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Thursday, February 16, 2017

Stocks Advance for Fifth-Straight Session

Charles Schwab: On the Market
Posted: 2/15/2017 4:15 PM ET

Stocks Advance for Fifth-Straight Session

U.S. stocks extended their recent rally, with global markets remaining optimistic regarding President Donald Trump's reflationary policy promises. Treasury yields rose, bolstered by favorable retail sales and regional manufacturing reports and a hotter-than-expected read on inflation. Crude oil prices and the U.S. dollar ticked lower, while gold was higher. In equity news, PepsiCo offered mixed earnings results and AIG missed expectations.

The Dow Jones Industrial Average (DJIA) advanced 107 points (0.5%) to 20,612, the S&P 500 Index gained 12 points (0.5%) to 2,349, and the Nasdaq Composite added 37 points (0.6%) to 5,819. In moderately-heavy volume, 844 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.09 lower to $53.11 per barrel and wholesale gasoline was flat at $1.55 per gallon. Elsewhere, the Bloomberg gold spot price rose $4.66 to $1,232.80 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 101.04.

PepsiCo Inc. (PEP $107) reported 4Q earnings-per-share (EPS) ex-items of $1.20, above the $1.16 FactSet estimate, as revenues rose 5.0% year-over-year (y/y) to $19.5 billion, roughly in line with expectations. PEP issued 2017 EPS guidance that missed forecasts and shares traded modestly lower. Schwab’s Chief Investment Strategist Liz Ann Sonders offers a look at the earnings front in her latest article, Better Days: Earnings Growth Picks Up Sharply in 2017, at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

American International Group Inc. (AIG $61) fell after the insurer posted a larger-than-expected 4Q operating loss of $2.72 per share. FactSet had anticipated a $0.61 per share shortfall but the company had one-time items in its results that may be impacting comparability. AIG also announced a $3.5 billion addition to its share repurchase program.

Express Scripts Holding Co. (ESRX $69) posted 4Q EPS ex-items of $1.88, one penny above estimates, with revenues declining 5.0% y/y to $24.9 billion, compared to the projected $26.3 billion. ESRX issued 1Q earnings guidance that slightly missed expectations, while reaffirming its full-year profit projection. ESRX ticked lower in choppy trading. 

Dow member Merck & Co. Inc. (MRK $65) announced that it ended a study of its Alzheimer's drug. Shares finished lower.

Retail sales and consumer price inflation top forecasts, Yellen concludes Capitol Hill visit

Advance retail sales (chart) for January rose 0.4% month-over-month (m/m), above the Bloomberg forecast of a 0.1% increase, and compared to December's upwardly revised 1.0% rise. Also, last month's sales ex-autos were up by 0.8% m/m, north of expectations of a 0.4% gain, and following the positive revision to a 0.4% rise seen in the previous month. Sales ex-autos and gas were higher by 0.7% m/m, compared to estimates of a 0.3% increase, and versus December's upward revision to a 0.1% gain. The retail sales control group, a figure used to help calculate GDP, increased 0.4%, compared to the projected 0.3% rise, and versus to the prior month's positively revised 0.4% gain. 9 of the 13 categories showed growth, led by electronics and appliances, sporting goods, department stores, food services and drinking places, and gasoline, while autos pulled back.

The report, given the importance of consumer spending on U.S. economic output, along with the following jump in regional manufacturing activity, adds credence to Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, view in his latest article, Simple Indicators In A Complex World, that while markets may exhibit increasing volatility, we believe the bull market is being supported by tangible and effective indicators of global growth. The stock markets remain at record highs, tracking economic data that continues to exceed expectations as discussed by Jeff in his commentary, Five Reasons to Stay Invested Despite Heightened Uncertainty. Read these articles at www.schwab.com/oninternational, and follow Jeff on Twitter: @jeffreykleintop.

The Consumer Price Index (CPI) (chart) was up 0.6% m/m in January, north of estimates and the prior month's 0.3% rise. The core rate, which strips out food and energy, gained 0.3% m/m, above expectations and December's 0.2% rise. Y/Y, prices were 2.5% higher for the headline rate, above forecasts of a 2.4% increase, while the core rate was up 2.3%, topping projections of a 2.1% gain. December y/y figures showed an unrevised 2.1% rise and an unadjusted 2.2% increase for the headline and core rates respectively.

The Empire Manufacturing Index showed output from the New York region jumped further into expansion territory (a reading above zero) for February. The index surged to 18.7—the highest since September 2014—from January's unrevised 6.5 level, with forecasts calling for a 7.0 reading.

Industrial production (chart) declined 0.3% m/m in January, compared to estimates of a flat reading, and following December's downwardly revised 0.6% gain. Manufacturing production ticked 0.2% higher m/m and mining production jumped, while utilities output tumbled. Capacity utilization dipped to 75.3% from December's upwardly revised 75.6%, and compared to projections for a 75.4% rate. Capacity utilization is 4.6 percentage points below its long-run average.

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month dipped for a second month to 65, compared to expectations for it to remain at January's unrevised 67 level, with a 50 mark separating good and poor conditions.

