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Thursday, May 25, 2017

Stocks' Recent Run Rolls On

Charles Schwab: On the Market
Posted: 5/25/2017 4:15 PM ET

Stocks' Recent Run Rolls On

U.S. stocks finished higher for the sixth-straight session as traders reacted favorably to yesterday's Fed minutes which indicated a systematic approach to unwinding the central bank's inflated balance sheet. A plethora of favorable earnings reports out of the retail sector also aided the upbeat sentiment, however, the energy sector was under pressure with crude oil prices falling in the wake of the highly-expected extension of OPEC's production cuts. In economic news, weekly jobless claims nudged higher and the preliminary trade deficit unexpectedly widened. Treasury yields were mixed, the U.S. dollar ticked higher and gold dipped.

The Dow Jones Industrial Average (DJIA) increased 71 points (0.3%) to 21,083, the S&P 500 Index added 11 points (0.4%) to 2,415, and the Nasdaq Composite gained 42 points (0.7%) to 6,205. In moderate volume, 814 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil dropped $2.46 to $48.90 per barrel and wholesale gasoline was $0.05 lower at $1.60 per gallon. Elsewhere, the Bloomberg gold spot price decreased $2.57 to $1,256.16 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 97.22.

Best Buy Co. Inc. (BBY $61) reported Q1 earnings-per-share (EPS) of $0.60, versus the $0.40 FactSet estimate, as revenues rose 1.0% year-over-year (y/y) to $8.5 billion, topping the forecasted $8.3 billion. U.S. Q1 same-store sales rose 1.4% y/y, compared to the expected 1.8% decline. BBY issued Q2 earnings and sales guidance that exceeded estimates, while its full-year revenue growth outlook also came in above forecasts. Shares rallied sharply.

Dollar Tree Inc. (DLTR $79) posted Q1 profits of $0.85 per share, or $0.98 ex-items, versus the projected $0.98, as revenues rose 4.0% y/y to $5.3 billion, roughly in line with expectations. Quarterly same-store sales increased 0.5% y/y, compared to the estimated 1.2% gain. DLTR raised its full-year EPS outlook, while lowering the high end of its revenue forecast. Shares overcame early losses and finished higher.

HP Inc. (HPQ $18) announced fiscal Q2 EPS of $0.33, or $0.40 ex-items, compared to the projected $0.39 expectation, with revenues growing 7.0% y/y to $12.4 billion, above the forecasted $11.9 billion. HPQ issued Q3 earnings guidance that was roughly in line with estimates, while projecting full-year EPS that was slightly above expectations. Shares gave up early gains and closed lower.

PVH Corp. (PVH $107) reported Q1 EPS of $0.89, or $1.65 ex-items, versus the forecasted $1.60, as revenues rose 4.0% y/y to $2.0 billion, roughly in line with expectations. The company said it continues to experience strong momentum in its Calvin Klein and Tommy Hilfiger businesses, despite the volatile macroeconomic environment and the highly promotional retail market in the U.S. PVH raised its full-year guidance and issued a Q2 outlook that topped estimates. Shares rose solidly.

Williams-Sonoma Inc. (WSM $49) posted Q1 EPS of $0.45, or $0.51 ex-items, compared to the estimated $0.49, as revenues grew 1.2% y/y to $1.1 billion, matching forecasts. Quarterly same-store sales ticked 0.1% higher y/y, versus the projected 0.4% decline. WSM issued Q2 revenue guidance that bested forecasts, while estimating full-year EPS and revenues above expectations. Shares relinquished early gains and dipped.

General Motors Co. (GM $33) saw pressure following a class-action lawsuit against the automaker, alleging that it installed emissions-cheating defeat devices in over 705,000 Duramax Diesel trucks. GM responded by calling the claims "baseless" and saying it will vigorously defend itself.

Jobless claims tick higher

Weekly initial jobless claims (chart) rose by 1,000 to 234,000 last week, below the Bloomberg forecast of 238,000, with the prior week’s figure being revised higher by 1,000 to 233,000. The four-week moving average fell by 5,750 to 235,250, while continuing claims rose by 24,000 to 1,923,000, south of estimates of 1,925,000.

The advance goods trade deficit widened to $67.6 billion in April, from the upwardly revised $65.1 billion in March, and compared to expectations of $64.5 billion.

Preliminary wholesale inventories declined 0.3% month-over-month (m/m) in April, versus forecasts for a 0.2% increase, and following March's downwardly revised 0.1% gain.

The Kansas City Fed Manufacturing Activity Index for May increased to 8, from April's 7 reading, but below forecasts of a rise to 9, though a level north of zero depicts expansion.

Treasuries were mixed, with the yield on the 2-year note increasing 1 basis point (bp) to 1.29%, the yield on the 10-year note flat at 2.25% and the 30-year bond rate declining 1 bp to 2.92%. For analysis of the bond markets, see our article, Mixed Signals: What Does Recent Economic Data Mean for Bonds?, on the Insights & Ideas page at www.schwab.com, where you can also find Schwab's Randy Frederick's and Chief Fixed Income Strategist, Kathy Jones' video, Fed Rate-Hike Cycle: How Can Bond Investors Prepare? Follow Kathy and Schwab on Twitter: @kathyjones and @schwabresearch.

Please note: Treasury markets will be closing early tomorrow in observance of the Memorial Day Holiday.

