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Friday, August 12, 2016

Equity Exchanges Mostly Lower After Flat Retail Sales

Charles Schwab: On the Market
Posted: 8/12/2016 4:15 PM ET

Equity Exchanges Mostly Lower After Flat Retail Sales

After yesterday's record-setting performance, U.S. stocks finished mostly lower, though the Nasdaq eked out a gain, on the heels of a disappointing July retail sales report, which coupled with some softer-than-expected China data to dampen sentiment. Treasuries rallied and the U.S. dollar was lower as additional domestic data revealed an unexpected decline in wholesale price inflation. Gold was lower and crude oil prices finished higher.

The Dow Jones Industrial Average (DJIA) decreased 37 points (0.2%) to 18,575, the S&P 500 Index shed 2 points (0.1%) to 2,184 and the Nasdaq Composite added 5 points (0.1%) to 5,233. In moderate volume, 698 million shares were traded on the NYSE and 1.5 billion shares changed hands on the Nasdaq. WTI crude oil was $1.00 higher at $44.49 per barrel, wholesale gasoline added $0.01 to $1.37 per gallon and the Bloomberg gold spot price declined $3.28 to $1,335.50 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—ticked 0.1% lower to 95.72. Markets were mostly flat but slightly higher for the week, as the DJIA and the Nasdaq increased 0.2% and the S&P 500 advanced nearly 0.1%.

J.C. Penney Co. Inc. (JCP $11) reported a 2Q loss ex-items of $0.05 per share, better than the $0.14 per share shortfall that FactSet had estimated, as revenues rose 1.5% year-over-year (y/y) to $2.9 billion, roughly in line with forecasts. 2Q same-store sales grew 2.2% y/y, mostly matching estimates. JCP reaffirmed its full-year guidance and shares finished higher.

Nordstrom Inc. (JWN $51) posted 2Q earnings-per-share (EPS) of $0.67, above the expected $0.56, with revenues declining 1.4% y/y to $3.7 billion, roughly in line with forecasts. Quarterly same-store sales decreased 1.2% y/y, compared to the projected 2.2% drop. JWN raised its full-year EPS outlook and reaffirmed its revenue guidance. Shares rallied.

NVIDIA Corp. (NVDA $63) achieved 2Q profits of $0.40 per share, topping the projected $0.37, as revenues rose 24.0% y/y to $1.4 billion, roughly matching estimates. NVDA issued stronger-than-expected 3Q revenue guidance. Shares gained solid ground.

Retail sales, inflation and consumer sentiment data miss expectations

Advance retail sales (chart) for July were flat month-over-month (m/m), versus the Bloomberg forecast of a 0.4% gain and June's upwardly revised 0.8% rise. Last month's sales ex-autos were lower by 0.3%, compared to the expected 0.1% increase, and following June's upwardly revised 0.9% rise. Sales ex-autos and gas dipped 0.1%, versus estimates of a 0.3% rise, and compared to June's favorably revised 0.8% increase. Finally, the retail sales control group, a figure used to help calculate GDP, was flat, compared to the projected 0.3% rise and June's unrevised 0.5% increase. Auto and nonstore retail sales—which include online spending—were bright spots but performance elsewhere was lackluster, with sales at gasoline stations falling solidly.

The Producer Price Index (PPI) (chart) in July declined 0.4% m/m, versus expectations of a 0.1% increase. The core rate, which excludes food and energy, decreased 0.3%, compared to forecasts of a 0.2% rise. Y/Y, the headline rate was down 0.2%, versus projections of a 0.2% rise, and the core PPI was 0.7% higher, below estimates of a 1.2% gain. For analysis of the inflation environment on the bond markets, see Schwab's Fixed Income Director Collin Martin's, CFA, article titled, Do TIPS Make Sense When Inflation is Low?, at www.schwab.com/onbonds and follow Schwab on Twitter: @schwabresearch.

The preliminary University of Michigan Consumer Sentiment Index (chart) ticked higher to 90.4 this month from July's 90.0 level, and compared to the expected 91.5 figure. The economic conditions portion of the report deteriorated, though the outlook component improved. The 1-year inflation outlook fell to 2.5% from 2.7%, while the 5-10 year inflation estimate remained at 2.6%.

Business inventories (chart) increased 0.2% m/m in June, above forecasts of a 0.1% rise, and matching May's unrevised gain. Sales jumped 1.2%, and the inventory-to-sales ratio—the time it would take to deplete inventories at the current sales pace—dipped to 1.39 months pace from May's 1.40 rate.

Today's mixed data appeared to catch the markets by surprise and likely dampened Fed rate hike expectations. However, as noted in the recent Schwab Market Perspective: Is the Recent Rally for Real?, the healthy job market and subsequent higher wages after years of stagnation, along with a continued solid housing sector, appear poised to buoy consumer confidence and retail sales in the second half. We believe the bull market will continue, but risks remain and bumps are inevitable. Read more at www.schwab.com/marketinsight.

Treasuries were higher, with the yields on the 2-year note and the 30-year bond declining 4 basis points (bps) to 0.71% and 2.23%, respectively, while the yield on the 10-year note fell 5 bps to 1.51%. For more analysis on the bond 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 and Kathy on Twitter: @randyafrederick and @kathyjones.

