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Wednesday, January 04, 2017

New Year Momentum Continues

Charles Schwab: On the Market
Posted: 1/4/2017 4:15 PM ET

New Year Momentum Continues

The U.S. equity markets notched another up day for the New Year, getting a modest afternoon boost following the release of the minutes from the Fed’s December monetary policy meeting. Treasuries yields moved lower following the Fed report, with the U.S. dollar paring some of its earlier losses and crude oil prices rebounding from yesterday's decisive downdraft. Equity news focused on the auto industry, as Tesla Motors shrugged off a miss in its deliveries, while Ford and GM posted upbeat December sales figures.

The Dow Jones Industrial Average (DJIA) increased 60 points (0.3%) to 19,942, the S&P 500 Index gained 13 points (0.6%) to 2,271 and the Nasdaq Composite jumped 48 points (0.9%) to 5,477. In heavy volume, 931 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.93 to $53.26 per barrel and wholesale gasoline gained $0.03 to $1.65 per gallon. Elsewhere, the Bloomberg gold spot price increased $4.63 to $1,163.47 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.6% lower at 102.58.

Tesla Motors Inc. (TSLA $227) said its 2016 deliveries were about 76,230, below its guidance for at least 80,000 deliveries. TSLA noted short-term production challenges starting at the end of October and lasting through early December from the transition to new autopilot hardware. Shares overcame early pressure and finished higher.

The major automakers reported U.S. December sales today, with General Motors Co's (GM $37) sales rising 10.0% year-over-year (y/y), compared to the projected 3.4% increase. Fiat Chrysler Automobiles NV's (FCAU $10) sales dropped 10.0%, compared to the expected 11.7% fall. Ford Motor Co (F $13) reported a 0.3% gain in sales, versus the expected 2.0% decline. GM and F rallied, while FCAU was only modestly higher.

Fed minutes indicate endorsement of gradual rate hikes

In afternoon action, the Federal Reserve released the minutes to the December Federal Open Market Committee’s monetary policy meeting, showing that Fed officials cited the impact of potential fiscal stimulus as weighing heavily on their decision to increase the target for the fed funds rate, as well as the need to quicken the pace of future rate hikes. Almost all participants “indicated that the upside risks to their forecasts for economic growth had increased as a result of prospects for more expansionary fiscal policies in coming years,” while also reiterating a gradual approach to such. In addition, the Committee was divided as to the outlooks of unemployment and inflation, with many members indicating that the risks of a significant “undershoot” on employment had increased somewhat.

The MBA Mortgage Application Index ticked 0.1% higher last week, following the previous week's 12.1% drop. The slight increase came as the Refinance Index increased 1.7%, rebounding from the prior week's 23.2% tumble, while the Purchase Index declined 1.4%, after dipping 0.7% in the previous week. The average 30-year mortgage rate fell 6 basis points (bps) to 4.39%.

Treasuries finished higher, as the yields on the 2-year and 10-year notes, as well as the 30-year bond all ticked 1 basis point lower to 1.21%, 2.44% and 3.04%, respectively.

Bond yields have found post-election support and have been bolstered by a string of upbeat economic data, along with the Fed's December rate hike and a faster-than-previously-forecasted pace of increases for 2017. Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the bond markets in a video with Schwab's Vice President of Trading and Derivatives, Randy Frederick titled, How Should Bond Investors Prepare in Light of Fed Outlook for 2017? at www.schwab.com/insights. Kathy also addresses some common questions from investors and considers some of the potential changes facing the fixed income market in her article, Changing Conditions: A Bond Market FAQ, where she notes that yields have surged in recent weeks, extending a rise that started this summer. Kathy concludes that the incoming administration of President-elect Donald Trump raises the prospect of new tax and spending policies that could make the fixed income market more volatile. Read more at www.schwab.com/marketinsight, and follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick.

