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Wednesday, July 27, 2016

Fed Stays Put, Stocks Nearly Do the Same

Charles Schwab: On the Market
Posted: 7/27/2016 4:15 PM ET

Fed Stays Put, Stocks Nearly Do the Same

U.S. stocks finished mixed and near the flat line for a second-straight day, save a nice gain for the Nasdaq on the back of an earnings beat from Apple, with investors weighing a plethora of earnings and economic data, including the widely-expected decision from the Federal Reserve to remain steady on interest rates. Crude oil prices tumbled following a bearish U.S. government oil inventory report, and the U.S. dollar was lower, while Treasuries and gold were higher.

The Dow Jones Industrial Average (DJIA) inched 2 points lower to 18,472 and the S&P 500 Index lost nearly 3 points (0.1%) to 2,167, while the Nasdaq Composite closed 30 points (0.6%) higher to 5,140. In moderately-heavy volume, 973 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.00 lower to $41.92 per barrel, wholesale gasoline lost $0.02 to $1.32 per gallon and the Bloomberg gold spot price jumped $19.01 to $1,339.27 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% lower at 96.79.

Dow member Apple Inc. (AAPL $103) reported fiscal 3Q earnings-per-share (EPS) of $1.42, two cents above the FactSet estimate, as revenues fell 14.5% year-over-year (y/y) to $42.4 billion, north of the projected $42.2 billion. The company's gross margin came in slightly ahead of expectations, along with its shipments of iPhones and iPads. AAPL's 4Q revenue guidance had a midpoint that exceeded forecasts. Shares were sharply higher.

For more on the global earnings landscape, see Schwab's Chief Global Investment Strategist, Jeffrey Kleintop's, CFA, article, Earnings estimates are rebounding: what it means for stocks, at www.schwab.com/marketinsight, and be sure to follow Jeff on Twitter: @jeffreykleintop.

Dow component Boeing Co. (BA $136) posted a 2Q loss ex-items of $0.44 per share, reflecting previously announced charges, compared to the projected $0.92 per share shortfall. Revenues rose 1.0% y/y to $24.8 billion, exceeding the estimated $24.2 billion. BA cut its full-year EPS outlook, while reaffirming its revenue forecast. Shares traded higher.

Dow member Coca-Cola Co. (KO $43) announced 2Q profits ex-items of $0.60 per share, two cents above expectations, with revenues declining 5.0% y/y to $11.5 billion, versus the projected $11.6 billion. The company issued full-year EPS guidance that came in below forecasts, while lowering its revenue outlook. KO was lower.

Comcast Corp. (CMCSA $68) reported 2Q EPS of $0.83, above the expected $0.81, as revenues increased 2.8% y/y to $19.3 billion, compared to the estimated $19.0 billion. Shares were higher.

Twitter Inc. (TWTR $16) posted 2Q profits of $0.13 per share, three cents north of the $0.10 estimate, with revenues growing 20.0% y/y to $602 million, versus the anticipated $608 million. TWTR issued 3Q guidance that missed projections. Shares finished sharply lower.

Durable goods orders fall, ahead of Fed decision

June preliminary durable goods orders (chart) dropped 4.0% month-over-month (m/m), compared to Bloomberg's estimate of a 1.4% decline and May's downwardly revised 2.8% drop. Ex-transportation, orders decreased 0.5% m/m, versus the 0.3% forecasted increase, and May's negatively revised 0.4% decline. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, rose 0.2%, roughly in line with projections, and following the downwardly revised 0.5% decline in the month prior.

Pending home sales rose 0.2% m/m in June, versus projections of a 1.2% gain and following the unrevised 3.7% drop registered in May. Compared to last year, sales were 0.3% higher, versus forecasts of a 3.0% increase. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which came in higher than expected for June.

The MBA Mortgage Application Index fell 11.2% last week, after decreasing 1.3% in the previous week. The drop came as a 15.1% tumble for the Refinance Index was accompanied by a 3.3% decline for the Purchase Index. The average 30-year mortgage rate rose 4 basis points (bps) to 3.69%.

