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Thursday, March 23, 2017

Stocks Deflate on News of Healthcare Vote Delay

Charles Schwab: On the Market
Posted: 3/23/2017 1:15 PM ET

Stocks Deflate on News of Healthcare Vote Delay

After being modestly higher for most of the day amid cautious optimism over this evening's vote on a widely-watched healthcare bill, U.S. equities lost steam late to finish near the flatline after reports surfaced that the vote would not happen today amid continued political wrangling. News on the economic front was mostly positive, with new home sales surprising to the upside in February, and as some regional manufacturing activity moved further into expansion territory, while weekly jobless claims unexpectedly increased. Treasuries were little changed and gold was lower, while the U.S. dollar ticked higher and crude oil prices lost ground.

The Dow Jones Industrial Average (DJIA) lost 5 points to 20,657, the S&P 500 Index shed 3 points (0.1%) to 2,346, and the Nasdaq Composite declined 4 points (0.1%) to 5,818. In moderate volume, 805 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.34 to $47.70 per barrel and wholesale gasoline lost a penny to $1.59 per gallon. Elsewhere, the Bloomberg gold spot price declined $3.04 to $1,245.80 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 99.74.

PVH Corp. (PVH $99) announced 4Q earnings-per-share (EPS) of $1.26 on a GAAP basis and $1.23 ex-items, topping FactSet projections of $1.19, while revenues dipped 0.4% year-over-year (y/y) to $2.0 billion, mostly in line with expectations. The company announced 2017 EPS guidance on a GAAP basis of $6.20 to $6.30 for the year and of $0.73 to $0.75 for 1Q, and the Board authorized an increase and extension to the current stock repurchase program. Shares rallied.

Cintas Corp. (CTAS $126) announced 3Q EPS of $1.11 ex-items, besting the consensus estimate of $1.07, while revenues increased 5.3% y/y to $1.3 billion, matching forecasts. Also, Scott Farmer, the company Chairman and CEO stated that this was the 14th consecutive quarter of y/y gross margin improvement. Shares of CTAS were nicely higher.

With equity news a bit on the lighter side, a large amount of investor focus was tuned to the current health-care bill that was expected to be voted on later tonight by the House of Representatives, but reportedly delayed until tomorrow. Though the legislative process is currently underway, many questions still surround the health-care industry and may or may not be addressed by the proposed legislation, however, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA tackles this sector with his three-to-six month outlook in the most recent Schwab Sector Views: How Should Investors Look at Health Care Now?. And be sure to check out Brad's views on ten other sectors at www.schwab.com/marketinsight. Follow Schwab on Twitter: @schwabresearch.

New home sales surprise to the upside, jobless claims unexpectedly increase

New home sales (chart) rose 6.1% month-over-month (m/m) in February to an annual rate of 592,000, above the Bloomberg forecast of 564,000 units, and compared to the upwardly revised 558,000 unit pace in January. The median home price was down 4.9% y/y at $296,200. New home inventory dipped to 5.4 months of supply at the current sales pace. Sales declined m/m in the Northeast, but rose sharply in the Midwest, and also increased in the West and South. New home sales are based on contract signings instead of closings.

Weekly initial jobless claims (chart) increased by 15,000 to 258,000 last week, above forecasts of 240,000, with the prior week’s figure being upwardly revised to 243,000. The four-week moving average rose to 240,000 from 239,000, while continuing claims dropped by 39,000 to 2,000,000, south of estimates of 2,040,000.

The Kansas City Fed Manufacturing Activity Index for March rose to 20, from February's 14 reading, where it was forecasted to remain, with a level north of zero depicting expansion.

Also, Federal Reserve Chair Janet Yellen delivered opening remarks this morning at a conference in Washington D.C. Though some market participants likely listened for indications on the trajectory of the U.S. economy and the pace of future rate hikes, the Fed Chair did not comment on monetary policy.

