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Friday, July 08, 2016

Stocks See Solid Gains Following Jobs Report

Charles Schwab: On the Market
Posted: 7/8/2016 4:15 PM ET

Stocks See Solid Gains Following Jobs Report

U.S. stocks rallied early and never looked back in the wake of the June labor report which showed a solid improvement in monthly job creation, though the unemployment rate ticked higher and growth in average hourly earnings was shy of forecasts. Treasuries were mixed following the jobs report, while in the final hour of trading consumer credit was shown to have expanded more than expected. Crude oil prices edged lower, the U.S. dollar was nearly unchanged and gold was slightly higher.

The Dow Jones Industrial Average (DJIA) rallied 251 points (1.4%) to 18,147, the S&P 500 Index surged 32 points (1.5%) to 2,130, and the Nasdaq Composite jumped 80 points (1.6%) to 4,957. In moderately heavy volume, 920 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil was $0.27 higher at $45.41 per barrel, wholesale gasoline added $0.01 to $1.37 per gallon and the Bloomberg gold spot price increased $5.89 to $1,366.34 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 96.25. Markets were higher for the week, as the DJIA gained 1.1%, the S&P 500 Index increased 1.3% and the Nasdaq Composite rallied 1.9%.

Gap Inc. (GPS $23) reported that net sales for the five-week period ended July 2, 2016 rose by 2% to $1.57 billion, compared to a 1% decline a year ago, with growth from its Old Navy segment driving the results for the clothing retailer. Shares of GPS finished nicely higher.

Polycom Inc. (PLCM $12) announced that it has agreed to be acquired by privately-held Siris Capital Group LLC for a price of $12.50 per share in cash. The offer is subject to PLCM's termination of its existing merger agreement with Mitel Networks Corp. (MITL $7). The transaction is valued at roughly $2.0 billion, including debt, a 13.6% premium over its previous offer from MITL. Shares of both companies closed sharply higher.

U.S. jobs jump, but unemployment ticks higher, while consumer credit tops estimates

Nonfarm payrolls (chart) rose by 287,000 jobs month-over-month (m/m) in June, compared to the Bloomberg forecast of a 180,000 increase. The disappointing rise of 38,000 seen in May was downwardly revised to a gain of 11,000 jobs. The total downward revision to job gains in May and April was 6,000. Excluding government hiring and firing, private sector payrolls increased by 265,000, versus the forecasted gain of 170,000, after declining by 6,000 in May, negatively revised from the 25,000 rise that was initially reported. Gains were seen in professional & business services with an increase of 38,000 jobs, telecommunications, with a 28,000 rise following the 32,000 decline registered in May due primarily to the Verizon strike, while manufacturing jumped 14,000.

The unemployment rate rose to 4.9% from 4.7%, compared to expectations of an increase to 4.8%, while average hourly earnings grew by 0.1% m/m, below projections of a 0.2% increase, and May's 0.2% rise was unadjusted. Finally, average weekly hours remained at May's unrevised 34.4 hours level, matching projections.

Consumer credit, released in the final hour of trading, showed consumer borrowing expanded by $18.6 billion during May, topping the $16.0 billion forecast of economists polled by Bloomberg, while April's figure remained near a level of $13.4 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, rose $16.2 billion, while revolving debt, which includes credit cards, rose by $2.4 billion.

Treasuries were mixed, with the yield on the 2-year note increasing 2 basis points (bps) to 0.61%, while the yield on the 10-year note decreased 3 bps to 1.36%, and the 30-year bond rate declined 4 bps to 2.10%. Bond yields have seen pressure lately, 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 with a focus on sectors, see the latest Schwab Sector Views: Sector Impact of Brexit from Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, at www.schwab.com/marktetinsight, while you can also follow Schwab on Twitter: @schwabresearch.

European markets get a boost from U.S. labor report, Asia mostly lower

European equities finished the week on a high note, notching solid gains following an upbeat U.S. labor report. The British pound continued to slowly recover from its rout that pushed it to a 31-year low versus the U.S. dollar this week in the wake of the Brexit vote, while a one-off special consumer confidence survey in the U.K. to measure sentiment following the Brexit vote showed a drop to a reading of -9 from the -1 posted in an earlier, regularly-scheduled monthly release. 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. Additional economic news in the region was mixed, as trade data out of Germany and the U.K. were mostly in line with forecasts, while industrial production in France fell short of expectations. The euro lost ground versus the U.S. dollar, while bond yield in the region were lower.

Stocks in Asia finished mostly lower, as the post-Brexit rally lost steam amid global growth concerns, ahead of the release of Friday's U.S. employment report. Flight-to-safety continued to boost the yen, pushing Japanese equities lower, while some attention may have shifted to the country's upper house elections, to be held this weekend. Australian securities ticked higher despite a sharp cut in the forecast for iron ore prices from the nation's Department of Industry, Innovation and Science, and following the credit outlook downgrade from Standard & Poor's on Thursday. Chinese stocks were lower amid rising worries over the country's banking sector, after a report showed non-performing loans exceeded $299.2 billion in May, upping banks' bad-loan ratio to 2.15%. Meanwhile, South Korean equites fell and Indian listings also lost ground.

Jobs report gives boost to stocks

Despite a sluggish start, U.S. stocks were higher for the holiday-shortened week as equities rallied on Friday, shaking off some of the post Brexit hangover, with the Dow topping 18,000 and the S&P 500 closing above 2,100. Gains for stocks transpired on the heels of the June labor report, which showed a solid improvement from May's disappointing figures for jobs created during the month. Our experts note in the recent Schwab Market Perspective: Looking Beyond Britain, that healthy job growth and the possible support to inflation from higher wages lead us to wonder if market expectations around Fed policy may have gone too far. The futures market indicates roughly no chance of a hike for the balance of the year; while rate cut expectations have come back in play. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

In addition to the jobs data, some other positive domestic economic reports included a decline in weekly jobless claims and a jump in mortgage applications, while the Institute for Supply Management (ISM) non-Manufacturing Index showed growth accelerated more than expected, rising to 56.5 in June, the highest since November 2015. However, factory orders declined and durable goods orders were revised to a 2.3% drop, slightly lower than the initial estimate.

Unofficial start to 2Q earnings season next week

Next week's economic docket will heat back up, with key releases of retail sales, the Consumer Price Index (CPI), the Producer Price Index (PPI), the Fed's Beige Book, industrial production and capacity utilization, along with the preliminary University of Michigan Consumer Sentiment Index for July.

2Q earnings season will also unofficially kick-off next week as Alcoa Inc. (AA $11) is expected to report results after the close on Monday. As noted in the recent Schwab Market Perspective, some questions have come to light recently regarding what consequences the uncertainty in Europe and a potential strengthening of the U.S. dollar may have. We'll start to get an initial view on those questions in the next few weeks as second quarter earnings season ramps up. Read the whole article at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

International reports slated for next week include: Japan—machine and machine tool orders, PPI, industrial production and capacity utilization and the Tertiary Industry Index. China—foreign direct investment, trade data, industrial production, retail sales and 2Q GDP. India—car sales, CPI, industrial production and trade data. U.K.—construction output and the Bank of England will announce its rate decision. Germany—Wholesale Price Index and CPI. Eurozone—industrial production, trade balance and CPI.

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