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Wednesday, November 16, 2016

Stocks Close Mixed Mid-Week

Charles Schwab: On the Market
Posted: 11/16/2016 4:15 PM ET

Stocks Close Mixed Mid-Week

U.S. stocks finished the regular trading session mixed with the post-election rally pausing as investors weighed a healthy dose of economic data. Financials led to the downside, while technology issues continued to rebound. Crude oil prices finished slightly lower after yesterday's solid rally and following a bearish government oil inventory report. The U.S. dollar ticked higher, Treasuries were mixed and gold dipped. In equity news, Target beat quarterly earnings estimates, while Lowe's reported 3Q results that were shy of expectations.

The Dow Jones Industrial Average (DJIA) declined 55 points (0.3%) to 18,869, the S&P 500 Index lost 3 points (0.2%) at 2,177 and the Nasdaq Composite increased 19 points (0.4%) to 5,295. In moderately-heavy volume, 876 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.24 lower to $45.57 per barrel, wholesale gasoline was $0.02 lower at $1.32 per gallon and the Bloomberg gold spot price dipped $3.81 to $1,224.93 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 100.40.

Target Corp. (TGT $76) reported 3Q earnings-per-share (EPS) ex-items of $1.04, above the $0.83 FactSet estimate, with revenues decreasing 6.7% year-over-year (y/y) to $16.4 billion, topping the expected $16.3 billion. 3Q same-store sales dipped 0.2% y/y, versus the projected 1.0% decline. The retailer said its results reflect meaningful improvement in its traffic and sales trends and much stronger-than-expected profitability. TGT raised its full-year profit outlook. Shares rallied.

Lowe's Companies Inc. (LOW $67) posted 3Q EPS ex-items of $0.88, below the expected $0.96, as revenues increased 9.6% y/y to $15.7 billion, south of the forecasted $15.8 billion. Same-store sales rose 2.7% y/y, compared to the estimated 3.0% gain. LOW said its results were below expectations due to slower sales in the first two months of the quarter as traffic slowed more than it anticipated, putting pressure on profitability. LOW lowered its full-year earnings and same-store sales guidance. LOW traded solidly lower.

Facebook Inc. (FB $116) has battled back from solid early pressure that stemmed from the social network's disclosure of new over-reported, miscalculated metrics that it provides to partners and advertisers. FB dipped.

Wholesale price inflation cooler than expected

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in October were flat month-over-month (m/m), versus the Bloomberg expectation of a 0.3% increase, and compared to September's unrevised 0.3% gain. The core rate, which excludes food and energy, declined 0.2% m/m, versus forecasts of a 0.2% increase and compared to September's unadjusted 0.2% rise. Y/Y, the headline rate was 0.8% higher, versus projections of a 1.2% rise, and the core PPI gained 1.2% last month, below estimates of a 1.6% increase. In September, producer prices were 0.7% higher and up 1.2% y/y for the headline and core rates, respectively.

Tomorrow, the October inflation picture will be further developed with the release of the Consumer Price Index (CPI), projected to rise 0.4% m/m, after gaining 0.3% in September (economic calendar). Core CPI is expected to increase 0.2% after ticking 0.1% higher in the prior month.

Industrial production (chart) came in flat m/m in October, below estimates of a 0.2% gain, and following September's downwardly revised 0.2% decrease. Manufacturing and mining production improved, with the latter jumping, while utilities output fell. Capacity utilization declined to 75.3% from September's unrevised 75.4%, and compared to projections for a 75.5% rate. Capacity utilization is 4.7 percentage points below its long-run average.

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month remained at October's unrevised 63 figure, matching forecasts. Builder confidence is well above the key 50 mark, which separates good and poor conditions. The NAHB said with most of its members responding before the November elections, confidence levels remained unchanged as they awaited the results. "Still builder sentiment has held well above 60 for the past three months, indicating that the single-family housing sector continues to show slow, gradual growth," the NAHB added.

We will get a look at October housing construction activity tomorrow in the form of housing starts and building permits. Starts are projected to jump 10.7% m/m to an annual rate of 1,159,000 units, while permits are estimated to decline 2.5% to an annual pace of 1,195,000 units.

The MBA Mortgage Application Index fell 9.2% last week, following the previous week's 1.2% decline. The drop came as the Refinance Index tumbled 10.9%, and the Purchase Index fell 6.2%. The average 30-year mortgage rate jumped 18 basis points (bps) to 3.95%.

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. For more on the housing sector, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest article, Real Estate Sector: Marketperform. Read both articles as well as other timely articles from our experts at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Treasuries were mixed, with the yield on the 2-year note ticking 1 basis point (bp) higher to 1.00%, the yield on the 10-year note was flat at 2.22% and the 30-year bond rate dipped 4 bp to 2.92%. Bond yields have surged recently in the wake of President-elect Donald Trump's surprising victory in last week's election. For our latest analysis of the bond markets 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.

Tomorrow, the U.S. economic calendar will also deliver the Philly Fed Manufacturing Index, forecasted to have declined to 7.8 for November from 9.7 in October, along with the weekly initial jobless claims report, expected to show a slight increase to 257,000 from last week's 254,000 level. In central bank action, Federal Reserve Chair Janet Yellen will testify before the Joint Economic Committee in Congress.

For more analysis of the election, see Schwab's Chief Investment Strategist 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. Follow Liz Ann and Schwab on Twitter: @lizannsonders and @schwabresearch. 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.

Europe lower on mixed data, Asia mixed amid festering U.S. election fallout

European equities finished mostly lower, with the global markets digesting the recent rally that has come courtesy of last week's surprising U.S. Presidential victory by Donald Trump, which has fostered jumps in the U.S. dollar and bond yields. The euro dipped and British pound was little changed versus the U.S. dollar, while bond yields in the region moved higher. Oil & gas issues gained solid ground in the wake of yesterday's sharp recovery in crude oil prices, while utilities and basic materials issues saw some pressure. U.K. employment change for September missed expectations, while the nation's unemployment rate unexpectedly dipped. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers analysis of the global economic landscape in his article, Recession Odds Pass Key Threshold, at www.schwab.com/oninternational, and follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed in the wake of the continued post-election rally in the U.S. yesterday, while the solid rebound in crude oil prices helped the energy sector. Japanese equities rose as the yen extended yesterday's weakness and as the U.S. dollar added to its recent run. Australian securities finished flat, with strength in oil & gas issues offsetting some weakness in the technology sector. Indian listings were also little changed as the emerging markets continued to grapple with the fallout from the surprise election in the U.S., while traders digested late-yesterday's release of mixed consumer price inflation and trade reports for October. Stocks trading in mainland China and Hong Kong dipped as property-related issues continued to see pressure amid the ensuing jump in global bond yields and lingering concerns about the government's crackdown on the real estate market. South Korean equities advanced. For analysis of the impact on the global markets of the U.S. election, see Schwab's Jeffrey Kleintop's, CFA, latest article, President Trump and Global Trade: How Will Campaign Promises Play Out?, at www.schwab.com/oninternational.

The international economic calendar for tomorrow will yield employment data from Australia, construction output and CPI from the Eurozone and retail sales from the U.K.

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