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Tuesday, July 26, 2016

Stocks Mixed Ahead of Fed Meeting

Charles Schwab: On the Market
Posted: 7/26/2016 4:15 PM ET

Stocks Mixed Ahead of Fed Meeting

U.S. stocks finished the trading session mixed and near the flat line amid a slew of economic and earnings data, and some noticeable caution ahead of tomorrow's conclusion to the Fed's monetary policy meeting. Treasuries were modestly higher, crude oil prices were mixed, while the U.S. dollar was slightly lower and gold gained ground.

The Dow Jones Industrial Average (DJIA) declined 19 points (0.1%) to 18,474, while the S&P 500 Index gained nearly 1 point to 2,169 and the Nasdaq Composite closed 12 points (0.2%) higher to 5,110. In moderate volume, 810 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil was $0.21 lower at $42.92 per barrel, wholesale gasoline gained $0.01 to $1.34 per gallon and the Bloomberg gold spot price increased $4.26 to $1,319.86 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 97.13.

Dow member Verizon Communications Inc. (VZ $55) reported 2Q earnings-per-share (EPS) ex-items of $0.94, besting the FactSet consensus estimate by $0.02, while revenues fell just shy of forecasts and decreased 5.4% year-over-year (y/y) to approximately $30.5 billion. Additionally, yesterday VZ announced it has entered into a definitive agreement to acquire the operating business of Yahoo! Inc. (YHOO $39). Shares of VZ were lower. 

Dow component McDonald's Corp. (MCD $122) announced 2Q EPS of $1.25, falling short of the $1.39 Factset consensus estimate, while revenues declined 3.6% y/y to approximately $6.3 billion to roughly match expectations. Shares of VZ were lower. 

Dow constituent 3M Company (MMM $178) reported 2Q EPS of $2.08, one penny north of forecasts, while revenues were roughly flat y/y at approximately $7.7 billion, meeting expectations. MMM traded lower.

Dow member United Technologies Corp. (UTX $108) was nicely higher after the company declared 2Q EPS ex-items of $1.82, surpassing the $1.68 FactSet estimate, while revenues also beat estimates rising 1.3% y/y to $14.9 billion.

Dow participant DuPont (DD $69) announced adjusted 2Q EPS of $1.24, beating the FactSet estimate of $1.10, while revenues declined nearly 1% y/y to $7.1 billion, exceeding estimates. DD was higher

Dow component Caterpillar Inc. (CAT $83) announced 2Q earnings of $1.09 per share, above the $0.96 FactSet consensus estimate, while revenues came in at $659 million, a decrease of 3.8% y/y, which the company noted was primarily due to a $15 million unfavorable impact from lower average earning assets. Shares of CAT finished higher.

Eli Lilly and Company (LLY $82) reported 2Q EPS ex-items of $0.86, matching the FactSet consensus estimate, while revenues beat forecasts, jumping 12.6% y/y to $5.4 billion. LLY is ticking higher.

After the closing bell yesterday, Texas Instruments Inc. (TXN $71) reported 2Q EPS of $0.76, north of the $0.72 FactSet estimate, while revenues increased 1.3% y/y to $3.3 billion topping expectations. TXN was higher.

Services sector read unexpectedly declined, regional manufacturing data jumps higher

The preliminary Markit U.S. Services PMI Index for July ticked lower to 50.9 from June's final reading of 51.4, with a level above 50 indicating expansion in activity, and compared to the Bloomberg forecast calling for a modest rise to 52.0. The release is independent and differs from the Institute for Supply Management's (ISM) report, as it has less historic value and Markit weights its index components differently.

The Consumer Confidence Index (chart) ticked slightly lower to 97.3 in July from the downwardly revised 97.4 level in June and compared to the estimated decline to 96.0. The sentiment towards the present situation continued to rise after two months ago registering the lowest level since November, while expectations of business conditions moved lower. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—rose to 0.7 from the -0.5 posted in June.

The Richmond Fed Manufacturing Activity Index unexpectedly jumped into expansion territory (a reading above zero), surging to 10 in July from the -7 posted in June, while economists had anticipated the index to remain in contraction territory, forecasting a reading of -5.

New home sales (chart) increased 3.5% month-over-month (m/m) in June to an annual rate of 592,000 units and compared to forecasts of 560,000 units. The median home price rose 6.1% y/y to $306,700. The supply of new home inventory decreased to 4.9 months at the current sales pace as sales declined m/m in the Northeast and South and rose in the West and Midwest. New home sales are based on contract signings instead of closings.

