Stocks Settle Lower amid Heightened Rate Hike Expectations

Charles Schwab: On the Market

Posted: 3/7/2017 4:15 PM ET

Stocks Settle Lower amid Heightened Rate Hike Expectations

U.S. stocks continued to pull back from last week's record highs as the global markets grapple with heightened expectations the Fed may raise rates after next week's meeting. Treasuries and gold were lower, while crude oil prices were little changed and the U.S. dollar ticked higher. In economic news, the trade balance matched forecasts, while consumer credit was well shy of expectations. In M&A action, Hewlett Packard Enterprise agreed to acquire Nimble Storage.

The Dow Jones Industrial Average (DJIA) lost 30 points (0.1%) to 20,925, the S&P 500 Index declined 7 points (0.3%) to 2,368, and the Nasdaq Composite decreased 15 points (0.3%) to 5,834. In moderate volume, 793 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.06 lower to $53.14 per barrel and wholesale gasoline added $0.01 to $1.68 per gallon. Elsewhere, the Bloomberg gold spot price ticked $9.49 lower to $1,215.80 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 101.78.

Hewlett Packard Enterprise Co. (HPE $23) announced an agreement to acquire flash storage solutions provider Nimble Storage Inc. (NMBL $13) for $12.50 per share in cash, or about $1.0 billion. HPE dipped and NMBL rallied sharply. For more on the tech sector, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Can the Tech Rally Continue? at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

Dick's Sporting Goods Inc. (DKS $48) reported 4Q earnings-per-share (EPS) of $0.81, or $1.32 ex-items, versus the $1.29 FactSet estimate, as revenues increased 10.9% year-over-year (y/y) to $2.5 billion, roughly in line with expectations. 4Q same-store sales rose 5.0% y/y, above the projected 4.5% increase. DKS issued 1Q and full-year EPS and same-store sales guidance that came in below the Street's forecasts. Shares saw heavy pressure.

Thor Industries Inc. (THO $104) fell sharply after the recreational vehicle maker posted fiscal 2Q gross margin that decelerated for the second-straight quarter and missed the Street's expectations. The disappointing margin figure appeared to overshadow its better-than-expected EPS and revenue results.

Trade deficit widens as expected

The trade balance (chart) showed that the deficit came in at $48.5 billion in January, matching the Bloomberg estimate. December's deficit was unrevised at $44.3 billion. Exports rose 0.6% month-over-month (m/m) to $192.1 billion, while imports gained 2.3% to $240.6 billion.

Consumer credit, released in the final hour of trading, showed consumer borrowing advanced by $8.8 billion during January, well shy of the $17.3 billion forecast of economists polled by Bloomberg, while December's figure was adjusted slightly higher to an increase of $14.8 billion from the originally reported $14.2 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, climbed by $12.6 billion, while revolving debt, which includes credit cards, fell by $3.8 billion.

Treasuries were lower, with the yield on the 2-year note ticking 2 basis points (bps) higher to 1.33%, while the yields on the 10-year note and the 30-year bond increased 1 bp to 2.51% and 3.11%, respectively.

The markets remain focused on the timing and details of President Donald Trump's policy plans, while expectations of a Fed rate hike next week have jumped in the wake of continued solid economic data. Amid this backdrop, see our latest article, End of an Era: Why Volatility May Return to the Stock Market at www.schwab.com/insights.

As noted in the latest Schwab Market Perspective: "Phenomenal" Expectations, higher inflation and stronger economic data—and perhaps the stock market's rip higher—have led to more "hawkish" commentary from the Fed recently. March Fed hike expectations have risen considerably, now well over 80. 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.

For analysis of the Fed and President Trump's highly-anticipated reflationary policies, 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 offers his latest article, Presidential Reset: What Does Trump's Speech Mean for His Agenda?, at www.schwab.com/insights. Follow Kathy on Twitter: @kathyjones.

Tomorrow, the U.S. economic calendar will offer the ADP Employment Change Report, with private sector payrolls forecasted to rise by 189,000 jobs in February, as well as final 4Q nonfarm productivity and unit labor costs, with productivity anticipated to have increased 1.5% on an annualized basis and costs forecasted to have risen 1.6%. Additional releases expected tomorrow include wholesale inventories, with economists expecting a 0.1% month-over-mon (m/m) decrease in January, matching that registered in December, and the weekly MBA Mortgage Applications report.

Europe and Asia mixed on Fed, data and politics

European equities finished mixed, with the global markets grappling with elevated U.S. Fed rate hike expectations, along with some disappointing German manufacturing data. Also, political uncertainty continued to fester as the markets await U.S. President Donald Trump's reflationary policy plans, while gearing up for an upcoming key French Presidential election as discussed by Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives, Randy Frederick in the video, Why Should the French Presidential Election Be Important to Investors? at www.schwab.com/insights. 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. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick. Germany reported a 7.4% m/m drop in factory orders for January, after rising 5.2% in December and compared to the projected 2.5% decline. In other economic news, eurozone 4Q GDP was unrevised at a 0.4% quarter-over-quarter rate and a 1.7% y/y pace of growth, both matching expectations. The euro dipped and the British pound saw modest pressure versus the U.S. dollar, while bond yields in the region finished mixed. 

Stocks in Asia finished mixed as the markets grapple with the boosted expectations of a rate hike in the U.S. next week, along with exacerbated political uncertainty ahead of a key election in France and amid anticipation of U.S. President Trump's policy plans. Also, geopolitical concerns have ticked higher on news that North Korea fired ballistic missiles off its east coast over the weekend. Japanese equities declined, with the yen choppy, while Australian securities gained ground on the heels of the unchanged monetary policy decision by the Reserve Bank of Australia. Chinese stocks advanced and those trading in Hong Kong rose with banking stocks leading the way and as traders continue to focus on the ongoing government's annual legislative meeting.

South Korean equities advanced despite the North Korean news, though Indian listings declined. For more on global investing, 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 a plethora of releases from Japan as the island nation reports its trade data, 4Q GDP, bank lending figures and Leading Index. Releases from across the pond will include industrial production from Germany and trade data from France.