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Thursday, November 03, 2016

Stocks Finish Lower Ahead of Labor Report

Charles Schwab: On the Market
Posted: 11/3/2016 4:15 PM ET

Stocks Finish Lower Ahead of Labor Report

U.S. stocks finished the regular trading session lower, though financial issues managed a mild advance as yesterday's monetary policy decision from the Federal Reserve preserved expectations for a possible December rate hike. In economic news, ISM's services sector report and jobless claims missed forecasts, while 3Q productivity and factory orders topped estimates. Treasuries were mixed, gold and the U.S. dollar were lower and crude oil prices continued a recent sell-off.

The Dow Jones Industrial Average (DJIA) declined 29 points (0.2%) to 17,931, the S&P 500 Index decreased 9 points (0.4%) to 2,089 and the Nasdaq Composite lost 47 points (0.9%) to 5,058. In moderately-heavy volume, 889 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.68 to $44.66 per barrel, wholesale gasoline lost $0.03 to $1.42 per gallon and the Bloomberg gold spot price moved $6.31 lower to $1,303.12 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 97.14.

Facebook Inc. (FB $120) reported 3Q earnings-per-share (EPS) ex-items of $1.09, above the $0.97 FactSet estimate, as revenues jumped 59.0% year-over-year (y/y) to $7.0 billion, north of the expected $6.9 billion. The social network's daily and monthly active users slightly beat forecasts, led by mobile, but the company warned that it could see a meaningful revenue growth deceleration and increased investment in 2017. Shares fell.

Whole Foods Market Inc. (WFM $28) posted fiscal 4Q EPS of $0.28, above the projected $0.24, as revenues grew 1.7% y/y to $3.5 billion, roughly in line with forecasts. 4Q same-store sales declined 2.6% y/y, compared to the estimated decrease of 2.0%. WFM guided that same-store sales thus far in 1Q are down 1.6%, while issuing full-year earnings and revenue guidance that was slightly below expectations. Separately, the company announced leadership changes, including the elimination of its co-CEO structure. WFM finished slightly lower.

MetLife Inc. (MET $47) announced 3Q profits of $1.28 per share, excluding items, above the $1.15 estimate, with revenues declining 2.0% y/y to $17.7 billion, versus the projection of $17.2 billion. Shares advanced.

Cigna Corp. (CI $117) posted 3Q EPS ex-items of $1.94, above the forecasted $1.90, with revenues increasing 5.0% y/y to $9.9 billion, roughly in line with expectations. CI narrowed its full-year profit outlook and reaffirmed its revenue growth outlook. Shares were modestly lower. For analysis of the healthcare cost environment, see Schwab's Chief Investment Strategist Liz Ann Sonders' latest article, Vertigo: Effect of Spiking Healthcare Costs on Consumers, at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Services sector reports mixed, jobless claims unexpectedly rise

The Institute for Supply Management (ISM) non-Manufacturing Index (chart) declined to 54.8 in October from 57.1 in September and compared to the Bloomberg forecast of a decrease to 56.0. A reading above 50 denotes expansion. New orders and business activity both declined but remained solidly in expansion territory. Growth in inventories accelerated slightly, while employment expansion decelerated.

The ISM said comments from respondents remained mostly positive about business conditions and the overall economy. However, several respondents noted the uncertainty on the impact of the upcoming U.S. Presidential election and Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Election Night: How to Watch the Returns, 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.

The final Markit U.S. Services PMI Index was unrevised at 54.8 in October from the preliminary level to match forecasts, but was above the 52.3 level registered in September. 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.

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.

Factory orders (chart) increased 0.3% month-over-month (m/m) in September, versus expectations of a 0.2% gain, while August's figure was adjusted higher to a 0.4% rise. September durable goods orders—preliminarily reported a week ago—were revised negatively to a 0.3% decrease, from an initial 0.1% dip, and orders of nondefense capital goods excluding aircraft—a proxy for business spending—was revised lower to a 1.3% drop from the initially reported 1.2% decline.

Weekly initial jobless claims (chart) increased by 7,000 to 265,000 last week, compared to forecasts of a decrease to 256,000, as the prior week figure was unrevised at 258,000. The four-week moving average increased by 4,750 to 257,750, while continuing claims declined 14,000 to 2,026,000, south of the estimated level of 2,043,000.

