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Thursday, October 06, 2016

Stocks Mixed Ahead of Jobs Report

Charles Schwab: On the Market
Posted: 10/6/2016 4:15 PM ET

Stocks Mixed Ahead of Jobs Report

U.S. equities finished mixed and near the unchanged mark, despite a continued rebound in crude oil prices and an unexpected decline in jobless claims, as investors appeared to fence-sit ahead of tomorrow's September U.S. nonfarm payroll report. Treasuries and gold were lower, while the U.S. dollar was higher. On the equity front, Dow member Wal-Mart disappointed with its outlook, and shares of Twitter came under solid pressure on a report that dampened takeover speculation.

The Dow Jones Industrial Average (DJIA) lost 12 points (0.1%) to 18,269, the S&P 500 Index gained 1 point (0.1%) to 2,161, and the Nasdaq Composite shed 9 points (0.2%) to 5,307. In moderate volume, 805 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.61 to $50.44 per barrel, wholesale gasoline gained $0.01 to $1.50 per gallon and the Bloomberg gold spot price declined $12.64 to $1,254.21 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.6% higher at 96.71.

Dow member Wal-Mart Stores Inc. (WMT $69) reaffirmed its fiscal 2017 earnings-per-share (EPS) outlook, with the midpoint below FactSet estimates, and noted that it expects 2018 earnings to be flat year-over-year (y/y). Shares traded lower.

Costco Wholesale Corp. (COST $149) reported total September same-store sales growth of 1.0% y/y, well above the 0.1% increase that was anticipated, led by a 6.0% gain in Canada, while U.S. and other international sales came in flat. Shares were modestly lower. 

Yum Brands Inc. (YUM $87) posted fiscal 3Q EPS of $1.09, one penny south of forecasts, with revenues declining 3.0% y/y to $3.3 billion, compared to the expected $3.5 billion. Same-store sales in its closely watched China division declined 1.0% y/y, versus the projected 4.5% gain. YUM noted that expected tougher sales in the China division for the second half of 3Q were compounded by an international court ruling on claims regarding the South China Sea, which triggered a series of regional protests and negative sentiment against a few international companies with well-known Western brands. However, the parent of Taco Bell, KFC and Pizza Hut added that the incident was short-lived and the sales impact continued to dissipate through August and September. YUM finished lower. 

L Brands Inc. (LB $71) reported September same-store sales growth of 3.0% y/y, above the expected 0.3% increase, as flat sales at its Victoria Secret segment were more than offset by a 9.0% gain at its Bath & Body Works unit. Shares were nicely higher.

Twitter Inc. (TWTR $20) tumbled 20% following a report from tech news website Recode that several potential bidders for the social-networking service, including Google parent Alphabet Inc. (GOOGL $803), as well as Dow members Apple Inc. (AAPL $114) and Walt Disney Company (DIS $93), may not be interested in buying the company. None of the entities cited have commented on the report.

Jobless claims unexpectedly decline

Weekly initial jobless claims (chart) fell by 5,000 to 249,000 last week, versus the Bloomberg estimate of an increase to 256,000, with the prior week's figure unrevised at 254,000. The four-week moving average declined by 2,500 to 253,500, while continuing claims decreased 6,000 to 2,058,000, south of the estimated level of 2,081,000.

Treasuries finished lower, as the yield on the 2-year note rose 2 basis points (bps) to 0.86%, while the yields on the 10-year note and the 30-year bond increased 3 bps to 1.73% and 2.45%, respectively. Bond yields have gained ground as of late with hawkish Fedspeak being met with upbeat reads on the key U.S. services sector and jobless claims to boost Fed rate hike expectations for this year. Schwab's Vice President of Trading and Derivatives, Randy Frederick and Chief Fixed Income Strategist, Kathy Jones, offer analysis of the interest rate environment titled Ready or Not—Bond Yields Could Be Going Up at www.schwab.com/insights. Follow Randy and Kathy on Twitter: @randyafrederick and @kathyjones.

Focus is now on tomorrow's September nonfarm payroll report expected to show an increase of 172,000 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). As noted in the Schwab Market Perspective: Crunch Time, 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 at  www.schwab.com/marketinsight.

Additionally, wholesale inventories will be reported, forecasted to be flat m/m for August, while in the final hour of trading, consumer credit will be released, with economists expecting consumer borrowing to have been $16.7 billion during August. As well, a number of Federal Open Market Committee members will speak at various engagements, which will likely garner some attention.

Europe lower amid ECB, Brexit uneasiness, Asia higher following U.S. data and oil

European equities finished modestly lower, with caution setting in ahead of tomorrow's September nonfarm payroll report in the U.S., while concerns about a potential sooner-than-expected tapering of asset purchases from the European Central Bank continued to fester. Moreover, the British pound fell versus the U.S. dollar as the markets remained in grapple mode toward U.K. Brexit timing. However, financials continued to catch a reprieve from the recent flare up in concerns toward to the sector, while a read on German factory orders rose more than expected in August and crude oil prices extended yesterday's rebound. The euro saw some pressure versus the greenback, while bond yields in the region finished mixed. With the volatility likely to remain as global market uncertainty heightens, 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, as well as Jeff's World Tour: An Around The World Look At the Economic Landscape, at www.schwab.com/oninternational. Follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mostly to the upside, with yesterday's solid rebound for crude oil prices on some bullish inventory data bolstering the energy sector. Also, Wednesday's much stronger-than-expected recovery for U.S. services sector activity aided global growth sentiment but fostered Fed rate hike expectations for this year. The yen extended its decline against the U.S. dollar on the increased Fed rate hike prospects, giving Japanese stocks a boost, and as the markets continue to grapple with the Bank of Japan's recent shift in monetary policy direction. Schwab's Jeffrey Kleintop, CFA, offers timely analysis of Japan's monetary policy changes in his article, Going Godzilla: What has the Bank of Japan Unleashed?, at www.schwab.com/oninternational. Equities traded in Hong Kong rose, but those in mainland China remained closed for the golden week holidays. Australia's markets traded higher, led by strength in oil & gas issues, while Indian securities declined amid the elevated U.S. rate hike expectations and as drugmakers and utilities saw some pressure. Finally, stocks inn South Korea increased.

For tomorrow, investors can expect to receive a host of economic data internationally, including Japan's trade balance and Leading Index, industrial production from Germany, France, the U.K. and Spain, as well as the trade balance from France and the U.K.

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