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Monday, March 13, 2017

Lackluster Session Ahead of Key Data and Events

Charles Schwab: On the Market
Posted: 3/13/2017 4:15 PM ET

Lackluster Session Ahead of Key Data and Events

U.S. equities were rangebound for most of the trading session, finishing mixed and near the flatline, with investors eyeing a heavy economic docket this week, headlined by Wednesday's highly-anticipated Fed rate hike. As well, political uncertainty on both sides of the Atlantic persisted. Dow member Intel's $15.3 billion agreement to acquire Mobileye dominated a quiet equity front. Meanwhile, Treasury yields and the U.S. dollar nudged higher amid a dormant economic calendar, while crude oil prices and gold ticked lower.

The Dow Jones Industrial Average (DJIA) declined 22 points (0.1%) to 20,881, the S&P 500 Index added nearly a point to 2,374, and the Nasdaq Composite increased 14 points (0.2%) to 5,876. In moderate volume, 738 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.09 lower to $48.40 per barrel and wholesale gasoline shed $0.02 to $1.58 per gallon. Elsewhere, the Bloomberg gold spot price ticked $0.47 lower to $1,204.17 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 101.36.

Dow member Intel Corp. (INTC $35) announced an agreement to acquire Mobileye NV (MBLY $61) for $63.54 per share in cash, or about $15.3 billion. INTC said the acquisition is expected to be accretive to its earnings-per-share (EPS) and free cash flow immediately. INTC traded lower, while MBLY surged nearly 30%.

Heavy dose of data on tap for the week, headlined by highly-expected Fed rate hike

Treasuries were lower amid an economic calendar void of any major reports today, as the yields on the 2-year note and the 30-year bond are gained 2 basis points (bps) to 1.37% and 3.19%, respectively, while the yield on the 10-year note rose 3 bps to 2.60%.

The week's economic docket will get into gear tomorrow, beginning with the National Federation of Independent Business (NFIB) Small Business Optimism Index, forecasted to tick lower to a level of 105.6 for February from the prior month's 105.9, as well as the Producer Price Index (PPI), with economists expecting a 0.1% month-over-month (m/m) increase for February, while excluding food and energy, the core rate is anticipated to have moved 0.2% higher.

A plethora of other key reads are expected later in the week, including consumer price inflation, retail sales, housing starts and building permits, industrial production and capacity utilization, leading indicators, and consumer sentiment.

However, the pinnacle event of the week will likely be Wednesday's conclusion of the Federal Open Market Committee's (FOMC) two-day monetary policy meeting, which is expected to deliver a 25 bp hike to the target for the fed funds rate. The statement and accompanying updated economic projections, which includes individual fed funds forecasts from FOMC participants, known as the dot plots, are poised to also garner heavy attention, with the markets looking to see if the pace of rate hikes is expected to accelerate beyond current expectations. This will be followed by the customary press conference by Fed Chairwoman Janet Yellen, which typically garners scrutiny.

As noted in the latest Schwab Market Perspective: "Phenomenal" Expectations, the economic picture continues to look good, but inflation is heating up, and we are watching to see if this could force the Fed's hand. History compiled by Strategas Research Partners shows that the best stock market performance during a rate hiking cycle comes when the Fed moves slowly in the first year, but quicker in the second year. That pattern appears to be panning out in this cycle. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

The stock markets have pulled back after reaching all-time highs early in March, while Treasury yields have rallied and the U.S. dollar has been choppy, with the markets grappling with upbeat economic data, a surge in Fed rate hike expectations, along with domestic and European political uncertainty. Amid this backdrop, see our latest article, End of an Era: Why Volatility May Return to the Stock Market and video from Schwab’s Chief Investment Strategist Liz Ann Sonders and Vice President of Trading and Derivatives, Randy Frederick titled, Stock Rally Continues, but Is It Time for Markets to Take a Breather?, at www.schwab.com/insights. Follow Liz Ann and Randy on Twitter: @lizannsonders and @randyafrederick.

For analysis of the Fed and U.S. political front, see Schwab's Chief Fixed Income Strategist, Kathy Jones' article, What would a shake-up at the Fed mean for bond investors? at www.schwab.com/onbonds, and Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's article, Presidential Reset: What Does Trump's Speech Mean for His Agenda?, at www.schwab.com/insights. Follow Kathy on Twitter: @kathyjones.

Europe and Asia mostly higher, markets brace for U.S. Fed rate hike

European equities finished mostly higher, with a rebound in basic materials helping foster some resiliency in the face of heightened expectations of a U.S. rate hike later this week and ramped up political uncertainty in the region. Along with the U.S., Japan, Switzerland and the U.K. will announce monetary policy decisions. The exacerbated political front was fostered by resurfaced Brexit timing uncertainty as U.K. Prime Minister May faces a vote today that could allow her to trigger Article 50 to formally start the Brexit process as early as Tuesday, while German Chancellor Merkel is set to meet with U.S. President Donald Trump this week. Moreover, Scottish First Minister Sturgeon said she will start the legal process of preparing for a second independence referendum. Finally, a Dutch election is set for Wednesday and next month's key French Presidential election looms. As such, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Randy Frederick discuss the political front in the video, Why Should the French Presidential Election Be Important to Investors? at www.schwab.com/insights. Follow Jeff on Twitter: @jeffreykleintop. Also, be sure to check out Jeff's articles, Five Reasons to Stay Invested Despite Heightened Uncertainty and The future of Europe: EU 2.0 and its impact on the markets at www.schwab.com/oninternational, where you can also find Director of International Research, Michelle Gibley's CFA, article, Europe Votes: Could More Countries Reject the EU?. In economic news, Italian industrial production fell more than expected in January. The euro dipped and the British pound rose versus the U.S. dollar, while bond yields in the region were mostly lower.

Stocks in Asia finished mostly higher despite the looming monetary policy decision in the U.S. on Wednesday, which is expected to deliver a rate hike. Upbeat economic data leading up to the decision has likely helped boost optimism that a rate hike can be absorbed relatively smoothly but the markets will likely closely scrutinize the outlook for the pace of future rate increases. Japanese stocks shrugged off a larger-than-expected drop in machine orders—a gauge of capital spending—to finish modestly higher, with the yen starting the day extending recent weakness but gaining ground as the session matured. Mainland Chinese equities and those traded in Hong Kong rose, amid eased concerns about U.S. and China trade relations, per Bloomberg. South Korean securities advanced, adding to last week's gains that came on the heels of a court ruling to uphold a parliamentary vote to impeach President Park. However, weakness in oil & gas issues on the heels of last week's tumble in crude oil prices overshadowed a modest rebound in basic materials and weighed on Australian listings. Markets in India were closed for a holiday, though the nation's Prime Minister Modi's party won state elections over the weekend by a larger amount than expected. Schwab's Michelle Gibley, CFA, provides timely analysis of global investing in her 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.

For tomorrow, the international economic calendar will hold trade data from South Korea, retail sales from China, CPI from Spain, CPI and the Zew Economic Sentiment Survey from Germany, and industrial production from the Eurozone.

Schwab Center for Financial Research - Market Analysis Group

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Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

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