Stocks Continue to Climb

Charles Schwab: On the Market

Posted: 7/14/2016 4:15 PM ET

Stocks Continue to Climb

U.S. stocks closed nicely higher with the Dow and S&P 500 adding to all-time highs, aided by a rebound in crude oil prices and as the Bank of England unexpectedly announced no change to its official bank rate, but did hint at the possibility of looser monetary policy in August. Dow member JPMorgan Chase & Co. reported stronger-than-expected 2Q earnings, while Treasuries fell in the wake of a hotter-than-expected read on producer price inflation and the U.S. dollar was pressured by a surge in the British pound. Gold lost ground.

The Dow Jones Industrial Average (DJIA) rose 134 points (0.7%) to 18,506, the S&P 500 Index increased 11 points (0.5%) to 2,164, and the Nasdaq Composite added 28 points (0.6%) to 5,034. In moderate volume, 825 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil was $0.93 higher at $45.68 per barrel, wholesale gasoline gained $0.03 to $1.41 per gallon and the Bloomberg gold spot price decreased $8.90 to $1,333.74 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.1% lower at 96.12.

Dow member JPMorgan Chase & Co. (JPM $64) reported 2Q earnings-per-share (EPS) of $1.55, above the $1.42 FactSet estimate, as revenues rose 2.5% year-over-year (y/y) to $24.4 billion, exceeding the projected $24.2 billion. The company said it performed well in all of its major businesses, highlighted by broad core loan growth, particularly in mortgage and commercial real estate. JPM added that outside of energy, both wholesale and consumer credit quality remained very good. Shares gained ground. 

Delta Air Lines Inc. (DAL $41) posted 2Q EPS ex-items of $1.47, compared to the expected $1.42, with revenues declining 2.4% y/y to $10.4 billion, just below forecasts of $10.5 billion. DAL noted that the revenue environment remains challenging, with persistent headwinds from close-in domestic yields and geopolitical uncertainty. DAL closedto the upside.

Yum Brands Inc. (YUM $89) announced 2Q profits ex-items of $0.75 per share, one penny north of estimates, as revenues declined 3.0% y/y to $3.0 billion, versus the forecasted $3.1 billion. The parent of KFC, Taco Bell and Pizza Hut said its worldwide and China division same-store sales were flat y/y, both below expectations. However, YUM finished nicely higher as it raised its core operating earnings growth guidance and said its China division is off to a good start in 3Q.

CSX Corp. (CSX $29) reported 2Q EPS of $0.47, above the anticipated $0.44, with revenues declining 12.0% y/y to $2.7 billion, roughly in line with expectations. The first major rail company to report 2Q results said it continues to expect full-year earnings to decline as the strong U.S. dollar, low commodity prices and energy market transition continue to challenge financial performance. CSX traded higher. 

Bayer AG(BAYRY $103) announced that it has increased its takeover offer for Monsanto Co. (MON $104) from $122.00 to $125.00 per share in cash, valuing the company at $54.7 billion, per Bloomberg, and offered a $1.5 billion reverse antitrust break-up fee. Monsanto acknowledged receiving the revised offer and said its board will review it. MON traded higher.

Jobless claims hold, while wholesale price inflation jumps

Weekly initial jobless claims (chart) remained at 254,000 last week, versus the Bloomberg estimate of 265,000. The four-week moving average fell by 5,750 to 259,000, while continuing claims rose 32,000 to 2,149,000, north of the estimated level of 2,130,000.

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in June rose 0.5% month-over-month (m/m), versus expectations of a 0.3% increase, and compared to May's unrevised 0.4% gain. The core rate, which excludes food and energy, gained 0.4% m/m, topping forecasts of a 0.1% rise, and May's unadjusted 0.3% increase. Y/Y, the headline rate was up 0.3%, versus projections of a flat reading, and the core PPI was 1.3% higher last month, exceeding estimates of a 1.0% gain. In May, producer prices dipped 0.1% and were up 1.2% y/y for the headline and core rates, respectively.

