Charles Schwab: On the MarketPosted: 9/2/2016 4:15 PM ET
Markets Notch Gains on Jobs Report
U.S. equities finished higher in the wake of a mixed August nonfarm payroll report that, albeit short of expectations, appeared solid enough to keep the notion of a September Fed rate hike still in play. Treasuries finished lower and the U.S. dollar gained ground following the report, which was accompanied by a larger-than-expected narrowing of the trade deficit. Elsewhere, equity news was mostly disappointing, headlined a severe miss in VeriFone’s guidance, while crude oil prices bounced back from this week's sharp decline and gold was higher.
The Dow Jones Industrial Average (DJIA) rose 73 points (0.4%) to 18,492, the S&P 500 Index gained 9 points (0.4%) to 2,180, and the Nasdaq Composite increased 23 points (0.4%) to 5,250. In moderate volume, 791 million shares were traded on the NYSE and 1.5 billion shares changed hands on the Nasdaq. WTI crude oil rebounded $1.28 to settle at $44.44 per barrel, wholesale gasoline ticked $0.03 higher to $1.30 per gallon and the Bloomberg gold spot price jumped $11.01 to $1,324.90 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 95.86. Markets were up for the week, as the DJIA and the S&P 500 Index both increased 0.5%, and the Nasdaq rose 0.6%.
Lululemon Athletica Inc. (LULU $69) reported 2Q earnings-per-share (EPS) ex-items of $0.38, roughly in line with the FactSet estimate, with revenues rising 14.0% year-over-year (y/y) to $515 million, versus the projected $516 million. 2Q same-store sales rose 4.0% y/y, below the expected 5.0% gain. The yoga-wear maker's 3Q EPS guidance came in mostly below expectations, while its full-year outlook was roughly in line with estimates. Shares were sharply lower.
Gap Inc. (GPS $24) posted a 3.0% y/y drop in August same-store sales, larger than the 2.0% decrease that was anticipated. Sales at its Gap and Banana Republic stores both fell, more than offsetting a modest gain in sales at its Old Navy stores. Shares of GPS lost ground.
VeriFone Systems Inc. (PAY $17) announced fiscal 3Q profits ex-items of $0.42 per share, two cents above forecasts, as revenues decreased 3.4% y/y to $493 million, south of the estimated $516 million. The electronic payment solutions company lowered its full-year guidance and severely missed the Street's expectations with its 3Q outlook. Shares tumbled.
August employment growth misses, trade deficit shrinks more than forecasted
Nonfarm payrolls (chart) rose by 151,000 jobs month-over-month (m/m) in August, compared to the Bloomberg forecast of a 180,000 increase. The rise of 255,000 seen in July was upwardly revised to a gain of 275,000 jobs. The total downward revision to job gains in June and July was 1,000. Excluding government hiring and firing, private sector payrolls increased by 126,000, versus the forecasted gain of 180,000, after increasing by 225,000 in July, upwardly revised from the 217,000 rise that was initially reported. Employment continued to trend up in several service-providing industries, while declining in construction and manufacturing.
The unemployment rate remained at 4.9%, compared to expectations of a dip to 4.8%, while average hourly earnings grew by 0.1% m/m, below projections of a 0.2% increase, and July's 0.3% rise was unadjusted. Finally, average weekly hours dipped to 34.3 from July's downwardly revised 34.4 hours level, and versus forecasts of 34.5.
Although missing forecasts, job growth remained steady coming off the prior two months' solid gains and some are pointing out that August has been one of the most revised months on the calendar. However, the softer-than-expected wage growth and hours worked may be causing some concern. After a brief drop following the report, September rate hike expectations rose back to near levels that preceded the data, while the U.S. dollar reversed higher along with Treasury yields. Schwab's Chief Investment Strategist, Liz Ann Sonders notes in her latest article, All Summer Long: Will the Extreme Lull in Volatility Persist?, on the heels of August's period of low volatility and volume, history shows similarly subdued periods tend to be followed by a lift in volatility, and some weakness in returns. Fed policy will likely drive much of any additional pickup in volatility and we expect to see the September odds move as economic data comes in over the next few weeks. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.
The trade balance (chart) showed that the deficit came in at $39.5 billion in July, compared to the $41.5 billion estimate. June's deficit was revised to $44.7 billion from the $44.5 billion posted earlier. Exports rose 1.9% m/m to $186.3 billion, and imports declined 0.8% m/m to $225.8 billion.
Factory orders (chart) rose 1.9% m/m in July, versus expectations of a 2.0% gain, while June's figure was adjusted lower to a 1.8% decrease. July durable goods orders—preliminarily reported a week ago—were unrevised at a 4.4% rise, and orders of nondefense capital goods excluding aircraft—a proxy for business spending—was revised lower to a 1.5% increase from the initially reported 1.6% rise. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, discusses the industrials sector in his latest Schwab Sector Views: The Politics and Economics of Industrials at www.schwab.com/marketinsight. Follow Schwab on Twitter: @schwabresearch.
Treasuries finished mostly lower, as the yield on the 2-year note was flat at 0.78%, while the yield on the 10-year note gained 3 basis points (bps) to 1.60% and the 30-year bond rate advanced 5 bps to 2.28%. For analysis on the fixed income markets see the video from Schwab's Vice President of Trading and Derivatives, Randy Frederick and Chief Fixed Income Strategist, Kathy Jones, titled Rate Hikes on the Horizon—but When? at www.schwab.com/insights. Follow Randy and Kathy on Twitter: @randyafrederick and @kathyjones.