Business inventories (chart) rose 0.4% m/m in December, matching forecasts, and versus November's upwardly revised 0.8% gain.

The MBA Mortgage Application Index declined 3.7% last week, following the previous week's 2.3% gain. The drop came as a 2.9% decrease for the Refinance Index was met with a 4.5% fall for the Purchase Index. The average 30-year mortgage rate declined 3 basis points (bps) to 4.32%.

Federal Reserve Chairwoman Janet Yellen is concluding her two-day semi-annual Congressional economic and monetary policy testimony in front of the House Financial Services Committee. Her prepared testimony did not deviate from yesterday's statement in front of the Senate, where she kept the possibility of a March rate hike on the table by noting that waiting too long to remove accommodation would be unwise. Also, she added that, "At our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate." The Q&A session is garnering some attention on the Street.

As noted in the latest Schwab Market Perspective: Not So Fast!, if economic data continues to surprise on the upside, a March rate hike is likely to be on the table; while there is an additional risk that the Fed may be forced to speed up the tightening process should inflation accelerate from here. Read more at www.schwab.com/marketinsight and check out Schwab's Liz Ann Sonders' video with Schwab's Vice President of Trading and Derivatives, Randy Frederick titled, What Can Investors Make of Latest Fed Meeting and January Labor Report?, at www.schwab.com/insights. Treasury yields and the U.S. dollar continued to regain upward momentum and the stock markets added to record highs in the wake of Yellen's comments yesterday.

Treasuries were lower, with yields adding to a recent rally on the retail sales and inflation data. The yield on the 2-year note rose 2 bps to 1.25%, while the yields on the 10-year note and the 30-year bond increased 3 bps to 2.50% and 3.08%, respectively. For a look at the bond markets, see Schwab's Director of Income Planning, Rob Williams', CFP, and Senior Research Analyst, Cooper Howard's, CFA, latest article, Short-Term Bonds: Why They Could Outperform As Interest Rates Rise, at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

Tomorrow, the economic calendar will bring a look at January housing construction activity, in the form of housing starts and building permits, with starts forecasted to remain at December's annual rate of 1,226,000 units, and permits projected to rise 0.2% m/m to an annual rate of 1,230,000 units. Additional reports will include weekly initial jobless claims, expected to have increased by 11,000 to 245,000, and the Philly Fed Manufacturing Index for February, anticipated to decline to 18.0 from January's 23.6 level, though a reading above zero indicates expansion in activity.

Europe gets back on the upward trend, Asia finished mostly higher 

European equities moved back in positive territory after the Stoxx Europe 600 Index finished flat yesterday, halting a five-session winning streak. The markets continued to get a boost from optimism regarding U.S. reflationary policies that are expected to be announced in the coming weeks. Most markets shrugged off lingering European political uncertainty, with some key elections in the region looming on the horizon, though it bogged down Italian markets. For analysis of the U.S. and European political fronts, see Schwab's Jeffrey Kleintop's, CFA, article, President Trump and Global Trade: How Will Campaign Promises Play Out? and Director of International Research, Michelle Gibley's, CFA, article, Europe Votes: Could More Countries Reject the EU? at www.schwab.com/oninternational. Solid gains for French bank Credit Agricole SA (CRARY $6) and brewer Heineken NV (HEINY $40) on the heels of their earnings reports helped the markets in the region, along with upbeat reads on U.K. employment and the eurozone trade surplus. The euro ticked higher and British pound dipped versus the U.S. dollar, which cooled a bit after a recent run that was bolstered by U.S. Fed Chief Yellen's comments yesterday that kept the possibility of a March rate hike on the table. Bond yields in the region finished mixed. For global market investing analysis, see Schwab's Jeffrey Kleintop's, CFA, articles, The CURE for a calm Market: Four risks for 2017, and 5 Reasons International Stocks May Underperform In 2017. Read these articles at www.schwab.com/oninternational.

Stocks in Asia finished mostly higher amid the continued global market rally that has taken the U.S. markets to record highs. The markets have received a boost from a shift in focus to reflationary policies in the U.S. and away from global trade and immigration concerns. Stocks moved higher despite U.S. Fed Chief Yellen's comments yesterday that kept the possibility of a March rate hike on the table. Japanese equities rose, with the yen extending yesterday's drop as the U.S. dollar gained ground on Yellen's comments. Mainland Chinese stocks declined, but those traded in Hong Kong rallied in the wake of late-yesterday's mixed lending statistics for last month, highlighted by a record high in aggregate financing, the biggest measure of new credit. Australian securities gained ground, led by banks as global bond yields moved higher on Yellen's comments, and South Korean stocks rose. Indian equities declined amid weakness in banks as reports suggested the government cut the amount it planned to inject into state-run lenders, per Bloomberg. For our analysis of the global markets, see Schwab's Director of International Research, Michelle Gibley's, CFA, articles, Currency Hedging: 5 Things You Need to Know and Emerging Markets: Why They Deserve a Place in Your Portfolio 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.

The international economic docket for tomorrow will include machine tool orders from Japan, employment data from Australia, unemployment reads from France and the trade balance from Italy.

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