Europe flat amid a flood of global data

European equities finished little changed, with the global markets digesting some softer-than-expected economic reports in China and the U.S., along with a plethora of earnings and economic data in the region. Eurozone 2Q GDP came in at a 0.3% quarter-over-quarter rate to match forecasts as growth in German output topped forecasts but Italian GDP was unexpectedly flat. In other economic news, eurozone industrial production rose slightly more than expected for June, while U.K. construction output fell by a slightly smaller amount than expected.

Yesterday, the Stoxx Europe 600 Index erased the sharp drop that ensued following the late-June vote in the U.K. to leave the European Union (EU), known as a Brexit. Pledges by central banks, notably the Bank of England, which last week cut its benchmark interest rate and surprisingly boosted its asset purchases, along with some relatively upbeat global economic data have helped ease concerns about the impact of the Brexit vote. For more, 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. Also, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversificationand Five ways investors can make the most of slower growth. Read both articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop. The euro rose and the British pound was lower versus the U.S. dollar, while bond yields in the region declined.

Stocks in Asia moved higher to close out the week, following yesterday's gains in the U.S. and Europe, as crude oil prices rebounded solidly and earnings reports were mostly better than expected. Also, the markets shrugged off a plethora of July Chinese economic data that slightly missed forecasts. Japanese equities returned to action following yesterday's holiday break, managing gains that were bolstered by some weakness in the yen. Chinese stocks advanced with property-related issues leading the way on optimism that merger activity in the group could accelerate, per Bloomberg. China's industrial production and retail sales both grew but missed forecasts, while a double-digit rise in fixed asset investment matched expectations. After the closing bell, Chinese new yuan loans and aggregate financing—a gauge of total credit issued—both came in well short of estimates, while Hong Kong's 2Q GDP returned to growth after contracting in 1Q. Amid the flood of data, Schwab's Jeffrey Kleintop, CFA, offers in his article, Trust but Verify: Five Independent Indicators of China's Economy and Schwab's Director of International Research, Michelle Gibley, CFA, discusses 5 Reasons China Won't Crash the Global Economy in 2016. Read both articles at www.schwab.com/oninternational. Australian securities found some support from resource-related issues, while South Korean equities also ticked higher. Finally, some strength in banking stocks helped push Indian listings higher.

Choppy week yields simultaneous record highs in U.S.

U.S. stocks finished little changed for the week in choppy action as the global markets continued to grapple with a divergent and uncertain monetary policy landscape, along with mixed earnings and economic reports. With earnings season coming down the home stretch, results from the retail sector were mostly upbeat in contrast to Friday's disappointing July retail sales report. Per data compiled by Bloomberg, of the 457 companies in the S&P 500 that have reported thus far, nearly 56% have topped sales forecasts, while about 78% have bested profit projections. Dampened Fed rate hike expectations weighed on the U.S. dollar and Treasury yields, while supply speculation bolstered crude oil prices. Energy and consumer discretionary stocks showed some strength, partially offset by weakness in financial and healthcare issues. On Thursday, the S&P 500, Dow and Nasdaq simultaneously posted record highs for the first time since December 1999, while European markets erased the heavy losses seen in the wake of the Brexit vote fallout.

Schwab's Jeffrey Kleintop, CFA, notes in his article, Earnings estimates are rebounding: what it means for stocks, the end of the downtrend in earnings estimates over the past year and a half has helped to support stocks in recent months, even in the face of negative geopolitical developments. However, if earnings estimates should roll back over due to a shock or deterioration in the global economic data, stocks are unlikely to be as resilient to geopolitical developments. Read the whole article at www.schwab.com/marketinsight.

Economic lineup set for week ahead

Next week's U.S. economic calendar will bring an abundance of reports, with Wednesday's release of the minutes from the Federal Reserve's July meeting likely to garner some attention. Schwab's Liz Ann Sonders communicates in her recent article A Hopeful Transmission: Fed Holds Rates Steady, But…, that it’s clear the FOMC would like to continue to normalize rates, albeit gradually. Although no specific timing was mentioned, the FOMC repeated that it expects “economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.” Read the whole article at www.schwab.com/marketinsight and be sure to follow Liz Ann on Twitter: @lizannsonders.

Some housing data may command attention in the form of the NAHB Housing Market Index, housing starts and building permits. As noted in the Schwab Market Perspective, the housing market is continuing to look healthy, with new home sales rising another 3.5% in June. Read the whole perspective at www.schwab.com/marketinsight.

Additional notable reports expected to be released include the Empire Manufacturing Index, Consumer Price Index, Industrial Production and Capacity Utilization, and the Leading Index.

Next week's international reports: Japan—preliminary 2Q GDP, industrial production and capacity utilization, trade data, machine tool orders and the All Industry Activity Index. U.K.—house prices, CPI, PPI, employment data and retail sales. Germany—the Wholesale Price Index, CPI, preliminary 2Q GDP, PPI and the Zew Economic Sentiment Survey. Eurozone—preliminary 2Q GDP, trade data, construction output and CPI.

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