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Thursday, November 17, 2016

Market Gains in Bumpy Action

Charles Schwab: On the Market
Posted: 11/17/2016 4:15 PM ET

Market Gains in Bumpy Action

U.S. equities finished the trading session with gains in choppy action, as investors weighed elevated Fed rate hike expectations following comments from Chair Yellen, a host of upbeat economic data, and mixed earnings reports. Treasury yields continued their ascent and the U.S. dollar was higher, while crude oil prices dipped and gold was solidly lower.

The Dow Jones Industrial Average (DJIA) rose 36 points (0.2%) to 18,904, the S&P 500 Index gained 10 points (0.5%) to 2,187 and the Nasdaq Composite increased 39 points (0.7%) to 5,334. In moderately-heavy volume, 838 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.15 lower to $45.42 per barrel, wholesale gasoline was $0.02 higher at $1.34 per gallon and the Bloomberg gold spot price dropped $7.75 to $1,217.24 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% higher at 100.95.

Dow member Wal-Mart Stores Inc. (WMT $69) reported 3Q earnings-per-share (EPS) ex-items of $0.98, above the $0.96 FactSet estimate, as revenues increased 0.7% year-over-year (y/y) to $118.2 billion, north of the projected $118.6 billion. 3Q U.S. Walmart same-store sales rose 1.2% y/y, compared to the expected 1.4% increase. WMT issued 4Q same-store sales guidance with a midpoint below forecasts, while raising the low end of its full-year EPS outlook. Shares were solidly lower. 

Best Buy Co. Inc. (BBY $46) posted 3Q EPS of $0.62, well above the estimated $0.47, with revenues rising 1.4% y/y to $9.0 billion, versus the projected $8.9 billion. 3Q domestic same-store sales grew 1.8% y/y, compared to the expected 1.0% increase. BBY issued stronger-than-expected 4Q and full-year profit guidance. Shares rallied.

Dow component Cisco Systems Inc. (CSCO $30) announced fiscal 1Q earnings ex-items of $0.61 per share, north of the expected $0.59, as revenues rose 1.0% y/y to $12.4 billion, topping the forecasted $12.3 billion. CSCO issued softer-than-expected 2Q EPS and revenue guidance. Shares finished solidly lower. 

L Brands Inc. (LB $70) reported 3Q profits of $0.42 per share, exceeding the projected $0.40, on previously reported revenues of $2.6 billion. LB issued 4Q profit guidance that missed the Street's estimates. Shares were higher in choppy trading.

Housing construction activity jumps, jobless claims fall

Housing starts (chart) for October surged 25.5% month-over-month (m/m) to an annual pace of 1,323,000 units, above the Bloomberg forecast of a 1,156,000 unit rate. September starts were upwardly revised to an annual pace of 1,054,000. Starts hit more than a nine-year high, as a surge in multi-family structures was met with a sharp rise in single-family construction. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, rose 0.3% m/m in October to an annual rate of 1,229,000, after September's unrevised 1,225,000 rate, and above the expected annual pace of 1,193,000 units.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers a look at the housing market in his latest article, Real Estate Sector: Marketperform, noting positives of low interest rates, an improving economy and supportive apartment trends. However, Brad maintains a marketperform rating on the group, due to possible counterbalancing issues of rising rates and a changing consumer, while the apartment trends could be at an inflection point. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

The Consumer Price Index (CPI) (chart) was up 0.4% m/m in October, matching estimates, while September's 0.3% increase was unrevised. The core rate, which strips out food and energy, ticked 0.1% higher m/m, below expectations of a 0.2% rise, and matching September's unrevised increase. Y/Y, prices were 1.6% higher for the headline rate, in line with forecasts, while the core rate was up 2.1%, below projections of a 2.2% increase. September y/y figures showed an unrevised 1.5% rise and 2.2% increase for the headline and core rates respectively.

