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Tuesday, March 14, 2017

Oil, Fed and Politics Pressure Markets

Charles Schwab: On the Market
Posted: 3/14/2017 4:15 PM ET

Oil, Fed and Politics Pressure Markets

U.S. equities finished lower ahead of tomorrow's highly-anticipated monetary policy decision from the Fed, with expectations high for a 25 basis point rate hike, while political uncertainty across the pond continued to fester. Energy issues came under pressure amid a drop in crude oil prices in the wake of a bearish OPEC report showing a jump in production from Saudi Arabia. Treasury yields declined despite a hotter-than-expected producer price inflation report, while the U.S. dollar was higher and gold lost ground.

The Dow Jones Industrial Average (DJIA) declined 44 points (0.2%) to 20,837, the S&P 500 Index lost 8 points (0.3%) to 2,365, and the Nasdaq Composite decreased 19 points (0.3%) to 5,857. In moderate volume, 748 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.48 to $47.72 per barrel and wholesale gasoline was unchanged at $1.58 per gallon. Elsewhere, the Bloomberg gold spot price declined $5.16 to $1,199.14 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 101.69.

HD Supply Holdings Inc. (HDS $41) reported 4Q earnings-per-share (EPS) of $0.26, or $0.44 ex-items, compared to the FactSet estimate of $0.43, as revenues rose 3.2% year-over-year (y/y) to $1.6 billion, roughly in line with forecasts. The industrial distributor issued 1Q EPS guidance that missed expectations and shares were solidly lower.

Shares of MoneyGram International Inc. (MGI $16) surged after the company received a takeover proposal from Euronet Worldwide Inc. (EEFT $83) for $15.20 per share in cash, valuing it at more than $1 billion. EEFT said the offer represents a 15% premium over MGI's previously agreed upon takeover by Ant Financial Services Group. MGI has not commented on EEFT's offer.

Producer price inflation hotter than expected, small business optimism dips slightly

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in February were up 0.3% month-over-month (m/m), above the Bloomberg expectation calling for a 0.1% gain and compared to January's unrevised 0.6% rise. The core rate, which excludes food and energy, rose 0.3%, versus forecasts of a 0.2% advance and January's unrevised 0.4% increase. Y/Y, the headline rate was 2.2% higher, north of projections of a 1.9% increase, and the core PPI rose 1.5% last month, matching estimates. In January, producer prices were 1.6% higher and up 1.2% for the headline and core rates, respectively.

The National Federation of Independent Business (NFIB) Small Business Optimism Index for February dipped to 105.3 from January's 105.9 level, compared to forecasts calling for a decline to 105.6.

Treasuries finished higher, as the yield on the 2-year note was flat at 1.37%, while the yield on the 10-year note declined 3 basis points (bps) to 2.59%, and the 30-year bond rate decreased 4 bps to 3.17%.

The markets are awaiting tomorrow's conclusion of two-day monetary policy meeting from the Federal Open Market Committee (FOMC), expected to deliver a 25 bp hike to the target for the fed funds rate. The statement and accompanying updated economic projections 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. Schwab's Chief Fixed Income Strategist, Kathy Jones offers a look at the Fed meeting and the impact on bond investing in her article, Will the Fed Hike Rates This Week? at www.schwab.com/insights. Follow Kathy on Twitter: @kathyjones.

The FOMC decision will be preceded by a plethora of economic reports such as MBA mortgage applications, the Empire Manufacturing Index, the Consumer Price Index (CPI), retail sales, the NAHB Housing Markets Index and business inventories. The read on consumer inflation will likely garner the heaviest attention. Core CPI is estimated to come in at 2.2% y/y for last month, a slight deceleration from the 2.3% gain in January, but the FOMC's favored core PCE Index remains slightly below its longer-run objective of 2.0%. Earlier this month, FOMC Chairwoman Janet Yellen bolstered rate hike expectations by noting that the economy is close to meeting the Fed's goals of maximum employment and price stability and that gradual increases in the fed funds rate will likely be appropriate in the months and years ahead to keep the economy from significantly overheating.

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.

Finally, for a look at the break in the rally in the stock markets and possibility of increased volatility, see our 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. And for analysis of the political front, see 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.

Europe dips as political uncertainty festers, Asia mixed 

European equities finished lower, with oil & gas and financial stocks leading to the downside amid some caution ahead of tomorrow's highly expected rate hike in the U.S., while crude oil prices fell on an OPEC report showing a jump in production from Saudi Arabia. Political uncertainty in the region also garnered heavy attention to likely hamstring sentiment, with U.K. Brexit uneasiness continuing to flare-up as Prime Minister May was granted the right to trigger Article 50, which will begin the formal process of negotiating the nation's exit from the European Union, following Scottish First Minister Sturgeon's news yesterday that she will start the legal process of preparing for a second independence referendum. Also, the markets are paying attention to tomorrow's Dutch election, which will set the stage for next month's key French Presidential election as discussed by Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Randy Frederick 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, eurozone industrial production rose by a smaller amount than expected for January, while German investor confidence improved by a smaller amount than forecasted for this month. The euro dipped and British pound fell compared to the U.S. dollar, while bond yields in the region were mixed.

Stocks in Asia finished mixed, with the markets digesting some diverging Chinese economic data and as the markets appear to be treading cautiously ahead of tomorrow's highly expected rate hike in the U.S. Moreover, European political uncertainty continues to ramp up, likely weighing on conviction. Japanese equities dipped, despite some weakness in the yen, while those traded in Australia finished flat. South Korean securities rose, extending a run that has ensued in the wake of last week's court ruling to uphold a parliamentary vote to impeach President Park, and markets in India jumped in a return to action following yesterday's holiday and following the weekend's state elections that showed Prime Minister Modi's party won by a larger amount than expected. Stocks in mainland China ticked higher and those traded in Hong Kong were little changed following reports that showed the nation's industrial production and fixed asset investment topped expectations, though retail sales missed forecasts for last month. 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.

Tomorrow, the international economic calendar will offer employment data from South Korea, India's trade balance, industrial production and retail sales from Japan, CPI from France and Italy, and employment figures from the U.K.

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