Preliminary 3Q nonfarm productivity (chart) grew 3.1% on an annualized basis, versus expectations of a 2.1% gain, following the favorably revised 0.2% decline seen in the 2Q. Also, unit labor costs increased 0.3%, versus the forecast calling for a 1.2% gain. Unit labor costs were revised lower to a rise of 3.9% in 2Q.

Treasuries were mixed with the yield on the 2-year note dipping 1 basis point (bp) to 0.81%, while the yield on the 10-year note ticked 1 bp higher at 1.81% and the 30-year bond rate rose 4 bps to 2.60%. With yesterday's unchanged monetary policy decision from the Federal Open Market Committee (FOMC) preserving elevated expectations of a rate hike in December, Schwab's Chief Fixed Income Strategist, Kathy Jones offers analysis of the FOMC's decision in her article, The Fed Plays It Safe, December Hike Likely, at www.schwab.com/insights, while also offering her article, Are Bond Yields About to Rise?, at www.schwab.com/onbonds. Follow Kathy on Twitter: @kathyjones.

Tomorrow, the U.S. economic calendar will culminate with the release of the October nonfarm payroll report, projected to show payrolls grew by 175,000 jobs, after gaining 156,000 in September. Private sector jobs are expected to rise 170,000 following the prior month's 167,000 increase. The unemployment rate is anticipated to dip to 4.9% from 5.0%. Average hourly earnings are estimated to increase 0.3% m/m, on the heels of September's 0.2% gain.

As noted in the recent Schwab Market Perspective: Looking Past the Election, the Fed believes the unemployment rate is nearing what it calculates to be "full" employment, and wage growth has already shown signs of picking up with average hourly earnings (AHE) accelerating to a year-over-year pace of more than 2.5%. Fed members have been preparing the market and investors for a hike, and we believe, after several false starts, it will actually follow through this time around. Perhaps equally as important will be the message the Fed sends regarding what it may be looking to do into 2017. Read more at www.schwab.com/marketinsight.

The trade balance for September will also be reported tomorrow, forecasted to have narrowed to a $38.0 billion deficit, from the $40.7 billion shortfall reported in August.

Europe mostly lower, Asia mixed

European equities finished mostly lower, with the Bank of England (BoE) expectedly keeping its monetary policy stance unchanged, following the Fed's decision yesterday that signaled a December rate hike was likely still on track. The BoE dropped its guidance for a possible rate cut as it raised its inflation and economic growth forecasts. Crude oil prices reversed to the downside to continue a recent tumble and pressure energy stocks. The British pound rallied versus the U.S. dollar after a court ruled that the U.K. government would have to request parliamentary approval to trigger Article 50 and start official negotiations with the European Union (EU) regarding its vote to leave the EU, known as a Brexit. The ruling cooled recently ramped up concerns of a so-called "hard" Brexit. For more analysis of the Brexit fallout, Schwab's Director of International Research, Michelle Gibley, CFA, offers her latest article, Keep Calm and Carry On: The Brexit Shock That Wasn't. Moreover, with the markets choppy and poised for increased volatility amid the diverging global monetary policy landscape, along with U.S. political and U.K. Brexit uncertainty, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers 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 all these articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop. The euro was little changed versus the U.S. dollar and bond yields in the region gained ground.

Stocks in Asia finished mixed, with the looming U.S. Presidential election continuing to foster uncertainty and yesterday's Fed monetary policy decision preserving elevated expectations of a December rate hike. However, crude oil prices rebounded slightly from a recent selloff and Chinese economic data continued to be on the favorable side. Volume was lighter than usual as Japanese markets were closed for a holiday. Mainland Chinese securities rose following an October read on the nation's key services sector activity, which showed growth accelerated, while optimism continued regarding government infrastructure spending. Schwab's Jeffrey Kleintop, CFA, offers timely analysis of the global economic picture in his article, World Tour: An Around The World Look At the Economic Landscape at www.schwab.com/oninternational. Stocks trading in Hong Kong, Australia and India declined, while equities in South Korea advanced.

The international economic docket for tomorrow will deliver a services sector PMI reading from Japan and retail sales from Australia. Releases from across the pond are expected to include Markit Services PMIs for Germany, Italy, France and the eurozone.

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