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Tuesday, December 06, 2016

Gains Continue

Charles Schwab: On the Market
Posted: 12/6/2016 4:15 PM ET

Gains Continue

U.S. equities finished modestly higher, despite continued eurozone political uncertainty and looming monetary policy decisions abroad. Financials and energy stocks again gained ground despite a pause in the rallies for Treasury yields and crude oil's pullback from a recent surge. The U.S. dollar was higher and gold was lower.

The Dow Jones Industrial Average (DJIA) rose 35 points (0.2%) to 19,252, the S&P 500 Index gained 8 points (0.3%) to 2,212 and the Nasdaq Composite added 24 points (0.5%) to 5,333. In moderate volume, 867 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.86 to $50.93 per barrel and wholesale gasoline was $0.02 lower at $1.54 per gallon. Elsewhere, the Bloomberg gold spot price traded $1.97 lower to $1,168.41 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—rose 0.4% to 100.51.

Toll Brothers Inc. (TOL $32) reported fiscal 4Q earnings-per-share (EPS) ex-items of $1.15, per adjustments made for one-time charges by Reuters, above the FactSet estimate of $0.99. Revenues rose 29.0% year-over-year (y/y) to $1.9 billion, exceeding the projected $1.8 billion. Deliveries, new contracts and backlog for the luxury home-builder all came in above expectations. Shares finished higher. 

AutoZone Inc. (AZO $780) reported fiscal 1Q EPS of $9.36, above the forecasted $9.31, with revenues increasing 3.4% y/y to $2.5 billion, roughly in line with projections. Domestic same-store sales increased 1.6% y/y, below the estimated 1.8% gain. AZO traded higher.

Shares of Chipotle Mexican Grill Inc. (CMG $366) tumbled after the burrito chain's co-Chief Executive Officer Steve Ells warned that sales have not recovered as much as expected from the widespread E. coli outbreak last year that hampered the company. Also, he warned that the company was "nervous" about meeting its full-year guidance.

Trade deficit widens more than expected

The trade balance (chart) showed that the deficit came in at $42.6 billion in October, compared to the Bloomberg estimate of $42.0 billion. September's deficit was revised to $36.2 billion from the $36.4 billion posted earlier. Exports declined 1.8% month-over-month (m/m) to $186.4 billion, while imports rose 1.3% to $229 billion.

Final 3Q nonfarm productivity (chart) was unrevised at the preliminary estimate of a 3.1% increase on an annualized basis, below expectations of an adjustment to a 3.3% rise. 2Q productivity was unrevised at a 0.2% decline. Unit labor costs were adjusted to a 0.7% increase, from the 0.3% rise initially reported, where it was expected to remain. Unit labor costs rose by an upwardly revised 6.2% in 2Q.

Factory orders (chart) rose 2.7% m/m in October, versus expectations of a 2.6% gain, while September's figure was adjusted higher to a 0.6% rise. October durable goods orders—preliminarily reported two weeks ago—were revised lower to a 4.6% gain, from an initial 4.8% jump, but above the projected revision to a 3.4% rise. Orders of nondefense capital goods excluding aircraft—a proxy for business spending—were revised lower to a 0.2% gain from the initially reported 0.4% increase.

Treasuries were little changed, as the yields on the 2-year and 10-year notes were flat at 1.12% and 2.39%, respectively, while the 30-year bond rate ticked 1 basis point higher to 3.07%. 

Bond yields have paused from a steep rally that has come from the surprise election and elevated December Fed rate hike expectations, supercharged by a plethora of stronger-than-expected economic data. For our latest analysis of the jump in bond yields, see Schwab's Chief Fixed Income Strategist, Kathy Jones' latest Bond Market Outlook: Higher Rates and Known Unknowns at www.schwab.com/onbonds, and be sure to check out Kathy's video with Schwab's Vice President of Trading and Derivatives, Randy Frederick titled How Will Expected December Interest Rate Hike Affect Markets in 2017?, at www.schwab.com/insights. Follow Kathy, Randy and Schwab on Twitter: @kathyjones, @randyafrederick and @schwabresearch.

For a look at the earnings and economic fronts, and their impact on valuations, Schwab's Chief Investment Strategist Liz Ann Sonders offers her latest article, You've Got to Earn It: Valuations Aided by Improving "E." Liz Ann notes that economic and earnings momentum has picked up—and not just post-election, with the latter expected to grow by more than 12% in 2017. She concludes that valuations are reasonable considering inflation; but that also represents a risk factor next year. Read why at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Employment data is on tap for tomorrow's economic calendar with the release of the JOLTS Job Openings report, a measure of unmet demand for labor, with economists forecasting that 5.50 million jobs were available to be filled in October, matching that seen in the month prior, while in the final hour of trading consumer credit will be reported, expected to show that consumer borrowing in October was $18.3 billion following the $19.3 billion registered in September. MBA Mortgage Applications will also be reported.

Europe and Asia higher though political and monetary policy uncertainty remain

European equities finished higher, with the markets continuing to show some resiliency on the heels of the weekend's failed Italian referendum that was the first step of several that could pave the way for an Italian exit from the European Union (EU), as discussed by Schwab's Director of International Research, Michelle Gibley, CFA, in her latest article, Europe Votes: Could More Countries Reject the EU?, at www.schwab.com/oninternational. Financials led the way and Italian stocks rebounded sharply from yesterday's decline, while utilities rallied in the wake of a German court ruling that power producers were entitled to compensation for rights lost because of the government's decision to exit from nuclear energy, per Bloomberg.

Eurozone 3Q GDP growth was revised to a 1.7% y/y expansion, from the 1.6% growth initially reported, where it was expected to remain. Eurozone 2Q GDP growth was also 1.7% y/y. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Happy Unrecession: The Alice in Wonderland economy, noting that while volatility may lie ahead for stocks, a prolonged bear market and recession seem unlikely for 2017. Read more at www.schwab.com/oninternational. Follow Jeff on Twitter: @jeffreykleintop. The euro lost ground and the British pound dipped versus the U.S. dollar, while bond yields in the region were mixed. The markets charged higher despite Thursday's looming monetary policy decision from the European Central Bank, with expectations that the central bank could extend its asset purchase program as inflation remains below its target.

Stocks in Asia rebounded from yesterday's declines, with markets in Europe and the U.S. shrugging off the weekend's failed Italian referendum yesterday, aided by some stronger-than-expected global business activity data. Stocks also are recovering from some flared-up U.S. global trade concerns over the weekend. 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. Stocks in Japan increased, recovering from yesterday's Italian referendum drop, despite some choppiness in the yen. Mainland Chinese equities declined slightly, while those traded in Hong Kong advanced, with the markets continuing to adjust to yesterday's beginning of the exchange trading link between Hong Kong and Shenzhen.

Australian markets rose, while the Reserve Bank of Australia (RBA) held its monetary policy stance unchanged as expected. The RBA noted that some slowing in the year-ended growth rate is likely, but pointing out that higher resource export prices are providing a boost to national income, per Bloomberg. Indian equities finished marginally higher with the Reserve Bank of India expected to cut its benchmark interest rate tomorrow, while listings in South Korea gained solid ground after the nation's finance ministry announced plans to spend more than half its 2017 budget in the first half of the year to boost growth, per CNBC.

In addition to the RBI's monetary policy meeting, the international economic calendar will hold GDP from Australia, trade data from South Korea, the Leading Index from Japan, as well as industrial production from Germany and the U.K.

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