.2% m/m, matching projections, and April's 0.3% rise was adjusted to a 0.4% increase. Finally, average weekly hours remained at April's downwardly revised 34.4 hours level, versus projections of a 34.5 rate.

The report is fostering volatility as the markets grapple with whether the sharp slowdown in job growth was an anomaly, and if the report will keep the Fed on hold. However, the hourly earnings component of the release, which showed a 2.5% rise over the past 12 months, continued to suggest wage growth is picking up. Schwab's Chief Investment Strategist, Liz Ann Sonders notes in her article, Sympathy for the Devil in the Details of Wage Growth, concerns about sluggish wage growth remain pervasive, while apples-to-apples wage growth measures show a healthier picture, possibly helping explain why the Fed has appeared itchier than ever to raise rates again. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

The Institute for Supply Management (ISM) non-Manufacturing Index (chart) fell to 52.9 in May from 55.7 in April, and compared to forecasts of a dip to 55.3, but remained in expansion territory (above 50). New orders and business activity both declined solidly, though staying above 50. Employment fell back into contraction and growth in prices accelerated. Non-manufacturing activity dwarfs manufacturing in terms of U.S. economic output, driven by the consumer which Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, discusses in his latest Schwab Sector Views: What is the State of U.S. Consumer Spending?. Brad notes that consumer spending appears to be in line with modest U.S. economic growth, but that doesn’t mean that the coast is clear for the consumer discretionary sector. Read more at www.schwab.com/marketinsight.

The final Markit U.S. Services PMI Index was revised to 51.3 in May from the preliminary level of 51.2, versus expectations of an upwardly revised 51.4. The index was down from the 52.8 reading registered in April. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently.

The trade balance (chart) showed that the deficit came in at $37.4 billion in April, compared to the $41.0 billion estimate. March's deficit was revised to $35.5 billion from the initially reported $40.4 billion. Exports rose 1.5% m/m to $182.8 billion, and imports gained 2.1% m/m to $220.2 billion.

Factory orders (chart) gained 1.9% m/m in April, in line with expectations, while March was adjusted higher to a 1.7% gain. April durable goods orders—preliminarily reported a week ago—were unrevised at a 3.4% gain.

Treasuries rallied following the disappointing jobs report, with the yield on the 2-year note falling 12 basis points (bps) to 0.77%, the yield on the 10-year note dropping 10 bps to 1.70%, and the 30-year bond rate declining 7 bps to 2.51%. Bond yields gave back some their recent rally as the employment data dampened Fed summer rate hike expectations that have ramped up as of late. 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.

European stocks mostly lower, Asia nudges higher

European equities mostly reversed to the downside as the markets reacted to the large miss in the May job growth and a disappointing services sector report in the U.S., which appeared to overshadow an upbeat read on eurozone business activity for May. Financials were the largest drag on the markets as the U.S. data dialed back heightened summer Fed rate hike expectations. The final Markit Eurozone Composite PMI Index—a gauge of output from the manufacturing and services sectors—was revised higher to 53.1 from the preliminary level of 52.9, where it was expected to remain. A reading above 50 denotes expansion and the index was up slightly from the 53.0 level posted in April. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses Europe in his article, Eight Years Later: Europe's Economy is Back and its Stocks are Leading Global Markets. Read both articles at www.schwab.com/oninternational, and be sure to follow Jeff on Twitter: @jeffreykleintop.

The euro and British pound rallied versus the U.S. dollar on the disappointing U.S. employment report, while bond yields in the region lost ground. The pound rebounded from recent weakness 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 Jeffrey Kleintop's article, Brexit: 5 Things Investors Need to Know at www.schwab.com/oninternational. However, U.K. stocks managed to eke out a gain as basic materials stocks jumped, with commodity prices bolstered by the weaker U.S. dollar.

Stocks in Asia finished mostly higher on the heels of the gains in the U.S. yesterday, though conviction was likely hampered by today's May U.S. nonfarm payroll report. Japanese stocks shrugged off the continued rally in the yen, which had weighed on the markets the past two sessions, as well as a softer-than-expected read on the nation's wages for April. Equities trading in mainland China and Hong Kong gained ground, despite a report from Caixin/Markit that showed growth in the nation's key services sector output decelerated in May, mirroring the country's official Services PMI Index's slip reported earlier this week. For our latest analysis of the global economic front, Schwab's Jeffrey Kleintop discusses Five ways investors can make the most of slower growth at www.schwab.com/oninternational. Australian securities advanced, led by basic materials listings and as oil & gas issues, as crude oil prices showed some resiliency in the face of yesterday's meeting among the Organization of the Petroleum Exporting Countries (OPEC) which concluded with no agreement on coordinated action. Finally, stocks trading in South Korea and India finished flat.

Stocks mixed in volatile shortened week

U.S. stocks finished mixed in the holiday-shortened week amid heightened volatility as the markets grappled with a plethora of global events. Domestic stocks were trudging along showing some resiliency in the face of flared-up Brexit concerns, mixed reads on Chinese business activity, and fiscal concerns that jumped in Japan after the nation delayed a sales tax hike again. The global markets appeared to come to grips with the heightened possibility of a summer Fed rate hike, bolstered by upbeat reports on U.S. manufacturing activity and personal spending.

However, Friday's massive job growth miss and much softer-than-expected services sector report stymied rate hike expectations. The U.S. dollar fell and Treasuries rallied as traders unwound some recent Fed-fueled positioning. Crude oil prices slipped slightly as the fall in the U.S. dollar failed to lift prices, while a Thursday OPEC meeting concluded with no coordinated action. Europe moved lower on the week amid the Brexit uncertainty and as the European Central Bank maintained its monetary policy stance. Japanese stocks fell as the yen rallied on the aforementioned sales tax hike delay. China was a standout winner this week, courtesy of optimism the nation's A-shares will get inclusion into MSCI Inc's global benchmark indexes.

As noted in the Schwab Market Perspective: Stocks Stuck in the Muck, the running-to-stand-still pattern in U.S. equities may continue, with bouts of volatility expected. But U.S. economic growth appears to be improving and stocks could start to sniff out a potentially better second half for both the economy and earnings. Investors should remain patient, and use volatility as opportunities to rebalance around normal strategic allocations in both U.S. and international equities. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Despite light economic docket, markets could see more Fed volatility

Next week's U.S. economic calendar will be relatively light, with the June preliminary University of Michigan Consumer Sentiment Index one of the few reports on the docket. However, the markets may remain volatile on the heels of Friday's Fed expectation reversal in the markets, with Monday's afternoon speech by Federal Reserve Chairwoman Janet Yellen likely commanding global attention.

International reports to look out for next week include: Australia—Reserve Bank of Australia monetary policy decision. China—trade balance, inflation data, and lending statistics. India—Reserve Bank of India monetary policy decision. Japan—1Q GDP and monthly machine orders. Eurozone—1Q GDP, along with German factory orders and trade balance. U.K.—trade balance and inflation target.

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