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Thursday, April 13, 2017

Stocks Close at Lows Ahead of Holiday Weekend

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

Stocks Close at Lows Ahead of Holiday Weekend

U.S. stocks finished the last session of the holiday-shortened week lower, despite some relatively upbeat results from JPMorgan and Citigroup to unofficially kick off 1Q earnings season. Losses accelerated after news broke that the U.S. dropped the largest non-nuclear bomb on a tunnel complex in Afghanistan. Energy issues were among the largest decliners as crude oil prices were a bit volatile before finishing nearly where they started. Treasuries were mostly flat in an abbreviated session, the U.S. dollar extended losses and gold was higher. In economic news, wholesale inflation was cooler than expected, but consumer sentiment popped above expectations.

The Dow Jones Industrial Average (DJIA) declined 139 points (0.7%) to 20,453, the S&P 500 Index lost 16 points (0.7%) to 2,329, and the Nasdaq Composite declined 31 points (0.5%) to 5,805. In moderate volume, 772 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil added $0.07 to $53.18 per barrel and wholesale gasoline was $0.01 lower at $1.73 per gallon. Elsewhere, the Bloomberg gold spot price was $1.02 higher at $1,287.80 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 100.55. Markets were down for the week, as the DJIA was 1.0% lower, the S&P 500 Index declined 1.2%, and the Nasdaq Composite lost 1.3%.

Dow member JPMorgan Chase & Co. (JPM $84) reported 1Q earnings-per-share (EPS) of $1.65, versus the $1.51 FactSet estimate, as revenues rose 6.5% year-over-year (y/y) to $24.7 billion, compared to the projected $24.8 billion. Fixed income and equity sales and trading revenues topped forecasts. The company's Chairman and Chief Executive Officer (CEO) Jamie Dimon noted that JPM is off to a good start for the year, and U.S. consumers and businesses are healthy and with pro-growth initiatives and improving collaboration between government and business, the U.S. economy can continue to improve. Shares of JPM gave up early gains and finished lower.

Citigroup Inc. (C $58) posted 1Q EPS of $1.35, compared to the expected $1.23, with revenues rising 3.0% y/y to $18.1 billion, versus the projected $17.7 billion. The company said the momentum it saw across many of its businesses towards the end of the year carried into 1Q and revenue increased in both its consumer and institutional lines of business. However, the company's net interest margin declined. C closed below the flatline in choppy trading. 

Wells Fargo & Co. (WFC $51) announced 1Q profits of $1.00 per share, above the expected $0.96, as revenues dipped 0.9% y/y to $22.0 billion, below the forecasted $22.3 billion. The company said its diversified business model generated higher revenue and net income y/y, though expenses were elevated, driven by typically-higher 1Q personnel-related expenses. Shares traded solidly lower.

Financials unofficially kicked off 1Q earnings season with relatively upbeat results, and for a look at all the sectors as the season begins, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Housing—Building Bubble or Growing Trouble?, at www.schwab.com/marketinsight. Follow Schwab on Twitter: @schwabresearch.

Inflation cooler than expected, jobless claims dip, consumer sentiment surprisingly improves

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in March dipped 0.1% month-over-month (m/m), versus the Bloomberg expectation calling for a flat reading and compared to February's unrevised 0.3% rise. The core rate, which excludes food and energy, came in flat, versus forecasts of a 0.2% advance and February's unrevised 0.3% increase. Y/Y, the headline rate was 2.3% higher, below of projections of a 2.4% increase, and the core PPI rose 1.6% last month, south of estimates of a 1.8% gain. In February, producer prices were 2.2% higher and up 1.5% for the headline and core rates, respectively.

Weekly initial jobless claims (chart) dipped by 1,000 to 234,000 last week, below forecasts of 245,000, with the prior week’s figure being revised higher by 1,000 to 235,000. The four-week moving average fell by 3,000 to 247,250, while continuing claims declined by 7,000 to 2,028,000, north of estimates of 2,024,000.

The preliminary University of Michigan Consumer Sentiment Index (chart) improved this month to 98.0, from the prior month's 96.9 level and compared to expectations of a dip to 96.5. The current economic conditions component rose solidly m/m, while the outlook portion ticked higher. The 1-year inflation and 5-10 year inflation outlooks remained at 2.5% and 2.4%, respectively.

Treasuries were little changed, with the yields on the 2-year and 10-year notes flat at 1.21% and 2.24%, respectively, while the yield on the 30-year bond ticked 1 basis point higher (bp) to 2.89%.

Bond yields have fallen as of late and the U.S. dollar dropped sharply yesterday after President Trump commented that he thought the currency was getting "too strong."

For a look at the moves in the bond markets, see Schwab's Senior Fixed Income Research Analyst, Collin Martin's, CFA, latest article titled, What Investors Should Know About the High-Yield Bond Rally at www.schwab.com/marketinsight, along with Collin's and Vice President of Trading and Derivatives, Randy Frederick's video Fed Hiked Interest Rates, So Why Are Bond Yields Still So Low?. Randy and Schwab's Chief Fixed Income Strategist, Kathy Jones also discuss, Three Fed Hikes Seen in 2017: How Should Bond Investors Respond?. See these and other videos at www.schwab.com/insights. Follow Randy and Kathy on Twitter: @randyafrederick and @kathyjones.

