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Thursday, September 15, 2016

Stocks Advance Amid Dampened Rate Hike Expectations

On the Market
Posted: 9/15/2016 4:15 PM ET

Stocks Advance Amid Dampened Rate Hike Expectations

U.S. stocks staged a solid advance as a flood of softer-than-expected domestic economic data, notably a miss in August retail sales, dampened imminent Fed rate hike expectations. Treasuries were mixed, gold was lower, the U.S. dollar was flat and crude oil prices were higher. In equity news, Dow member Apple continued to catch a tailwind on upbeat orders for its recently released iPhone 7. Across the pond, the Bank of England indicated another rate cut could be on the horizon.

The Dow Jones Industrial Average (DJIA) advanced 178 points (1.0%) to 18,215, the S&P 500 Index gained 22 points (1.0%) to 2,147, and the Nasdaq Composite advanced 76 points (1.5%) to 5,249. In moderately-heavy volume, 827 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.33 to $43.91 per barrel, wholesale gasoline increased $0.07 to $1.43 per gallon and the Bloomberg gold spot was $9.20 lower at $1,313.74 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 95.31.

Dow member Apple Inc. (AAPL $116) continued to garner positive attention, extending the rallying seen in the past two sessions on stronger-than-expected iPhone 7 pre-order reports from some major carriers. Also, Apple announced that the initial run of the iPhone 7 Plus has sold out globally.

Goodyear Tire & Rubber Co. (GT $32) rose solidly after outlining its growth plan, including a 2020 target of $3.0 billion in annual operating income, while it reaffirmed its 2016 financial targets and raised its quarterly dividend by 43.0% to $0.10 per share.

Retail sales miss to headline mixed heavy economic docket

Advance retail sales (chart) for August were down 0.3% month-over-month (m/m), versus the Bloomberg forecast of a 0.1% dip and July's upwardly revised 0.1% rise. Also, last month's sales ex-autos were lower by 0.1% m/m, compared to expectations of a 0.2% increase, and following the negatively revised 0.4% decline seen in the previous month. Sales ex-autos and gas dipped 0.1% m/m, versus estimates of a 0.3% rise, and matching July's unrevised decline. Finally, the retail sales control group, a figure used to help calculate GDP, was down 0.1%, compared to the projected 0.4% rise, matching the prior month's unfavorably revised dip.

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in August were flat m/m, versus expectations of a 0.1% increase, and compared to July's unrevised 0.4% decrease. The core rate, which excludes food and energy, ticked 0.1% higher m/m, in line with forecasts and versus July's unadjusted 0.3% decline. Y/Y, the headline rate was flat, versus projections of a 0.1% rise, and the core PPI was 1.0% higher last month, matching estimates. In July, producer prices declined 0.2% and were up 0.7% y/y for the headline and core rates, respectively. 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? and follow Schwab on Twitter: @schwabresearch.

Industrial production (chart) declined 0.4% m/m in August, versus estimates of a 0.2% decrease, and following July's downwardly revised 0.6% gain. Manufacturing and utilities production both declined, while mining output rose. Capacity utilization declined to 75.5% from July's unrevised 75.9%, and compared to projections for a 75.7% rate. Capacity utilization is 4.5 percentage points below its long-run average.

Weekly initial jobless claims (chart) rose by 1,000 to 260,000 last week, versus estimates of an increase to 265,000, with the prior week's figure unrevised at 259,000. The four-week moving average declined by 500 to 260,750, while continuing claims rose 1,000 to 2,143,000, south of the estimated level of 2,150,000.

The Empire Manufacturing Index showed output from the New York region improved but remained in contraction territory (a reading below zero) for September. The index rose to -2.0 from August's unrevised -4.2 level, with forecasts calling for an improvement to -1.0.

The Philly Fed Manufacturing Index (chart) in in September jumped further into at a level depicting expansion (a reading above zero) after rising to 12.8 from 2.0 in August, compared to estimates of a dip to 1.0.