Please note: All U.S. markets will be closed on Monday in observance of the Labor Day holiday.
European stocks higher despite soft U.S. jobs report, Asia mixed
European equities moved to the upside, with the markets digesting the softer-than-expected U.S. nonfarm payroll report, which initially dampened recently heightened September Fed rate hike expectations. Oil & gas issues rebounded as crude oil prices recovered some of this week's sharp drop that had come on a rise in the U.S. dollar amid heightened Fed rate hike expectations and as inventory data has fostered oversupply concerns. The equity markets in the region recovered from yesterday's downside reversal that followed a disappointing read on U.S. manufacturing activity that overshadowed a jump in U.K. manufacturing output, which continued to suggest the late-June vote in the U.K. to leave the European Union, known as a Brexit, is having a limited economic impact thus far. For more analysis of the Brexit fallout, Schwab's Director of International Research, Michelle Gibley, CFA, offers her latest article,
Keep Calm and Carry On: The Brexit Shock That Wasn't.
Moreover, with the markets choppy and poised for increased volatility amid the diverging global monetary policy landscape and Brexit uncertainty, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversification and why Your portfolio may be less diversified than you think. Read all these articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop. The euro was lower and the British pound was higher versus the greenback, while bond yields in the region finished mixed.
Stocks in Asia finished mixed in subdued volume on continued cautious trading ahead of today's key employment report in the U.S., which will follow yesterday's disappointing U.S. manufacturing data that appeared to dampen recently heightened expectations that the Fed will hike rates this month. Japanese equities were little changed, holding onto solid weekly gains that have been fostered by weakness in the yen as the U.S. dollar has rallied as of late amid the elevated Fed rate hike expectations. Chinese stocks, and those traded in Hong Kong advanced following some upbeat earnings results from the banking sector. Markets in Australia fell, as some weakness in healthcare, financials and oil & gas issues more than offset a rebound in the recently battered basic materials sector, while South Korean listings rose following the unexpected upward revision to its 2Q GDP growth to a 3.3% y/y rate, from the initial 3.2% expansion, and up from the 2.8% pace posted in 1Q. Finally, Indian securities moved modestly to the upside.
Stocks shrug oil's drop and soft manufacturing data
U.S. stocks finished modestly higher on the week, showing some resiliency in the face of a tumble in crude oil prices that pressured the energy sector on the recent strength in the U.S. dollar and inventory data that sparked oversupply concerns. The greenback had received a boost after last Friday's speech from Federal Reserve Chairwoman Janet Yellen and Vice Chair Fischer that suggested a September rate hike may be on the table. However, this week's data did little to change rate hike expectations, and financials continued to rally. Consumer Confidence and personal income and spending improved, and today's labor report showed job growth remained steady despite missing forecasts, countering an unexpected drop in the ISM Manufacturing Index into contraction territory for the first time since February and lackluster monthly auto sales. Global manufacturing reports were mostly positive, with U.K. and Chinese activity rising back into expansion territory, while eurozone output continued to grow. Treasury yields dipped on the short-to-medium end of the curve in choppy action as traders grappled with the mixed data. Equity news was relatively light, though Dow member Apple Inc. (AAPL $107) was in focus after the European Union (EU) Commission ruled that it was granted undue tax benefits in Ireland of up to $14.5 billion. Also, Hershey Co. (HSY $100) fell after Mondelez International Inc. (MDLZ $44) announced it has ended discussions regarding a possible combination of the two companies.
As noted in the Schwab Market Perspective: Get Ready for the End of the Summer Slumber, stocks have largely moved sideways over the past month with muted volatility and depressed volume. In our view, action is likely to heat up, with the threat of a near-term pullback within an ongoing bull market. U.S. economic data has perked up, but we need to see consistently better data to confirm a sustainable lift in growth beyond the third quarter. The Federal Reserve is indicating a desire to raise rates, but Friday’s slightly weaker-than-expected jobs report suggests a September hike is less likely. Read the whole perspective at www.schwab.com/marketinsight.
Short week will continue to bring key data
Although stunted by Labor Day, next week's U.S. economic calendar will bring a few data points for the markets to chew on amid uncertainty regarding a Fed rate hike, headlined by reads on the key services sector activity in the form of the ISM non-Manufacturing Index and Markit's Services PMI Index. These reports will be followed by the Fed's Beige Book—an anecdotal report on national economic activity used by the Central Bank to prepare for the next two-day monetary policy meeting ending on September 21. For a look at short-term implications for the market, see the video by Schwab's Liz Ann Sonders and Randy Frederick titled, Long-Running Bull Finally Attracting Believers? at www.schwab.com/insights.
International reports due out next that are worth mentioning include: Australia—Reserve Bank of Australia monetary policy decision and 2Q GDP. China—trade balance and inflation data. Japan—trade balance and 2Q GDP. Eurozone—European Central Bank monetary policy decision, retail sales, Markit's business activity report and 2Q GDP. U.K.—industrial/manufacturing production, Markit's business activity reports and trade balance.