Fed Stays Course, But Hints at December

Charles Schwab: On the Market

Posted: 11/2/2016 4:15 PM ET

Fed Stays Course, But Hints at December

U.S. equities finished lower after the Federal Reserve opted to keep monetary policy steady, but hinted at the possibility of a December increase, while a tightening race heading into next Tuesday's Presidential election continued to be a drag on the markets. Treasuries finished higher following the Fed decision, and crude oil prices continued their selloff, exacerbated by some bearish oil inventory data. Gold was higher, and the U.S. dollar fell.

The Dow Jones Industrial Average (DJIA) fell 77 points (0.4%) to 17,960, the S&P 500 Index decreased 14 points (0.7%) to 2,098 and the Nasdaq Composite tumbled 48 points (0.9%) to 5,106. In heavy volume, 985 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.33 to $45.34 per barrel, wholesale gasoline lost $0.03 to $1.45 per gallon and the Bloomberg gold spot price rose $8.77 to $1,296.81 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 97.37.

Time Warner Inc. (TWX $87) posted 3Q earnings-per-share (EPS) ex-items of $1.55, above the $1.37 FactSet estimate, with revenues increasing 9.2% year-over-year (y/y) to $7.2 billion, exceeding the expected $7.0 billion. TWX raised its full-year earnings guidance, and shares finished lower.

Clorox Co. (CLX $116) announced fiscal 1Q earnings of $1.36 per share, below the projected $1.42, as revenues rose 3.8% y/y to $1.4 billion, roughly in line with forecasts. CLX lowered its full-year EPS outlook, while reaffirming its revenue guidance. Shares traded lower.

Electronic Arts Inc. (EA $79) reported fiscal 2Q EPS ex-items of $0.53, north of the projected $0.43, as revenues declined 4.3% y/y to $1.1 billion, roughly in line with estimates. EA issued softer-than-expected 3Q guidance, but delivered a stronger-than-expected full-year profit outlook. Shares were higher.

Alibaba Group Holding Ltd. (BABA $99) is moving higher after China's largest online retailer posted stronger-than-expected 2Q results, with revenues jumping over 50%, as growth in cloud computing services bolstered its e-commerce activity, per Bloomberg. BABA gave up an early gain and was lower.

Broadcom Ltd. (AVGO $171) announced an agreement to acquire Brocade Communications Systems Inc. (BRCD $12) for $12.75 per share, in an all-cash transaction valued at about $5.5 billion, excluding debt. AVGO finished higher, while BRCD rallied nearly 10%.

Fed maintains policy, ADP's employment report missed forecasts

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, opting to keep the target for the Fed funds rate unchanged, as many had expected, while sending signals of a possible rate hike at its December meeting. In its statement, the Committee said it judged "that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives." There was no press conference or updated economic projections following the decision. Be sure to see Schwab's analysis of the Fed's decision later today at www.schwab.com/marketinsight.

The ADP Employment Change Report showed private sector payrolls rose by 147,000 jobs in October, below forecasts of 165,000, while September's gain of 154,000 jobs was revised higher to a 202,000 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 175,000 jobs, while private sector payrolls are projected to rise by 170,000 (economic calendar). The unemployment rate is forecasted to dip to 4.9% from 5.0%, and average hourly earnings are projected to rise 0.3% month-over-month (m/m).

The MBA Mortgage Application Index decreased 1.2% last week, after dropping 4.1% in the previous week. The decline came as the Refinance Index fell 1.6% and the Purchase Index dipped 0.4%. The average 30-year mortgage rate increased 4 basis points (bps) to 3.75%.

Treasuries finished higher, as the yields on the 2-year note and the 30-year bond declined 2 bps to 0.81% and 2.56%, respectively, while the yield on the 10-year note dropped 3 bps to 1.80%. Bond yields have given back some of a recent rally that has come from some relatively upbeat economic data and elevated Fed rate hike expectations and Schwab's Chief Fixed Income Strategist, Kathy Jones notes in her article, Are Bond Yields About to Rise?, the shift to higher yields is likely to be slow, in our view, but markets don’t appear to be prepared for the change. We suggest investors prepare for a potential rise in bond yields by trimming exposure to bonds with either long durations or high credit risk. Read more at www.schwab.com/onbonds and follow Kathy on Twitter: @kathyjones.

Finally, U.S. political risk continues to garner attention and hamper the global markets, and Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Final Clinton-Trump Debate Sets Up a Sprint to the Finish Line, as part of our election 2016 commentary at www.schwab.com/insights/category/election-2016, where you can also find timely analysis of The Stock Market and Election Cycles.

Tomorrow's U.S. economic calendar will bring key reports on jobless claims, 3Q nonfarm productivity and unit labor costs, and factory orders. However, the headlining releases will bring looks at the all-important domestic services sector for October, with the ISM non-Manufacturing Index and the final Markit Services PMI Index. Readings above 50 for both indexes denotes expansion, and ISM's release is expected to show growth decelerated slightly to 56.0 from 57.1 in September, while Markit's report is projected to be unrevised at the preliminary level of 54.8, up from 52.3 in the moth prior.

U.S. services sector output accounts for the lion's share of economic activity, powered by the consumer, which Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, discusses in his latest Schwab Sector Views: The Most Wonderful Time of the Year…Already?, Brad notes that consumer confidence is encouraging heading into the holidays, wages are ticking higher, and the labor market looks healthy, but there are questions whether American consumers' notorious propensity to spend has decreased following the financial crisis. Read more at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

Europe and Asia lower amid U.S. election uncertainty

European equities traded lower, ahead of today's monetary policy decision in the U.S., which will be followed by the Bank of England's decision tomorrow. Crude oil prices continued a selloff to weigh on the energy sector on the heels of some much larger-than-expected oil inventory builds. Increased U.S. political uncertainty remained a drag on sentiment as the race appears to be tightening ahead of Tuesday's election. Also, Italian banking concerns festered, while the markets digested some mixed earnings reports in the region. An upbeat read on eurozone manufacturing activity offered little support, with Markit's final Eurozone Manufacturing PMI Index being revised to 53.5 for October, from the preliminary level of 53.3, where it was expected to remain. A reading above 50 denotes expansion in manufacturing output, and the index hit the highest level since January 2014. In other economic news, German unemployment fell more than expected in October, while U.K. construction output grew faster than anticipated for last month. The euro and British pound gained ground on the U.S. dollar, while bond yields in the region were lower.

With the markets poised for more choppy action amid lingering monetary policy and political uncertainty, 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 follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished lower on the day, with festering U.S. political uncertainty less than a week away from the Presidential election continuing to stymie conviction, while the persistent drop in crude oil prices weighed on the energy sector and caution may have prevailed ahead of today's Fed decision. Schwab's Jeffrey Kleintop, CFA, discusses central bank decisions and the recent movement in the global yield curve in his latest article, Recession Odds Pass Key Threshold at www.schwab.com/oninternational. Jeff notes that the yield spread rose for many countries in October, a key indicator that the risk of global recession and accompanying bear market in the coming year diminished during the month. Japanese stocks fell sharply, with the yen gaining ground in the wake of yesterday's unchanged monetary policy decision from the Bank of Japan, which also pushed out its time frame to reach its 2.0% inflation goal. Mainland Chinese equities and those in Hong Kong fell, and Australia's markets traded lower with weakness in oil & gas issues being met with a drop in the technology sector. Meanwhile, stocks in India and South Korea also dropped.

Tomorrow's international economic calendar will hold the Caixin Services PMI from China, employment data from Spain and Italy, as well as the Bank of England's monetary policy decision.