The 20-city composite S&P/Case-Shiller Home Price Index showed a gain in home prices of 5.2% y/y in May, just shy of expectations for a 5.5% rise. Month/month (m/m), home prices were down by 0.05% on a seasonally adjusted basis for May, below forecasts of a 0.1% increase.

Treasuries were modestly hgier, as the yields on the 2-year and the 10-year note fell 2 basis points (bps) to 0.75% and 1.56%, respectively, while the 30-year bond rate ticked 1 bp lower to 2.28%. 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. For analysis see the video from Schwab's Chief Investment Strategist, Liz Ann Sonders and Managing Director of Trading and Derivatives, Randy Frederick, titled Strong Jobs Report: Recession off the Table but Is Rate Hike Back On?, at www.schwab.com/insights. Follow Liz Ann and Randy on Twitter: @lizannsonders and @randyafrederick. Also, Schwab's Chief Fixed Income Strategist, Kathy Jones offers analysis in her recent article 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, the headlining event will likely be the conclusion of the Federal Open Market Committee's (FOMC) two-day monetary policy meeting, where it is widely expected that the FOMC will keep its stance unchanged. As noted in the latest Schwab Market Perspective: New Records…Same Skepticism, while there’s a near unanimous opinion that the Federal Open Market Committee (FOMC) will stay put at its meeting this week, 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.

In addition to the FOMC, the economic calendar will hold the preliminary durable goods orders report, forecasted to show a 1.4% m/m decline for June, while ex-transportation, orders are expected to have increased 0.3% m/m. As well, pending home sales will be reported, expected to have risen 1.2% m/m in June, while MBA Mortgage Applications will round out the day's docket.

European equities mostly higher, Asia mixed as Japan falls and China rallies

European equites pared earlier declines and finished mostly higher in late-afternoon action with gains in commodity listings helping to ease losses in energy and bank issues. Traders may have exercised some caution ahead of this week's monetary policy decisions from the U.S. Federal Reserve and Bank of Japan and as more than 200 companies listed on the Stoxx Europe 600 Index are reporting earnings this week. The British pound continued its decline versus most of its peers today after a Bank of England policy maker said he's begun to favor immediate stimulus for the U.K. economy. Euro-area bonds finished lower as some early support from speculation that the European Central Bank (ECB) will extend stimulus measures in September faded. The ECB made no changes to its policy stance at last week's meeting. German 10-year bunds dipped to halt a three-day advance, ahead of the key central bank meetings later this week, while the euro lost ground versus the U.S. dollar. Meanwhile, it's been just over a month since the U.K. voted in favor of Brexit and Schwab's experts inform us in the most recent Schwab Market Perspective: New Records…Same Skepticism, that the Brexit aftermath on a global basis has been better than many had been expecting, leading to improved optimism that some of the more dire scenarios being painted won’t come to fruition. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Stocks trading in Asia were mixed as Japanese shares declined on some fresh strength in the yen, while Chinese issues were nicely higher amid some economic optimism in the country. Japan's markets dropped on the heels of yesterday's decline for U.S. equities and as a read for producer price inflation came in slightly hotter than expected. Export related issues were among the worst performers as the yen rallied to extend gains from Monday ahead of Friday's conclusion to the Bank of Japan's two-day monetary policy meeting with the current majority of market participants expecting the central bank to ease monetary policy further. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, addresses the use of helicopter money—a term coined in 1969 by economist Milton Friedman to make a hypothetical point about inflation--being discussed by policy makers in Japan in order to boost growth and work their way out of Japan’s enormous debt load that stands at more than double the size of the economy, in his article, What investors need to know about helicopter money, at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop.

Stocks in China were the top performers in the region, led by consumer companies, while a 10-day volatility gauge dropped to a two-year low yesterday. Securities traded Hong Kong joined the advance, as casino stocks rallied following some upbeat earnings releases from the gambling sector. Australian listings ticked higher and speculation of a rate cut by the Reserve Bank of Australia hasn't deterred traders from doubling long positions on the country's dollar as they are wagering that the Reserve Bank of New Zealand may drop rates by a wider margin. Stocks in India declined, while separately the nation's market regulator announced a desire to slow down high frequency trading in the next three months. Lastly, South Korean equities rallied

Tomorrow's international economic calendar will offer inflation data from Australia, consumer sentiment from South Korea, PPI from France, consumer confidence from Germany, housing prices and GDP data from the U.K., and confidence measures from Italy.

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