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Wednesday, October 05, 2016

Bulls Make First Appearance of 4Q

Charles Schwab: On the Market
Posted: 10/05/2016 4:15 PM ET

Bulls Make First Appearance of 4Q

U.S. stocks saw solid gains along with crude oil prices, which added to their recent string of gains in the wake of a bullish government oil inventory report, while activity in the domestic services sector accelerated nicely. Treasuries and gold were lower, while the U.S. dollar was nearly unchanged. In other developments, Constellation Brands and Micron Technology posted upbeat earnings and guidance, while ADP's private sector employment report missed estimates. Across the pond, European equities snapped a six-session winning streak amid focus on the global monetary policy landscape.

The Dow Jones Industrial Average (DJIA) increased 113 points (0.6%) to 18,281, the S&P 500 Index gained 9 points (0.4%) to 2,160, and the Nasdaq Composite advanced 26 points (0.5%) to 5,316. In moderate volume, 965 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil rallied $1.14 to $49.83 per barrel, wholesale gasoline decreased $0.01 to $1.49 per gallon and the Bloomberg gold spot price shed $0.90 to $1,268.80 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 96.15.

Constellation Brands Inc. (STZ $169) reported fiscal 2Q earnings-per-share (EPS) ex-items of $1.77, above the FactSet estimate of $1.65, as revenues rose 17.0% year-over-year (y/y) to $2.0 billion, bolstered by recent acquisitions, roughly in line with forecasts. STZ raised its full-year EPS outlook. Separately, the company announced an agreement to acquire Utah-based High West Distillery. STZ gained ground.

Micron Technology Inc. (MU $18) posted a fiscal 4Q loss of $0.05 per share, compared to the $0.12 per share shortfall that was anticipated, with revenues falling 11.0% y/y to $3.2 billion, roughly in line with forecasts. MU issued full-year EPS guidance that topped expectations. Shares ticked slightly lower.

Services sector activity improves, while private sector payrolls miss

The Institute for Supply Management (ISM) non-Manufacturing Index (chart) rose to 57.1 in September—the highest since October 2015—from 51.4 in August and compared to the Bloomberg forecast of an improvement to 53.0. A reading above 50 denotes expansion. New orders and business activity both jumped back above the 60 mark. Inventories and employment both showed solid growth. The ISM said the majority of comments from respondents were mostly positive about business conditions and the overall economy.

The final Markit U.S. Services PMI Index was revised to 52.3 in September from the preliminary level of 51.9, where it was expected to remain, and above the 51.0 level registered in August. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently. A reading above 50 denotes expansion.

As noted in the Schwab Market Perspective: Crunch Time, economic data has been mixed over the past month. It started with soft ISM readings at the beginning of September and continued with some weaker-than-expected housing data. At this point we believe this is temporary softness brought on by a very quiet August when more folks than usual seemed to be on the sidelines; and are looking for a comeback in the fourth quarter. Continuing historically-low initial jobless claims reading (a key leading economic indicator), the low unemployment rate, rising wages and consumer confidence, and ongoing accommodative monetary policy lead us to believe that the economy will continue to muddle through into 2017. Read the whole perspective

Factory orders (chart) rose 0.2% month-over-month (m/m) in August, versus expectations of a 0.2% decline, while July's figure was adjusted lower to a 1.4% increase. August durable goods orders—preliminarily reported a week ago—were revised upward to a 0.1% rise, and orders of nondefense capital goods excluding aircraft—a proxy for business spending—was revised higher to a 0.9% increase from the initially reported 0.6% gain.

The ADP Employment Change Report showed private sector payrolls rose by 154,000 jobs in September, below forecasts of 165,000, while August's gain of 177,000 jobs was revised lower to a 175,000 rise. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday's broader September nonfarm payroll report, expected to show an increase of 174,000 jobs, while private sector payrolls are projected to rise by 170,000 (economic calendar). The unemployment rate is forecasted to remain at 4.9% and average hourly earnings are projected to rise 0.3% month-over-month (m/m).

The trade balance (chart) showed that the deficit came in at $40.7 billion in August, compared to the $39.2 billion estimate. July's deficit was unrevised at $39.5 billion. Exports rose 0.8% m/m to $187.9 billion, and imports increased 1.2% m/m to $228.6 billion.

The MBA Mortgage Application Index rose 2.9% last week, after declining 0.7% in the previous week. The increase came as a 4.7% gain for the Refinance Index more than offset a 0.1% dip for the Purchase Index. The average 30-year mortgage rate fell 4 basis points (bps) to 3.62%.

Treasuries were lower, though the yield on the 2-year note was nearly unchanged at 0.83%, the yields on the 10-year note and the 30-year bond gained 3 bps to 1.71% and 2.43%, respectively. For more on the bond markets, see Schwab's Chief Fixed Income Strategist, Kathy Jones' article,  With a Whimper Instead of a Bang: Is the Great Bond Bull Market Over?, at and follow Kathy on Twitter: @kathyjones.

Tomorrow, the U.S. economic calendar will be light, offering the weekly initial jobless claims report, forecasted to have ticked slightly higher to a level of 256,000 from 254,000 the week prior.

Europe lower and Asia mixed as monetary policy focus remained

European equities traded mostly lower, snapping a six-session winning streak for the Stoxx Europe 600 Index. The decline followed yesterday's hawkish commentary from Fed officials in the U.S., while a report from Bloomberg late yesterday suggesting the possibility of a sooner-than-expected tapering of asset purchases from the European Central Bank (ECB) stymied sentiment. However, the ECB denied that it had discussed the subject. Also, lingering uncertainty about the timing of the U.K.'s Brexit weighed on conviction, while the upbeat U.S. economic data had little impact. The euro dipped and the British pound ticked higher versus the U.S. dollar, while bond yields in the region gained ground. However, Italian stocks bucked the downward trend bolstered by the banking sector as recently flared-up concerns eased somewhat. Losses were likely held in check as crude oil prices rebounded in the wake of a bullish U.S. government oil inventory report. In economic news, eurozone services sector activity for September was revised to a slightly higher rate of expansion than had originally been reported, while eurozone August retail sales came in at a smaller m/m decline than had been anticipated. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers a World Tour: An Around The World Look At the Economic Landscapeat, and follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed in dampened volume as mainland Chinese markets remained closed for the golden week holiday, while hawkish commentary from Fed officials in the U.S. and a flare-up in concerns about the European Central Bank potentially tapering its quantitative easing measures garnered attention. Japanese equities rose, aided by continued weakness in the yen as the U.S. dollar rose and Bank of Japan monetary policy uncertainty lingered. For our latest analysis of Japan's monetary policy, see Schwab's Jeffrey Kleintop's, CFA, article, Going Godzilla: What has the Bank of Japan Unleashed?, at Stocks trading in Hong Kong gained ground, while South Korean shares pared early losses on the heels of some hotter-than-expected consumer price inflation data. Australian securities dropped as some weakness in oil & gas and basic materials issues overshadowed an upbeat read on the nation's retail sales for August. Indian stocks declined following yesterday's unexpected rate cut from the Reserve Bank of India.

Tomorrow, the international economic docket will be light, yielding the trade balance from Australia and manufacturing orders from Germany.

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