Treasuries finished lower, with the yield on the 2-year note ticking 1 basis point (bp) higher to 0.68%, the yield on the 10-year note rising 6 bps to 1.53%, and the 30-year bond rate gaining 8 bps to 2.25%. Bond yields have shown some signs of life as of late, rebounding from record lows that have come from the U.K. Brexit fallout, which exacerbated global growth concerns, as well as dampened expectations for a Fed rate hike this year. Against this backdrop, read our article, Uncharted Waters: What Record-Low Yields Mean for Investors, at www.schwab.com/insights and follow Schwab on Twitter: @schwabresearch.

Tomorrow, the economic week will end with a flurry of key reports, as we will get June reads on retail sales and the Consumer Price Index (CPI), along with industrial production and capacity utilization. Also, the preliminary July University of Michigan Consumer Sentiment Index will be released. Retail sales are expected to rise for a third-straight month and CPI is projected to grow for a fourth-consecutive month, while industrial production and capacity utilization are estimated to rebound from the prior month's drops. Consumer sentiment is anticipated to be little changed from June's level, and the markets will likely be looking to see how much the relatively positive developments being seen in the U.S. offset the impact from the late-June U.K. Brexit vote.

As noted in the recent Schwab Market Perspective: Looking Beyond Britain, although U.S. consumer confidence has been slightly dented, we see continued supports for consumer spending, including low interest rates, higher wages, better housing data, and a healthy employment picture. If financial markets stabilize, the job market remains healthy, and inflation pressures rise the Fed could look to move toward a more “normal” rate, while also giving it some room to act if/when the U.S. economy begins showing recession risks. Read the whole article at www.schwab.com/marketinsight.

Other releases on tomorrow's economic docket include: the Empire Manufacturing Index and business inventories.

Europe mostly higher despite BoE rate decision surprise, Asia adds to rally

European equities traded mostly higher, with oil & gas and basic materials stocks higher on the heels of the recent optimism in the mining sector and as crude oil prices rebounded from yesterday's drop. Moreover, Italian banking stocks, which have come under fire as of late to weigh on the financial sector in the region, rallied to help boost the markets on eased capital concerns. However, stocks finished off the best levels of the day and U.K. equities reversed to the downside after the Bank of England (BoE) unexpectedly left its benchmark interest rate unchanged at a record low of 0.50%, while Bloomberg economists had anticipated a 25 bps reduction. The BoE voted 8-1 to maintain its monetary policy stance, with the lone dissenter voting for a reduction. The British pound jumped against the U.S. dollar, but the BoE noted in its policy-meeting minutes that "most members of the committee expect monetary policy to be loosened in August." The euro gained ground on the greenback, while bond yields in the region finished mostly higher. With volatility remaining elevated, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, provides  Three Reasons Why Now is Not the Time to Retreat from Global Diversificationat www.schwab.com/marketinsight, and be sure to follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia continued the rally this week that has seen Japanese markets surge on expectations that the nation will deploy more aggressive stimulus measures. Also, global market sentiment seemingly improved, courtesy of eased Brexit and political uncertainty in the U.K., and as last week's stronger-than-expected U.S. labor report helped soothe global growth concerns. Japanese equities added to a solid weekly gain, with the yen dropping late in the session on ramped up speculation that the country could be close to announcing coordinated fiscal and monetary stimulus measures. For more on Japan's potential increased stimulus measures see Schwab's Jeffrey Kleintop's, article, What investors need to know about helicopter money. Australian and Indian securities gained ground, while South Korean listings also ticked higher on the heels of the Bank of Korea's decision to keep its benchmark interest rate unchanged.

However, performance in China was mixed, with mainland shares declining and stocks in Hong Kong advancing. The moves in China followed yesterday's mixed trade report and came ahead of tonight's flood of economic reports from the nation, with industrial production and retail sales data being accompanied by 2Q GDP, forecasted to show y/y growth slowed to 6.6% from 6.7% in 1Q. Schwab's Jeffrey Kleintop discusses China data in his article, Trust but Verify: Five Independent Indicators of China's Economy. Also, Schwab's Director of International Research, Michelle Gibley, CFA, offers 5 Reasons China Won't Crash the Global Economy in 2016. Read all the articles at www.schwab.com/oninternational.

Tomorrow, the international economic docket will be headlined by the aforementioned plethora of releases from China, while reports from across the pond will include the trade balance from Italy, construction output from the U.K. and the trade balance and CPI for the Eurozone.