Stocks Finish Little Changed Ahead of Jobs Report

Charles Schwab: On the Market

Posted: 9/1/2016 4:15 PM ET

Stocks Finish Little Changed Ahead of Jobs Report

U.S. stocks finished the regular trading session near the unchanged mark, paring a mild decline that developed following a disappointing domestic manufacturing read, while caution remained ahead of tomorrow's key August U.S. labor report. Crude oil prices continued to drop to weigh further on the energy sector, Treasuries and gold were higher and the U.S. dollar traded to the downside. In equity news, the major automakers reported monthly U.S. sales today.

The Dow Jones Industrial Average (DJIA) increased 18 points (0.1%) to 18,419, the S&P 500 Index was flat at 2,171, and the Nasdaq Composite added 14 points (0.3%) to 5,227. In moderate volume, 817 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil lost $1.54 to $43.16 per barrel, wholesale gasoline declined $0.06 to $1.27 per gallon and the Bloomberg gold spot price increased $4.60 to $1,313.57 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% lower at 95.62.

Costco Wholesale Corp. (COST $156) reported flat year-over-year (y/y) August same-store sales, compared to the FactSet estimate of a 1.4% gain. Excluding the impacts from gasoline price deflation and foreign exchange, same-store sales grew 2.0%. COST lost solid ground.

Campbell Soup Co. (CPB $57) posted fiscal 4Q earnings-per-share (EPS) ex-items of $0.46, below the projected $0.50, with revenues dipping 0.4% y/y to $1.7 billion, roughly in line with expectations. CPB issued EPS and sales guidance for the current year that missed estimates. Separately, the company announced a 12.0% increase of its quarterly dividend to $0.35 per share. Shares fell.

Salesforce.com Inc. (CRM $76) posted 2Q earnings ex-items of $0.24 per share, two cents above forecasts, as revenues rose 25.0% y/y to $2.0 billion, roughly in line with estimates. CRM issued softer-than-expected 3Q and full-year EPS guidance, while slightly raising its revenue outlook for the year. Shares were under pressure.

The major automakers reported U.S. August sales today, with Ford Motor Co's (F $12) sales falling 8.4% y/y, versus the FactSet estimate of a 6.8% drop, while General Motors Co's (GM $32) sales declined 5.2%, compared to the projected 4.7% decrease. Fiat Chrysler Automobiles NV's (FCAU $7) Chrysler brand's sales rose 3.0%, compared to the expected 0.8% decline, and Toyota Motor Corp's (TM $121) sales fell 5.0%, versus the projected 1.1% decline. F, GM and FCAU finished lower, while TM closed higher.

Manufacturing activity surprisingly falls into contraction

The Institute for Supply Management (ISM) Manufacturing Index (chart) in August fell back to contraction territory (below 50) for the first time since February after dropping to 49.4 from July's 52.6 level, and compared to the Bloomberg forecast of a dip to 52.0. New orders, production, and employment all dropped below 50 amid widespread weakness.

The final Markit U.S. Manufacturing PMI Index was revised to 52.0 for August from the 52.1 preliminary level, where it was expected to remain. The index was down from the 52.9 level posted in July. A reading above 50 denotes expansion. The release is independent and differs from ISM's manufacturing report, as it has less historic value and Markit weights its index components differently.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, holds a marketperform rating for the industrials sector in his latest Schwab Sector Views: The Politics and Economics of Industrials. Brad notes that the industrials sector is often in the back of investors' minds, as it is sometimes thought of as "old technology" or a group that is losing relevance in today's economy. But in our view nothing could be further from the truth, as the industrials sector contains industries that are at the core of making our world go round. Read more at www.schwab.com/marketinsight.

Weekly initial jobless claims (chart) rose by 2,000 to 263,000 last week, versus estimates of an increase to 265,000, with the prior week's figure unrevised at 261,000. The four-week moving average dipped 1,000 to 263,000, while continuing claims rose 14,000 to 2,159,000, north of the estimated level of 2,145,000.

Final 2Q nonfarm productivity (chart) was revised to a 0.6% decline on an annualized basis, from the preliminary 0.5% drop, in line with expectations. 1Q productivity was unrevised at a 0.6% decline. Also, unit labor costs were adjusted to a 4.3% rise, from the 2.0% increase initially reported, and compared to forecasts calling for a revision to a 2.1% gain. Unit labor costs dipped by a downwardly revised 0.3% in 1Q.