Finally, in what was likely today's headlining event, 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 said that near-term risks to the economic outlook have diminished, while also noting that since its last meeting in June, the pace of improvement in the labor market has risen, with job gains during the month "strong," and that economic activity expanded at a moderate pace. As noted in the latest Schwab Market Perspective: New Records…Same Skepticism, while there was a near unanimous opinion that the FOMC would stay put at its meeting today, market expectations for a rate hike later this year have risen over the past couple of weeks, coming closer to what we have believed was the more realistic possibility. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

See additional commentary on the FOMC's monetary policy decision from Schwab's Chief Investment Strategist, Liz Ann Sonders, later today at www.schwab.com/insights, and you can also follow Liz Ann on Twitter: @lizannsonders.

Treasuries were higher, as the yield on the 2-year note fell 4 bps to 0.72%, and the yields on the 10-year note and the 30-year bond declined 6 bps to 1.51% and 2.22%, respectively. Bond yields have rebounded a bit as of late from record lows on some favorable U.S. economic data, as well as eased U.K. Brexit concerns and expectations of a Fed rate hike this year. Schwab's Chief Fixed Income Strategist, Kathy Jones offers analysis in her recent article titled, titled, With a Whimper Instead of a Bang: Is the Great Bond Bull Market Over?, at www.schwab.com/marketinsight. Follow Kathy on Twitter: @kathyjones.

Tomorrow's domestic economic calendar will slow down a bit, with reports slated for release to include weekly initial jobless claims, forecasted to increase to a level of 262,000 from the prior week's 253,000, as well as the Kansas City Fed Manufacturing Activity Index, with economists anticipating an improvement to a level of 4 for July from June's 2 mark, with a reading above zero denoting expansion in activity.

Europe higher as earnings and economic data help sentiment, Asia mixed

European equities traded mostly higher, following upbeat global earnings results, though caution may have prevailed ahead of today's U.S. Fed monetary policy decision. Continued reports of further Japanese stimulus measures likely underpinned sentiment and economic data in the region was also positive, with August German consumer confidence topping expectations and U.K. preliminary 2Q GDP growing at a 0.6% quarter-over-quarter pace, exceeding forecasts of a 0.5% rate of expansion and the 0.4% growth posted in 1Q. Also, eurozone lending statistics showed June loans to non-financial businesses and households were higher y/y. The euro ticked higher and the British pound dipped versus the U.S. dollar, while bond yields in the region were mostly lower. Amid the backdrop of heightened volatility in the region as the markets grapple with the impact of a Brexit, Jeffrey Kleintop, CFA, offers analysis for investors in his article, After the Brexit Vote: What Lies Ahead for Markets?, and gives us Three Reasons Why Now is Not the Time to Retreat from Global Diversification. Read both articles at www.schwab.com/oninternational.

Stocks in Asia finished mixed amid some likely caution ahead of today's monetary policy decision in the U.S., while reports of stimulus measures pressured the yen and boosted Japanese equities, gaining for the first time in three sessions, following media reports that Prime Minister Abe announced plans for further stimulus measures to support the nation's economy. The reports come as the Bank of Japan (BoJ) is set to deliver its monetary policy decision at the end of the week. For more on Japan's potential increased stimulus measures see Jeffrey Kleintop's, article, What investors need to know about helicopter money, at www.schwab.com/oninternational. Mainland Chinese stocks fell, with sentiment stymied by talk that the China Banking Regulatory Commission is discussing stricter curbs on wealth-management products, per Bloomberg. However, those traded in Hong Kong advanced, buoyed by strength in technology issues. Australian securities finished flat, with gains for technology and basic materials stocks being countered by weakness in oil & gas and healthcare issues, while markets in India were higher, and South Korea was lower.

Scheduled releases on tomorrow's international economic calendar will be trade figures from Japan and Australia, employment data and the CPI out of Germany, and confidence reads out of the Eurozone.

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