Yesterday's report from the Institute for Supply Management (ISM) showing a two-year high in manufacturing growth set the stage for tomorrow's complementary business activity reads on the more critical U.S. services sector. The ISM non-Manufacturing Index is projected to dip to 56.8 in December from 57.2 in November, while Markit's final Services PMI Index is expected to be unrevised at 53.4 and down from the 54.6 level posted in November.

Readings above 50 for both indexes denote expansion, which the ISM's index has notably shown since the start of 2010. The inflation components of the reports could garner attention amid recent signs of pricing pressure and the Fed's more aggressive rate hike forecast in December, while yesterday's manufacturing report showed prices jumped to the highest since June 2011. Also, the employment component could also command attention ahead of Friday's key December labor report. Schwab's Fixed Income Director, Collin Martin, CFA, discusses in his article, Inflation Is Rising: Time to Consider Treasury-Inflation Protected Securities? at www.schwab.com/onbonds, while Schwab’s Chief Investment Strategist Liz Ann Sonders asks if rising confidence among business leaders, consumers and investors will be rewarded in her latest article, Luminous Times: Looking Ahead With Optimism About 2017, at www.schwab.com/marketinsight. Follow Liz Ann and Schwab on Twitter: @lizannsonders and @schwabresearch.

In addition to the aforementioned services sector reports, tomorrow’s economic calendar will include weekly initial jobless claims, forecasted to decline to a level of 260,000 from the prior week’s 265,000, as well as the ADP Employment Change Report, with economists expecting a 172,000 increase in private sector jobs during December.

Europe battles back on upbeat data, Asia mixed

European equities overcame some afternoon pressure to finish mixed, with some data in the region remaining on the positive side and financials continue a recent recovery from festering banking sector concerns, but automakers saw some pressure. Markit's Eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—was revised to 54.4 for December, from the preliminary estimate and November's level of 53.9, where it was expected to remain. A reading above 50 denotes expansion. Also, the eurozone consumer price inflation estimate accelerated more than expected for last month on a year-over-year basis, while U.K. consumer credit topped forecasts in November. The euro and British pound were higher versus the U.S. dollar, while bond yields in the region finished mixed. For timely analysis of the global landscape, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, latest article, 5 Reasons International Stocks May Underperform In 2017, at www.schwab.com/oninternational, as well as his video with Senior Derivatives Analyst Nathan Peterson titled, Brexit, Germany, China: How the Global Economy Could Fare in the New Year at www.schwab.com/insights. Follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed, though the recent rally in the U.S. dollar that has pressured the yen and boosted export-related issues gave Japanese equities a boost after being closed yesterday for a holiday. Also, Japan posted an upbeat read on its manufacturing growth, which joined favorable reports on the sector in recent days from the U.S., Eurozone, U.K., and China. The data adds credence to Schwab's Jeffrey Kleintop's, CFA, view in his article, Happy Unrecession: The Alice in Wonderland economy, that while volatility may lie ahead for stocks, a prolonged bear market and recession seem unlikely for 2017. Mainland Chinese stocks gained ground, bolstered by strength in rail companies amid reports that the government will continue to invest in railways this year. However, the advance may have been limited by festering currency/liquidity concerns and government crackdowns on certain sectors. Meanwhile, markets in Hong Kong dipped, with energy stocks seeing pressure after crude oil's sharp downside reversal yesterday.

Australian listings ticked higher, as strength in financials and consumer goods issues were met with a drop in technology stocks, and those traded in South Korea saw a slight gain, while India's bourse finished flat as the global economic optimism fostered by the manufacturing data was offset by a disappointing read on the nation's key services sector output, which contracted for a second-straight month in December. Schwab's Director of International Research, Michelle Gibley, CFA, offers timely analysis of emerging markets in her latest article, Emerging Markets: Why They Deserve a Place in Your Portfolio. Read the above articles at www.schwab.com/oninternational, and be sure to check out our release, Why Your Portfolio Needs International Stocks—Despite 2017 Risks at www.schwab.com/insights.

Tomorrow’s international economic calendar will hold the Services PMI Indexes from Japan, China and the U.K., as well as auto sales in Japan, and PPI from the Eurozone.

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