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Thursday, May 04, 2017

Stocks Flat as Oil Touches Five-Month Low

Charles Schwab: On the Market
Posted: 5/4/2017 4:15 PM ET

Stocks Flat as Oil Touches Five-Month Low

U.S. stocks finished mostly flat with energy issues leading the decliners as crude oil prices fell to a five month low, while Facebook, Tesla and Viacom were under pressure following earnings reports. Health care stocks finished higher as the House of Representatives passed the GOP health bill aimed at repealing and replacing the Affordable Care Act. Treasury yields were higher and the U.S. dollar was lower amid some mixed economic data and ahead of tomorrow's key labor report. Gold traded lower.

The Dow Jones Industrial Average (DJIA) declined 6 points to 20,951, the S&P 500 Index added 1 point (0.1%) to 2,390, and the Nasdaq Composite ticked 3 points higher to 6,075. In heavy volume, 1.0 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil dropped $2.30 to $45.52 per barrel and wholesale gasoline fell $0.05 to $1.48 per gallon. Elsewhere, the Bloomberg gold spot price lost $9.61 to $1,228.56 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% lower at 98.74.

Facebook Inc. (FB $151) reported Q1 earnings-per-share (EPS) of $1.04, or $1.30 ex-items, versus the $1.12 FactSet estimate, as revenues grew 49.0% year-over-year (y/y) to $8.0 billion, above the projected $7.8 billion. The social network's monthly and daily active users modestly topped expectations. However, shares were under pressure as the company warned about slowing ad revenue growth for the year.

Tesla Inc. (TSLA $295) posted a Q1 loss of $2.04 per share, or a loss of $1.33 per share ex-items, compared to the shortfall of $0.82 that was projected, as revenues rose 18.0% quarter-over-quarter (q/q) to $2.7 billion, above the forecasted $2.6 billion. TSLA maintained its first-half outlook for vehicle deliveries and said its Model 3 is on track for initial production in July. Shares were solidly lower.

Kraft Heinz Co. (KHC $90) announced Q1 EPS of $0.73, or $0.84 ex-items, versus the forecasted $0.86, as revenues declined 3.1% y/y to $6.4 billion, compared to the expected $6.5 billion. The company noted a slow start to the year, with lower y/y consumption in North America being offset by significant gains from cost savings. Shares traded higher.

Viacom Inc. (VIA $38) reported fiscal Q2 earnings of $0.30 per share, or $0.79 ex-items, versus the projected $0.59, as revenues rose 8.0% y/y to $3.3 billion, versus the forecasted $3.0 billion. Shares moved noticeably to the downside as the company reported a drop in ad revenue at its TV network unit, exacerbating industry uneasiness regarding "cord-cutting" cable subscribers.

Oracle Corp. (ORCL $45) advanced after announcing a strategic agreement with AT&T Inc. (T $38), which will move thousands of its large scale internal databases to Oracle's Cloud Infrastructure as a Service (IaaS) and Platform as a Service (PaaS). T lost ground. 

Trade deficit dips, productivity and jobless claims drop

The trade balance (chart) showed that the deficit came in at $43.7 billion in March, compared to the Bloomberg estimate of $44.5 billion. February's deficit was revised higher to $43.8 billion. Exports dipped 0.9% month-over-month (m/m) to $191.0 billion, while imports declined 0.7% to $234.7 billion.

Preliminary Q1 nonfarm productivity (chart) fell 0.6% on an annualized basis, versus expectations of a 0.1% dip, following the upwardly revised 1.8% increase seen in Q4. Also, unit labor costs increased 3.0%, versus the forecast calling for a 2.7% gain. Unit labor costs were revised lower to a rise of 1.3% in Q4.

Weekly initial jobless claims (chart) fell by 19,000 to 238,000 last week, below forecasts of 248,000, with the prior week’s figure unrevised at 257,000. The four-week moving average rose by 750 to 243,000, while continuing claims dropped by 23,000 to 1,964,000, south of estimates of 1,990,000.

Factory orders (chart) rose 0.2% m/m in March, below the expected 0.4% gain and February's upwardly revised 1.2% increase. March durable goods orders—preliminarily reported last week—were adjusted higher to a 0.9% increase, from a 0.7% gain, and versus expectations of no revision. Orders of nondefense capital goods excluding aircraft—a proxy for business spending—were adjusted higher to a 0.5% increase.

Tomorrow, the economic calendar will culminate with the release of the April nonfarm payroll report, projected to show employment grew by 190,000 jobs, rebounding from the prior month's disappointing 98,000 gain. Private sector payrolls are forecasted to increase by 188,000 jobs, following March's 89,000 rise. The unemployment rate is expected to tick higher to 4.6% from 4.5% and average hourly earnings are anticipated to rise 0.3% m/m and be 2.7% higher y/y. Average hourly earnings could post a fifth-straight monthly gain and the figure is likely to garner scrutiny, given its impact on the consumer, which drives the majority of economic growth, and amid the backdrop of recent soft readings on inflation.

