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Wednesday, August 17, 2016

Divided Fed Ups Ante on Uncertainty



Charles Schwab: On the Market
Posted: 8/17/2016 4:15 PM ET

Divided Fed Ups Ante on Uncertainty

U.S. equities were able to recover from early losses to finish near the flat line, after the Fed's afternoon release of its July meeting minutes showed a split Committee with regards to the timing of a rate increase. Treasuries rose following the report, while crude oil prices were able to finish higher after the government's oil report showed an unexpected drop in inventories. Earnings results from the retail sector continued to fill the economic docket, while gold and the U.S. dollar were nearly unchanged.

The Dow Jones Industrial Average (DJIA) increased 22 points (0.1%) to 18,574, the S&P 500 Index gained 4 points (0.2%) to 2,182 and the Nasdaq Composite added nearly 2 points to close at 5,229. In moderate volume, 777 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.21 higher to $46.79 per barrel, wholesale gasoline added $0.03 to $1.45 per gallon and the Bloomberg gold spot price ticked $0.21 higher to $1,346.56 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was flat at 94.79.

Target Corp. (TGT $71) reported 2Q earnings-per-share (EPS) ex-items of $1.23, above the $1.13 FactSet estimate, as revenues dropped 7.2% year-over-year (y/y) to $16.2 billion, roughly in line with forecasts. 2Q same-store sales declined 1.1% y/y, versus the projected 0.7% decrease. TGT issued softer-than-expected 3Q EPS guidance and lowered its full-year profit and same-store sales outlooks. Shares were solidly lower.

Lowe's Companies Inc. (LOW $77) posted 2Q profits ex-items of $1.37 per share, compared to the expected $1.42, with revenues growing 5.3% y/y to $18.3 billion, below the forecasted $18.4 billion. Quarterly same-store sales increased 2.0% y/y, compared to the projected 4.2% gain. LOW lowered its full-year EPS outlook and announced stronger-than-expected revenue guidance, while reaffirming its same-store sales forecast. Shares finished noticeably lower.

Urban Outfitters Inc. (URBN $36) announced 2Q earnings of $0.66 per share, topping the expected $0.55, as revenues rose 3.0% y/y to $891 million, versus the estimated $886 million. Same-store sales increased 1.0% y/y, compared to the projected flat reading. Shares were nicely higher.

Shares of Cree Inc. (CREE $23) were sharply lower after the LED lighting company issued softer-than-expected 1Q guidance after its fiscal 4Q EPS ex-items of $0.19 came in a penny shy of expectations.

Fed minutes show split Fed

The Federal Open Market Committee's (FOMC) July meeting minutes, released in afternoon action, showed a somewhat divided Fed, with two members of the Committee wanting a rate hike sooner. Most members noted uncertainty in the aftermath of Brexit, while also being unsure of the inflation outlook, needing more confidence in the pace of price increases. However, the overriding consensus was that the Committee saw little risk in a sharp increase in inflation, and that it was prudent to accumulate more data before taking any further steps to remove policy accommodation. With uncertainty regarding Fed policy festering to cause some volatility outside the stock markets, Schwab's Chief Investment Strategist, Liz Ann Sonders notes in her latest commentary, With a Little Help From My Friends: On Africa, Economy and Earnings we continue to believe a rate hike is on the table for this year. The combination of Fed policy uncertainty and the contentious election season could mean the recent lull in volatility will not persist into the fall. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

The MBA Mortgage Application Index fell 4.0% last week, after rising 7.1% in the previous week. The fall came as a 4.2% decrease for the Refinance Index was accompanied by a 3.9% decline for the Purchase Index. The average 30-year mortgage rate dipped 1 basis point (bp) to 3.64%.

Treasuries moved higher following the Fed minutes, as the yield on the 2-year note fell 2 bps to 0.74%, while the yields on the 10-year note and the 30-year bond declined 3 bps to 1.55% and 2.26%, respectively. For analysis on the fixed income markets see the video from Schwab's Managing Director of Trading and Derivatives, Randy Frederick and Collin Martin, CFA, titled  Tempered Expectations for Bond Returns: Why Hold Bonds?, at www.schwab.com/insights. Also, Schwab's Chief Fixed Income Strategist, Kathy Jones addresses in her latest article, What Does Strong Job Growth Mean for Bond Investors?, at www.schwab.com/marketinsight. Follow Randy, Kathy and Schwab on Twitter: @randyafrederick, @kathyjones and @schwabresearch.

Tomorrow's economic calendar will begin with weekly initial jobless claims, forecasted to tick lower to 265,000 from the prior week's 266,000, followed by the Philly Fed Manufacturing Index, with economists expecting the gauge of activity to move back into expansion territory, as denoted by a reading above zero, by posting a level of 2.0 for August, following July's -2.9 figure. Rounding out the day will be July's Index of Leading Economic Indicators, expected to match June's 0.3% rise.

Europe lower, Asia mixed ahead of Fed report

European equities moved lower, with technology stocks leading the way along with a pullback in the mining sector, while caution likely prevailed as the global markets eyed today's release of the July policy meeting minutes in the U.S. The euro dipped versus the U.S. dollar after yesterday's rally, and bond yields in the region were mostly lower. The British pound lost some ground compared to the greenback, despite an unexpected drop in July jobless claims. The pound advanced yesterday following a hotter-than-expected rise in consumer price inflation, with data out of the nation post the vote in late June to leave the European Union, known as a Brexit, being highly scrutinized for implications of the economic impact of the Brexit vote. Reads on U.K. retail sales and public sector net borrowing are due out later this week. For more on the potential impact of the Brexit vote, read Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Brexit's Impact on Sectors, Part Two at www.schwab.com/marketinsight.

Stocks in Asia finished mixed amid some likely caution ahead of today's release of the U.S. FOMC's July meeting minutes, amid the backdrop of heightened Fed policy uncertainty, which has contributed to volatility in the currency and bond markets. Amid the elevated uncertainty in the markets, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversification at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop. Japanese equities rose, trimming yesterday's loss, with the yen giving back some of its rally that has come courtesy of the Fed policy uncertainty and lingering disappointment regarding monetary policy actions from the Bank of Japan. Moreover, yesterday's extension of the rebound in crude oil prices boosted the global energy sector, which helped Australia's markets eke out a slight gain. Mainland Chinese securities finished flat and those trading in Hong Kong declined slightly, following the approval of the long-planned stock-trading link between Hong Kong and Shenzhen, which expectations of have bolstered the Chinese markets. Per Bloomberg, this is another step toward opening China's $6.5 trillion equity market to international investors, and may start in about four months. Elsewhere, stocks in both India and South Korea moved to the downside.

Items on tomorrow's international economic calendar include: trade figures from Japan, employment data from Australia and France, the aforementioned retail sales out of the U.K., and CPI from the Eurozone.

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