Business inventories (chart) were flat m/m in July, below forecasts of a 0.1% rise, and versus June's unrevised 0.2% gain. Sales declined 0.2%, and the inventory-to-sales ratio—the time it would take to deplete inventories at the current sales pace—remained at June's 1.39 months pace.

Treasuries were mixed, with the yield on the 2-year note declining 2 basis points (bps) to 0.74%, while the yield on the 10-year note was flat at 1.70% and the 30-year bond rate gained 2 bps 2.47%.

Schwab's Chief Fixed Income Strategist, Kathy Jones offers her latest analysis of the interest rate environment in her article, Negative Interest Rate Policy: What Is It and Could It Happen Here?. Read both fixed income articles at www.schwab.com/onbonds and follow Kathy on Twitter: @kathyjones.

Today's plethora of mixed data dampened September Fed rate hike expectations, but also preserved the possibility of a December increase, keeping the markets grappling with the "Fed policy loop," a concept constructed by Bank Credit Analyst (BCA), that Schwab's Chief Investment Strategist, Liz Ann Sonders discusses in her latest article, Is That All? Liz Ann points out since the beginning of 2015, we have been in this loop—moving frequently between easy and tight financial conditions, which have triggered the moves between a dovish and hawkish Fed. "As I've been saying for some time, I don't see how we extricate ourselves from this loop; while it's likely to remain a source of more frequent bouts of volatility." For more on this topic, see our latest article, Fed Uncertainty Brings Volatility to Markets. Read both articles at www.schwab.com/marketinsight, and follow Liz Ann on Twitter: @lizannsonders.

Tomorrow, the U.S. economic calendar will include the Consumer Price Index (CPI), forecasted to have increased 0.1% m/m during August, while excluding food and energy, the core rate is expected to have advanced 0.2% m/m. Also, the September preliminary University of Michigan Consumer Sentiment Index is projected to show consumer confidence improved to 90.6 from August's 89.8 level.

Europe shows late-day resiliency, Asia mixed as central bank focus continues

European equities overcame early weakness to snap a five-session losing streak for the Stoxx Europe 600 Index, courtesy of a late-day rally, as a plethora of mixed U.S. economic data dampened imminent Fed rate hike expectations ahead of next week's monetary policy decision. Moreover, the Swiss National Bank kept its negative interest rate policy intact and the Bank of England (BoE) left its policy stance unchanged but indicated that there is still a chance of another rate cut this year. The BoE raised its economic growth outlook and said inflation is likely to rise to its target in the first half of next year. The decision came as recent U.K. data—including today's better-than-expected August retail sales report—has suggested the late-June vote to leave the European Union, known as a Brexit, is having a limited economic impact thus far and Schwab's Director of International Research, Michelle Gibley, CFA, offers her article, article, Keep Calm and Carry On: The Brexit Shock That Wasn't at www.schwab.com/oninternational. The British pound and the euro lost modest ground versus the U.S. dollar, while bond yields in the region were mostly higher.

Stocks in Asia finished mixed in lighter-than-usual volume, with markets in mainland China and South Korea closed for holidays. The global markets continue to grapple with monetary policy uncertainty, ahead of next week's meetings from the Bank of Japan (BoJ) and the Fed. Japanese equities fell, with the yen showing some strength, and as uncertainty regarding what the BoJ may announce next week in terms of further stimulus measures continued to drain conviction and foster heightened volatility. Stocks trading in Hong Kong advanced in the final day of trading before tomorrow's holiday break, following yesterday's stronger-than-expected August lending statistics, while casino operators continued to catch a tailwind on reports that have suggested a recovery in the Macau gambling market. Australian securities moved higher on the heels of some relatively upbeat August employment data, while Indian listings ticked higher with some recent cooler-than-expected inflation reports preserving optimism that the Reserve Bank of India may have room to further cut rates, countering the uncertainty regarding the Fed and BoJ.

With global volatility heating up, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, reminds investors, 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 these articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop.

The international economic docket for tomorrow will be light, offering wage data from France, the trade balance from Italy and labor costs from the Eurozone.

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