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Thursday, July 07, 2016

Stocks Disagree on Direction Ahead of Jobs Data

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

Stocks Disagree on Direction Ahead of Jobs Data

U.S. stocks closed the trading session mixed with some modest early gains fading as investors may have been exercising some caution ahead of tomorrow's June labor report release. Crude oil prices reversed solidly lower on the heels of a weekly report that showed stockpiles fell less than forecasted, while weekly jobless claims declined and ADP reported a better-than-expected increase for private sector jobs. Treasuries and gold were lower and the U.S. dollar was higher.

The Dow Jones Industrial Average (DJIA) declined 23 points (0.1%) to 17,896, the S&P 500 Index decreased 2 points (0.1%) to 2,098, and the Nasdaq Composite added 18 points (0.4%) to 4,877. In moderate volume, 864 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil was $2.29 lower at $45.14 per barrel, wholesale gasoline dropped $0.07 to $1.36 per gallon and the Bloomberg gold spot price decreased $3.76 to $1,360.02 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 96.27.

PepsiCo Inc. (PEP $107) reported core 2Q EPS of $1.35, above the $1.29 FactSet estimate, on revenues of $15.4 billion that matched expectations. The snack and soft drink maker credited strength in the U.S. market and its cost-cutting initiatives that were able to overcome weaker sales abroad. PEP also raised its full-year forecasts. Shares of PEP closed nicely higher.

Danone SA (DANOY $14) has agreed to buy WhiteWave Foods Co. (WWAV $56) for $10 billion, in a move to add the Denver-based company's popular Silk soy milk brand to its expanding organic food segment. WWAV shareholders will receive $56.25 per share in cash for each share owned, a 19% premium to Wednesday's closing price. Danone's Chief Executive Officer Faber said the acquisition will "allow us to double the size of our U.S. business and become the world leader in organic." DANOY finished slightly higher, while WWAV rallied.

Jobs data highlights economic calendar

Weekly initial jobless claims (chart) declined by 16,000 to 254,000 last week, versus the Bloomberg estimate of 270,000. The prior week's figure of 270,000 was downwardly revised to 268,000. The four-week moving average declined by 2,500 to 264,750, while continuing claims fell 44,000 to 2,124,000, north of the estimated level of 2,123,000.

The ADP Employment Change Report showed private sector payrolls rose by 172,000 jobs in June, above forecasts of 151,000, while May's gain of 173,000 jobs was revised lower to a 168,000 rise. Today’s ADP data, which does not include government hiring and firing, comes ahead of tomorrow's broader June nonfarm payroll report, expected to show an increase of 180,000 jobs, while private sector payrolls are expected to rise 170,000 (economic calendar). The unemployment rate is forecasted to tick higher to 4.8% from 4.7% and average hourly earnings are projected to rise 0.2% month-over-month (m/m).

In the final hour of trading tomorrow, we will also receive the latest consumer credit report, which is expected to show consumer borrowing for the month of May expanded by a level of $16.0 billion, after increasing by $13.4 billion in April.

Treasuries were mostly lower, with the yield on the 2-year note increasing 1 basis point (bp) to .059% and the yield on the 10-year note gaining 2 bps to 1.39%, while the yield on the 30-year bond was nearly unchanged at 2.14%. Bond yields have come under pressure as of late, falling to record lows as the global markets continue to grapple with the impact of the U.K. Brexit vote, and Schwab's Chief Fixed Income Strategist, Kathy Jones offers analysis in her recent article titled, Brexit: What Does It Mean for the Bond Market?, at www.schwab.com/marketinsight. Follow Kathy on Twitter: @kathyjones. Also, for more on the Brexit fallout, see the latest Schwab Sector Views: Sector Impact of Brexitfrom Schwab Director of Market and Sector Analysis, Brad Sorensen, CFA, at www.schwab.com/marktetinsight, and follow Schwab on Twitter: @schwabresearch.

Europe rebounds from three-day fall, Asia mixed 

European equities finished higher, rebounding from a three-day drop, as optimism re-surfaced that central banks will be supportive in the wake of the U.K. Brexit vote, which has fueled risk aversion and global growth concerns, and after yesterday's minutes from the Fed's June meeting showed continued dovishness. Also, anxiety toward the Italian banking sector softened amid increased hopes that a resolution to aid the battered sector can be achieved. Moreover, the British pound recovered somewhat after falling to a 31-year low versus the U.S. dollar. For deeper analysis of the impact of the Brexit vote, see the Schwab Center for Financial Research's recent article, Brexit: What Investors Should Know, at www.schwab.com/marketinsight and be sure to check out the video from Schwab's Managing Director of Trading and Derivatives, Randy Frederick and Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, titled Brexit Aftershock: When Will the Markets Calm Down?, at www.schwab.com/insights. Follow Randy and Jeff on Twitter: @randyafrederick and @jeffreykleintop.

Economic news in the region was mixed, with a better-than-expected read on U.K. industrial production being somewhat overshadowed by a surprising decline in production out of Germany, while France's trade deficit narrowed and housing prices in the U.K. rose above forecasts. The euro was lower versus the U.S. dollar, while bond yields in the region were higher.

Stocks in Asia finished mixed, with the angst surrounding the U.K. Brexit vote fallout easing somewhat, but the global growth concerns remained. The flight-to-safety continued to boost the yen, which fostered a decline for Japanese equities. Elsewhere, Australian securities managed gains despite Standard & Poor's lowering the nation's AAA-credit rating outlook to negative from stable, saying "the government's fiscal stance may no longer be compatible with the country's high level of indebtedness." The move follows last weekend's general elections that rendered inconclusive results. Mainland Chinese stocks were mostly flat, but securities trading in Hong Kong gained ground for the sixth-straight day. Meanwhile, South Korean stocks rose and Indian equities inched higher following yesterday's holiday.

The international economic docket for tomorrow will yield trade data from Japan and Germany, industrial and manufacturing production from France and labor costs and the trade balance from the U.K.

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