Construction spending (chart) was flat m/m in July, versus projections of a 0.5% advance, and following June's upwardly revised 0.9% gain. Residential spending gained 0.4%, while non-residential spending declined 0.3%.

Treasuries were higher, with the yields on the 2-year and 10-year notes declining 2 basis points to 0.78%, and 1.57%, respectively, while the 30-year bond rate was flat at 2.23%.

For analysis on the fixed income markets see the video from Schwab's Vice President of Trading and Derivatives, Randy Frederick and Kathy Jones, titled Rate Hikes on the Horizon—but When? at www.schwab.com/insights and follow Randy on Twitter: @randyafrederick. Also, for the latest on the subdued market action in the "dog days" of summer, Schwab's Chief Investment Strategist, Liz Ann Sonders offers her latest article, All Summer Long: Will the Extreme Lull in Volatility Persist? at www.schwab.com/marketinsight. Follow Liz Ann on Twitter: @lizannsonders.

Tomorrow, the highly-anticipated August nonfarm payroll report will close out the week's U.S. economic calendar, forecasted to show 180,000 jobs were added, following July's 255,000 gain. Private sector jobs are projected to rise 180,000 after the 217,000 increase in the month prior. The unemployment rate is expected to dip to 4.8% from 4.9%, and average hourly earnings are anticipated to rise 0.2% m/m, following July's 0.3% gain.

Schwab's Chief Fixed Income Strategist, Kathy Jones discusses in her article, What Does Strong Job Growth Mean for Bond Investors?, the strong U.S. employment reports over the past two months suggest that the Fed may raise the federal funds rate target this year. More jobs and higher wages should provide a solid base for consumer spending and overall economic growth and could also reinforce the upward trend in inflation seen in the past few months. Read what Kathy suggests for bond investors with long-term holdings at www.schwab.com/onbonds and follow her on Twitter: @kathyjones.

Europe mostly lower and Asia mixed ahead of U.S. payroll report

European equities gave up early gains and finished mostly to the downside, with the disappointing U.S. manufacturing report following some relatively upbeat manufacturing data in the region and a return to expansion in the Chinese sector. Conviction remained hamstrung ahead of tomorrow's key August U.S. nonfarm payroll report amid the backdrop of heightened Fed rate hike expectations, which helped financials continue a recent rally. Also, oil & gas issues continued to be hampered by crude oil's recent drop exacerbated by a stronger U.S. dollar and U.S. inventory data that stoked oversupply concerns. Markit's Eurozone Manufacturing PMI Index was revised slightly lower to 51.7 in August, from the preliminary level of 51.8, where it was expected to remain, but was down from the 52.0 level that was posted in July. However, a reading above 50 denotes expansion, suggesting 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. Adding to this, Markit's U.K. PMI Manufacturing Index jumped back to a level depicting expansion, rising to 53.3 in August, from 48.3 in July, and compared to the 49.0 level that was expected. The index hit a 10-month high and the British pound rallied versus the U.S. dollar. 

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 has reversed to the upside versus the greenback, while bond yields in the region remain mostly higher.

Stocks in Asia finished mixed as the global markets remained cautious ahead of tomorrow's key employment report in the U.S., while the energy sector saw additional pressure following crude oil's recent drop. Also, the markets digested some August business activity data, which kicked off a global look at the health of manufacturing activity. China's official Manufacturing PMI Index unexpectedly rose to 50.4, from 49.9 in July, and compared to the expected dip to 49.8. A reading above 50 denotes expansion and the index hit the highest level since October 2014. Also, China's non-Manufacturing PMI Index, a gauge of output from the nation's key services sector showed growth decelerated slightly. Separately, the Caixin/Markit China PMI Manufacturing Index declined more than expected to 50.0. Mainland Chinese shares declined following the mixed data, while stocks in Hong Kong rose, aided by strength in casino operators following some upbeat gambling revenue data in Macau, per Bloomberg. In the wake of the data, Schwab's Jeffrey Kleintop discusses Five ways investors can make the most of slower growth at www.schwab.com/oninternational.

Japanese equities finished higher, with the yen holding onto recent weakness, while banks and auto stocks moved higher to lend support and overshadow its August manufacturing report that showed continued contraction and 2Q capital spending and company profits data that missed forecasts. Australian stocks were bogged down by continued pressure on oil & gas and mining stocks. The looming U.S. employment report and increased Fed rate hike expectations stymied emerging markets, with Indian and South Korean securities finishing lower.

The international economic docket for tomorrow will be light, offering the Consumer Confidence Index from Japan, 2Q GDP from Italy and PPI from the Eurozone.