Treasuries were nearly unchanged, as the yield on the 2-year note lost 1 basis point (bp) to 1.24%, while the yields on the 10-year note and the 30-year bond were flat at 2.41% and 3.02%, respectively.

As noted in the recent Schwab Market Perspective: Teflon Market, helping to bolster our belief in a strengthening economy—and our bullish stance—is the increased hawkishness of the Federal Reserve and their decision to hike rates at the March Federal Open Market Committee (FOMC) meeting. Additionally, the Fed signaled willingness to continue to hike rates in the coming months, which would mark the first time we would see more than one hike in a year since the financial crisis. Read the whole perspective at www.schwab.com/marketinsight. Also, for analysis on the Fed and its implications for bond investors, see the video from Schwab's Chief Fixed Income Strategist, Kathy Jones and Vice President of Trading and Derivatives, Randy Frederick titled Three Fed Hikes Seen in 2017: How Should Bond Investors Respond?, at www.schwab.com/insights. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick.

The week's economic calendar will culminate tomorrow with a look at the manufacturing sector, as preliminary durable goods orders will be released, forecasted to show a 1.3% m/m increase for the headline rate during February, a 0.6% rise excluding transportation, while orders for nondefense excluding aircraft, considered a proxy for business spending, is estimated to have ticked 0.2% higher m/m. Finally, the preliminary Markit Manufacturing PMI Index will be reported, with economists expecting an uptick to a level of 54.8 for March from the 54.2 posted in the month prior, with a reading above 50 indicating expansion in activity.

Europe and Asis mostly higher ahead of U.S. health care vote

European equity markets finished the trading day higher, as traders await today's vote on the proposed replacement for the Affordable Care Act in the U.S. House of Representatives, with market participants looking toward the outcome as a gauge of the Trump Administration's ability to implement its pro-growth policies. The European Central Bank (ECB) gave banks in the euro-area approximately $252 billion, the largest net amount yet, in its Targeted Longer-Term Refinancing Operations program, as ECB President Mario Draghi signaled that time is running out for banks to get their house in order with the end of the central bank's current quantitative easing program in mind, which according to a Bloomberg survey is now expected to be around mid-2018. In Germany, the country's lower house of parliament is in the early stages of introducing new laws with respect to insolvency proceedings after a recent Tax Restructuring Decree was overturned, while in other tax news, the country reported a rise in February tax revenue, which benefitted from stable economic development, with income and sales tax revenue both increasing per the Deputy Finance Minister. Meanwhile, in the U.K., some upbeat retail sales data did little to dispel the notion of concern about the outlook of consumers in Britain if the current rise in inflation, which is expected to reach 3 percent later this year, continues.

Stocks in Asia rebounded some from yesterday's selloff and closed mostly higher with financial and industrial shares leading gains. Japanese equities advanced, shrugging off three days of declines, with the yen slightly weaker, as the current health-care bill discussions in the U.S. may be increasing the demand for safe-haven assets. The yen had risen in the previous seven-straight sessions. Mainland Chinese securities increased slightly, and those traded in Hong Kong were mostly flat amid reports that the country's financial regulators may need to take further steps to reign in leverage that continues to mount after the bond market in the world's second largest economy experienced one of its worst months since December 2010. Some smaller banks in the country were said to have missed debt payments amid a surge in interbank rates, which spurred emergency liquidity injections from the central bank. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses how rate hikes by the Federal Reserve put pressure on the People's Bank of China to respond to manage the currency and capital flows in his recent article, The Fed has China in a Tough Spot, at www.schwab.com/marketinsight and follow Jeff on Twitter: @jeffreykleintop. Elsewhere, stocks in Australia gained ground, led higher by strength in mining and energy stocks, with a rebound in crude oil prices also indirectly lending support, while markets in South Korea and India also advanced.

Tomorrow, manufacturing PMI reads from across the globe will dominate the international economic calendar, while other reports on tap include consumer sentiment from South Korea, trade data from Australia, the Leading Index from Japan, GDP from France, and PPI from Spain.

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