Weekly initial jobless claims (chart) fell by 19,000 to 235,000 last week, below forecasts of an increase to 257,000, as the prior week figure was unrevised at 254,000. The four-week moving average dropped by 6,500 to 253,500, while continuing claims fell by 66,000 to 1,977,000, south of the estimated level of 2,030,000. For a look at employment, see Schwab's Chief Investment Strategist Liz Ann Sonders' article, Welcome to the Working Week: An Update on Jobs, at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

The Philly Fed Manufacturing Index (chart) in November declined but remained at a level depicting expansion (a reading above zero) after decreasing to 7.6 from 9.7 in October, compared to estimates of a drop to 7.8.

Federal Reserve Chairwoman Janet Yellen is testifying before the Joint Economic Committee, suggesting that a December rate hike is likely. Yellen noted that a rate hike "could well become appropriate relatively soon," while warning about the risks to financial stability and frequency of tightening monetary policy of holding the fed funds rate at its current level for too long. As noted in the latest Schwab Market Perspective: Is the Fog Starting to Lift?, "full" employment is at least in sight, housing is recovering, economic growth has improved and inflation is heating up. As such, the Fed funds futures markets are pointing to a rate hike at the Fed's final meeting of the year in December. That may remove some uncertainty, but questions will remain as to the path and frequency of rate hikes in 2017 and beyond. We continue to believe the Fed will be able to go slow in normalizing rates, as they have stated they want to do, but signs of rising inflation could force its hand. Read more at www.schwab.com/marketinsight.

Treasuries finished lower following the data and Yellen's comments, as the yield on the 2-year note ticked 2 basis points (bps) higher to 1.02%, the yield on the 10-year note gained 6 bps to 2.28%, and the 30-year bond rate rose 7 bps to 3.00%. For our latest analysis of the rally in bond yields following the surprise election results, see Schwab's Chief Fixed Income Strategist, Kathy Jones' latest article, Change Is in the Air: A Post-Election Look at Bonds at www.schwab.com/onbonds, and follow Kathy on Twitter: @kathyjones.

For more analysis of the election, see Schwab's Liz Ann Sonders' and Senior Vice President with the Schwab Center for Financial Research, Mark Riepe's, CFA, video titled The Election's Over, so What's Next for Markets? at www.schwab.com/insights. Also, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Could Tax Cuts Really Happen in 2017?, as part of our election 2016 commentary at www.schwab.com/insights/category/election-2016.

Rounding out the week, tomorrow's economic calendar will yield the Index of Leading Economic Indicators, forecasted to have ticked 0.1% higher m/m during October following the 0.2% gain registered in September.

Europe mostly higher, Asia mixed as U.S. election posturing fades

European equities posted a late-day advance to finish mostly higher, with the volatile global market reaction to last week's surprising U.S. election cooling, likely vectoring attention to earnings and economic data and the heightened expectations of a December U.S. Fed rate hike. The plethora of data in the U.S., coupled with comments from Fed Chair Yellen appeared to preserve elevated rate hike expectations. Oil & gas issues were standout winners, despite a modest rise in crude oil prices, while technology, telecommunications and basic materials all moved higher. In economic news in the region, eurozone consumer price inflation came in a bit cooler than expected m/m in October, while the y/y rise matched forecasts. U.K. retail sales jumped more than expected in October. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers a World Tour: An Around The World Look At the Economic Landscape, at www.schwab.com/oninternational and follow Jeff on Twitter: @jeffreykleintop. The euro declined and the British pound was little changed after giving up early gains versus the U.S. dollar, while bond yields in the region were mixed.

Stocks in Asia finished mixed with the recent surprise U.S. election positioning that has ramped up activity in the global markets for the past week continuing to fade, while crude oil prices resumed decline yesterday weighed on the energy sector. Following the past week of U.S. election-fueled market volatility, Schwab's Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversificationand why Your portfolio may be less diversified than you think. Japanese equities finished flat with some choppiness in the yen gaining attention as the Bank of Japan began its first bond market operation since the September decision to change its monetary policy direction to focus on managing the yield curve. For our latest analysis of Japan's monetary policy, see Jeffrey Kleintop's, CFA, article, Going Godzilla: What has the Bank of Japan Unleashed?. Read all these articles at www.schwab.com/oninternational. Meanwhile, stocks in China, South Korea and Australia gained ground, but those traded in Hong Kong and India declined.

Tomorrow's international economic calendar will hold PPI from South Korea and Germany, while the eurozone will report CPI figures.

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