As noted in the latest Schwab Market Perspective: Should Sharp Sentiment Shifts Mean a Change in Strategy?, we don't believe that trend growth is as low as the 0.7% real gross domestic product (GDP) print posted for this year's first quarter, but neither do we believe the economy has accelerated markedly. We continue to believe the bull market will continue due to decent economic growth and a good profits picture, but there will likely be sentiment-driven dips and surges to come. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest Schwab Sector Views: Is Retail Really Dead?, the American consumer remains relatively healthy in our view, with increasing wages, low unemployment and high confidence. Read more on the Markets & Economy page at www.schwab.com and follow Schwab on Twitter: @schwabresearch.

Treasuries traded lower, with the yield on the 2-year note rising 1 basis point (bp) to 1.31%, while the yields on the 10-year note and the 30-year bond advanced 3 bps to 2.35% and 2.99%, respectively. Bond yields finished mixed yesterday after the widely expected unchanged monetary policy stance from the Federal Open Market Committee (FOMC), which noted that "the slowing in growth during the first quarter is likely to be transitory," and that "near-term risks to the economic outlook appear roughly balanced." In their unanimous decision, the Committee provided little direction of any change to its current outlook for future rate increases, which beforehand showed that members have penciled-in two additional rate hikes this year.

For analysis of the bond markets, see Schwab's Chief Fixed Income Strategist, Kathy Jones' article, Three Reasons to Own Bonds When the Fed is Raising Interest Rates on the Markets & Economy page at www.schwab.com. Follow Kathy on Twitter: @kathyjones. Schwab's Vice President of Trading and Derivatives, Randy Frederick and Senior Fixed Income Research Analyst, Collin Martin, CFA, offer the video What's Driving the Ongoing Drop in Long-Term Bond Yields? on the Insights & Ideas page at www.schwab.com, where you can also find our latest article, Mixed Signals: What Does Recent Economic Data Mean for Bonds?. Follow Randy on Twitter: @randyafrederick.

The U.S. political front continues to command attention, and Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses What the Coming Tax Cuts Mean for the Stock Market on the Markets & Economy page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop. Moreover, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend and Randy Frederick offer the article, Trump's First 100 Days: Key Observations, on the Insights & Ideas page at www.schwab.com.

Also, consumer credit will be released tomorrow afternoon to round out the economic docket for the week. Economists are forecasting that consumer borrowing expanded by $14.0 billion in March after increasing by $15.2 billion in February.

Europe higher on data, Asia mixed following Fed decision

European equities finished higher, with financials rising following some solid earnings results. The markets digested the unchanged monetary policy stance in the U.S. yesterday. Moreover, French political concerns remained subdued following yesterday's Presidential debate, after which polls suggested mainstream candidate Emmanuel Macron is poised to defeat anti-EU Marine Le Pen in the final vote this weekend. Meanwhile, U.K. Brexit negotiations continued as the nation heads for a June vote, while a German election looms. For analysis of the political uncertainty on both sides of the pond, see Schwab's Jeffrey Kleintop's, CFA, and Vice President of Trading and Derivatives Randy Frederick's video, Political Risk: How Should Investors Respond? on the Insights & Ideas page at www.schwab.com, where you can also find our article, Brexit Begins: What's Next for the U.K?, while Director of International Research, Michelle Gibley CFA, offers her article, Europe Votes: Could More Countries Reject the EU? on the International Investing page at www.schwab.com. Eurozone and U.K. business activity showed growth accelerated in April, and eurozone retail sales rose slightly more than expected. The euro and British pound moved higher versus the U.S. dollar and bond yields in the region traded mixed.

Stocks in Asia finished mixed on the heels of the highly-expected unchanged monetary policy decision in the U.S., while basic materials continued to slide. Geopolitical and political uncertainty lingered, while volume continued to be lighter than usual as markets in Japan remained closed for a holiday. Australian securities declined, with weakness in financials continuing following recent earnings reports in the banking sector, while the drop in basic materials also weighed on the markets. Chinese shares decreased amid lingering economic concerns in the wake of soft manufacturing and services sector reports as of late, along with festering regulatory crackdown concerns. However, stocks in India rose on strength in the financial sector following reports of new rules for the banking sector, while South Korean equities also gained ground after returning to action following yesterday's holiday break. For analysis of the global landscape, see Schwab's Jeffrey Kleintop's, CFA, article, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com, as well as his article, Top Five Trade Issues Investors Should Be Watching on the International Investing page at www.schwab.com.

Tomorrow the international economic calendar will be light, offering construction data from Australia and retail PMI reads from Germany, France, Italy and the Eurozone. Meanwhile, in central bank action, the Reserve Bank of Australia will release its monetary policy statement.

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