Please note: All U.S. markets will be closed tomorrow in observance of the Good Friday holiday.

U.S. stocks dipped on the week with geopolitical concerns continuing to fester toward North Korea and Syria, while lingering uncertainty regarding President Trump's pro-business policies appeared to foster a modest unwinding of the reflationary trade that fueled some of the post-election rally. As such, the fall in Treasury yields pressured financials, while materials, industrials, technology and health care issues were all lower for the holiday-shortened week. Energy stocks edged lower despite the modest extension of the recent surge in crude oil prices. The markets also appeared to be treading lightly as earnings season shoved off against elevated growth expectations.

Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, One of These Things … Market's Moves Not All About Trump, much of the pick-up in economic growth, as well as the earnings turn, pre-dated the election and shouldn't be fully credited to President Trump. Liz Ann believes the recent mild pullback/consolidation in stocks was driven less by Trump malaise and more by some sentiment froth which needed working off. We are likely to see another leg up for stocks courtesy of continued genuine improvement in the U.S. and global economy; not just on hope for or a bet on Trump and his pro-growth policies. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

European stocks see pressure on data and geopolitics, Asia mixed

European equities finished lower, with the markets digesting comments from U.S. President Trump regarding the strong U.S. dollar, China, and interest rates. Financials saw pressure as the markets sifted through mixed results from major U.S. companies and as Spanish bank Banco Popular SA (BPESY $3) continued to fall amid concerns about its need to raise more capital. Oil & gas issues retreated from a recent rally as crude oil prices retreated modestly from a recent surge. Geopolitical concerns remained toward North Korea and following last week's missile strikes by the U.S. in Syria, while Brexit negotiations continued and a key French Presidential election moved closer. For more on the political front in the region, see Schwab's Jeffrey Kleintop's, CFA, and Randy Frederick's videos, "Brexit" Underway: How Can Investors Prep Now That Article 50 Has Been Triggered? and Why Should the French Presidential Election Be Important to Investors? at www.schwab.com/insights. Also, check out our article, Brexit Begins: What's Next for the U.K., at www.schwab.com/insights, while Director of International Research, Michelle Gibley CFA, offers her article, Europe Votes: Could More Countries Reject the EU? at www.schwab.com/oninternational. Action was likely muted by market closures tomorrow and Monday for the Easter celebration. German and French consumer price inflation rose in line with forecasts. The euro dropped and the British pound dipped versus the U.S. dollar, while bond yields in the region were mixed.

Stocks in Asia finished mixed, with the markets continuing to grapple with heightened geopolitical concerns, as well as digesting some Chinese trade data and comments from U.S. President Trump. Japanese equities fell as the yen rallied and the U.S. dollar fell on the heels of Trump's comments that he thought the greenback was too strong. Mainland Chinese stocks ticked higher and shares traded in Hong Kong declined following trade data that showed exports and imports both easily topped forecasts, with the former jumping the most in two years, per Bloomberg. Also, the markets reacted to Trump's apparent reversal, noting that he will not brand China a currency manipulator. For a look at the global trade landscape, see Schwab's Jeffrey Kleintop's, CFA, article, Top Five Trade Issues Investors Should Be Watching at www.schwab.com/oninternational.

South Korean stocks advanced, while the Bank of Korea left its benchmark interest rate unchanged. Noticeable weakness in basic materials issues weighed on Australian securities and Indian equities dropped following yesterday's unexpected decline in industrial production. Indian stocks have wavered somewhat recently after a run to record highs, leading emerging markets' strong 1Q rally. Schwab's Michelle Gibley, CFA, offers her commentary, Emerging Markets: Why They Deserve a Place in Your Portfolio, while Schwab's Kathy Jones addresses the question, Emerging Market Bonds: Can the Hot Start In 2017 Continue?. Read all these commentaries at www.schwab.com/oninternational and www.schwab.com/marketinsight.

Housing and manufacturing data set to headline next week's calendar

Next week's economic calendar will bring a glance at the housing market with some key reads in the form of housing starts, building permits and existing home sales. Schwab's Brad Sorensen, CFA, notes in his recent Schwab Sector Views that one of the major features talked about by the National Association of Realtors (NAR) in its latest report was the lack of inventory, with existing homes available for sale dipping below a four-month supply, a level that has rarely been reached over the past 20 years. Meanwhile, another report that will likely garner some attention will be March retail sales. Brad also notes in his piece Consumer Discretionary Sector Rating: Marketperform, the outlook for American consumer spending appears to be improving, with consumer confidence strong and wages generally showing signs of trending higher. Read both articles, as well as Brad's views on other sectors at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Manufacturing data will also make an appearance, with next Friday's release of the preliminary Markit Manufacturing PMI Index, which will be preceded in the week by a couple of regional manufacturing reports.

International releases of note are expected to include: China—retail sales, industrial production and 1Q GDP. Australia—new vehicle sales and business confidence. Japan—industrial production and capacity utilization, trade data and the Tertiary Industry Index. U.K.—retail sales. Eurozone—CPI, construction output and consumer confidence. Germany—CPI, PPI and preliminary Markit Manufacturing PMI Index.

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