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Tuesday, August 16, 2016

Stocks Take a Little off the Top, Trimming Recent Gains

Charles Schwab: On the Market
Posted: 8/16/2016 4:15 PM ET

Stocks Take a Little off the Top, Trimming Recent Gains

U.S. stocks took a breather after the recent record-run, with the major domestic indexes exhaling the previous session's gains amid some volatility in the currency markets and a surprise rise in U.K. inflation. The U.S. dollar was lower, while gold, crude oil prices and Treasuries were higher. In economic news, housing starts and industrial production reports came in better than expected and core consumer price inflation was cooler than forecasted.

The Dow Jones Industrial Average (DJIA) decreased 84 points (0.5%) to 18,552, the S&P 500 Index shed 12 points (0.5%) to 2,178 and the Nasdaq Composite lost 35 points (0.7%) to 5,227. In moderate volume, 736 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil was $0.84 higher at $46.58 per barrel, wholesale gasoline added $0.02 to $1.42 per gallon and the Bloomberg gold spot price ticked $7.21 higher to $1,346.61 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.9% lower to 94.79.

Dow member Home Depot Inc. (HD $136) reported 2Q earnings-per-share (EPS) of $1.97, in line with the FactSet estimate, as revenues increased 6.6% year-over-year (y/y) to $26.5 billion, mostly matching forecasts. 2Q same-store sales grew 4.7% y/y, versus the projected 4.8% gain. HD raised its full-year EPS outlook, while reaffirming is sales guidance. Shares gave up early gains and finished modestly lower.

Advance Auto Parts Inc. (AAP $160) announced 2Q EPS ex-items of $1.90, below the forecasted $2.11, with revenues decreasing 4.8% y/y to $2.3 billion, versus the anticipated $2.2 billion. 2Q same-store sales declined 4.1% y/y, compared to the projected 4.5% decrease. The company said its 2Q results "were not acceptable" and it is moving thoughtfully and swiftly to make the necessary changes across a number of critical areas. AAP traded solidly lower.

Dick's Sporting Goods Inc. (DKS $59) reported 2Q earnings of $0.82 per share, well above the expected $0.69, as revenues grew 7.9% y/y to $2.0 billion, topping the forecasted $1.9 billion. Quarterly same-store sales rose 2.8% y/y, compared to the estimated 2.2% decline. DKS issued stronger-than-expected 3Q profit guidance and raised its full-year earnings outlook. Shares rallied.

Hain Celestial Group Inc. (HAIN $39) tumbled after delaying the release of its 4Q and full-year financial results, as it reviews its accounting for revenue associated with concessions that were granted to certain U.S. distributors. HAIN also said it is evaluating its internal control over financial reporting.

With 2Q earnings season wrapping up, Schwab's Chief Investment Strategist, Liz Ann Sonders discusses in her latest commentary, With a Little Help From My Friends: On Africa, Economy and Earnings whether earnings growth can squeak its way back into the green in the third quarter, at www.schwab.com/marketinsight. Follow Liz Ann on Twitter: @lizannsonders.

Housing construction activity mixed, core consumer price inflation misses

Housing starts (chart) for July rose 2.1% month-over-month (m/m) to an annual pace of 1,211,000 units, above the Bloomberg forecast of a 1,180,000 unit rate. June's starts were downwardly revised to an annual pace of 1,186,000. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, dipped 0.1% m/m in July to an annual rate of 1,152,000, after June's unrevised 1,153,000 rate, and below the expected annual pace of 1,160,000 units.

The Consumer Price Index (CPI) (chart) was flat m/m in July, matching forecasts, while June's 0.2% rise was unrevised. The core rate, which strips out food and energy, ticked 0.1% higher m/m, below expectations of a 0.2% rise and June's unrevised 0.2% increase. Y/Y, prices were 0.8% higher for the headline rate, south of forecasts of a 0.9% rise, while the core rate was up 2.2%, missing projections of a 2.3% increase. May y/y figures showed an unrevised 1.0% rise and an unadjusted 2.3% increase for the headline and core rates respectively.

Industrial production (chart) rose 0.7% m/m in July, versus estimates of a 0.3% increase, and following June's downwardly revised 0.4% gain. Manufacturing and mining production rose, while utilities output jumped. Capacity utilization rose to 75.9% from June's unrevised 75.4%, and compared to projections for a 75.6% rate. Capacity utilization is 4.1 percentage points below its long-run average.

Treasuries finished lower, with the yields on the 2-year and 10-year notes rising 2 basis points (bps) to 0.75% and 1.58%, respectively, while the 30-year bond rate ticked 1 bp higher to 2.29%. 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.

Today's reports showed housing starts unexpectedly rose and industrial production posted a back-to-back monthly gain, while the cooler-than-expected core consumer inflation followed an unexpected dip in July wholesale inflation. The data is likely preserving Fed rate hike uncertainty ahead of tomorrow's release of the Federal Open Market Committee's (FOMC) July meeting minutes (economic calendar). As noted in the recent Schwab Market Perspective: Is the Recent Rally for Real?, The FOMC upgraded their assessment of the financial situation through their statement, and had enough positive things to say about the economy to put the possibility of a hike at some point in 2016 firmly back on the table. And that possibility, along with the uncertainty that is a hallmark of the Fed as of late, will likely contribute to bouts of volatility. Read more at www.schwab.com/marketinsight.

The domestic docket for tomorrow will also include the weekly MBA Mortgage Applications report.

Europe and Asia lower as currency moves eyed

European equities traded lower, with the euro and British pound gaining solid ground on the U.S. dollar as recently eased U.S. Fed rate hike expectations was met with a surprising rise in U.K. inflation data for July. U.K. consumer price inflation accelerated 0.6% y/y versus expectations for it to remain at June's 0.5% increase. This was one of the first pieces of data for the markets to digest as they begin to assess the impact of the late-June vote in the U.K. to leave the European Union, known as a Brexit. The ensuing tumble in the pound following the Brexit vote led to the biggest jump in import costs in more than four years, per Bloomberg. Later this week, the U.K. will deliver reads on jobless claims, retail sales and public sector borrowing for July that are likely to garner attention. 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. In other economic news German investor confidence rebounded by a smaller-than-expected amount for this month. Bond yields in the region traded higher. Oil & gas issues were higher as crude oil prices added to a recent run.

Stocks in Asia finished lower, despite more record highs in the U.S. yesterday, with Japanese declines leading the way in the wake of a strong rally in the yen. The yen's ascent received a boost from waning U.S. Fed rate hike expectations, along with lingering disappointment and uncertainty regarding monetary policy actions from the Bank of Japan. Amid this backdrop, 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. Securities trading in mainland China and Hong Kong declined, even as the long-planned stock-trading link between Hong Kong and Shenzhen has been approved, taking another step toward opening China's $6.5 trillion equity market to international investors, per Bloomberg. Australian listings dipped as strength in oil & gas and basic materials stocks were overshadowed by weakness in the financial and telecom sectors. South Korean equities inched lower in a return to action following yesterday's holiday, while trading in India also resumed after a Monday break, with stocks declining despite the recent drop in the U.S. dollar as a hotter-than-expected read on the nation's wholesale price inflation for July likely weighing on sentiment.

Tomorrow, the international economic calendar will be light, offering employment data from the U.K.

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