Treasury yields finished lower yesterday following the May Fed meeting minutes that kept June rate hike expectations intact but noted that the Federal Open Market Committee (FOMC) was looking for more evidence suggesting that the recent soft patch of economic data was transitory. The report also offered details of the discussion regarding shrinking the Central Bank's bloated balance sheet. Most of the FOMC favored an approach where it would determine a set of slowly but surely increasing caps, or limits, on the dollar amounts of Treasury and agency securities that would be allowed to run off each month. They also agreed that discussions of potential changes to the Committee's reinvestment policy will be continued in its June 13th-14th meeting.

Schwab’s Chief Investment Strategist Liz Ann Sonders points out in her video, June Rate-Hike Highly Likely?, on the Insights & Ideas page at www.schwab.com, with Vice President of Trading and Derivatives, Randy Frederick, that shrinking the Fed balance sheet is a form of policy tightening and we are probably going to hear a lot more about a transition from quantitative easing (QE) to quantitative tightening (QT). Liz Ann addresses the question of why shrink the balance sheet now in her latest article, Gimme Three Steps … and a Stumble?, noting that allowing the balance sheet to shrink gives ammunition back to ease policy when the next recession occurs. But the Fed is navigating uncharted waters in trying to shrink such a gargantuan balance sheet; which is why the process is likely to be very gradual, but also why periods of market volatility could ensue. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann and Randy on Twitter: @lizannsonders and @randyafrederick.

The economic week will conclude with tomorrow's release of the first revision (of two) to Q1 GDP, projected to be adjusted to a 0.9% quarter-over-quarter (q/q) annualized pace of growth, from the initial estimate of a 0.7% rate of expansion. Q1 growth slowed noticeably from Q4's 2.1% expansion, matching the pattern seen in the past 10 years and the Fed is watching data to see evidence this is transitory. Schwab’s Chief Investment Strategist Liz Ann Sonders discusses this phenomenon in her article, ½ Full: Seeing Through a Weak Q1, pointing out that the average GDP growth for the subsequent quarters over the past 10 years has been 1.8%, but hard data has been stubbornly weak relative to soft data.

This sets the stage for tomorrow's preliminary April durable goods report, giving some hard data for the markets to look at post Q1. The volatile headline figure is expected to show a 1.5% drop m/m, after March's 1.7% gain, while excluding transportation, orders are projected to rise 0.4% after increasing 0.8% in March. Nondefense capital goods orders excluding aircraft—a gauge of business spending—will likely be highly scrutinized, forecasted to increase 0.5% for a second-straight month to cap off four-consecutive monthly increases. This figure is part of the Conference Board's Index of Leading Economic Indicators, which Liz Ann points out in her article remains quite healthy, solidifying our view that we likely just experiencing yet another "soft patch" in an ongoing expansion. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Europe dips as oil drops, Asia mostly higher after Fed minutes

European equities finished modestly lower, with oil & gas issues seeing some pressure as crude oil prices fell in the wake of the highly-expected extension of OPEC production cuts by nine months. Crude oil prices gave back a recent rally that came in anticipation of the OPEC production cut extension, with some apparent disappointment that more was not announced to fight the global supply glut that has kept crude oil prices depressed. The global markets reacted to yesterday's Fed May meeting minutes out of the U.S. The report appeared to foster some relative dovish takeaways as it suggested that after June's highly-expected rate hike, the Central Bank may wait until it sees evidence the recent soft economic patch was transitory before raising rates further. In economic news, U.K. Q1 GDP growth was revised lower to a 0.2% q/q pace of expansion, from a previously-estimated rise of 0.3%, where it was expected to remain. The growth was a deceleration from the 0.7% expansion posted in Q4. The euro was little changed and the British pound dipped versus the U.S. dollar, while bond yields in the region mostly moved to the downside.

Political uncertainty remained, as U.K. Brexit negotiations continue, while elections loom for the U.K., Germany and Italy later this year, and U.S. President Trump continued his first overseas trip in Europe today. For analysis, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Randy Frederick's video, Political Risk: How Should Investors Respond? on the Insights & Ideas page at www.schwab.com, as well as Jeff's article, Top Five Trade Issues Investors Should Be Watching on the International Investing page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop. Volume was lighter today as a few markets in the region, including Switzerland, were closed for a holiday.

Stocks in Asia finished mostly higher, on the heels of the extended winning streak in the U.S. yesterday, while the markets awaited the highly-expected OPEC decision to extend production cuts. Also, yesterday's May meeting minutes from the Fed in the U.S. were eyed, showing a June hike was likely, but the pace thereafter may be in question, while the Central Bank discussed how to begin unwinding its huge balance sheet. Japanese equities gained ground, overcoming early losses that stemmed from some firming of the yen after the Fed minutes, aided by some optimism regarding corporate earnings in the nation. Shares trading in mainland China and Hong Kong advanced, continuing to shrug off yesterday's credit downgrade of the nation by Moody's, with financials showing some strength. South Korean stocks moved nicely higher amid the global market advance as the Bank of Korea kept its benchmark interest rate unchanged as expected. Australian securities rose, buoyed by strength in basic materials and oil & gas issues, while Indian listings jumped back to record highs, amid a rally in industrial equipment makers. Schwab's Director of International Research, Michelle Gibley CFA, offers some timely commentary of the global markets in her latest article, Different Drivers: Why Emerging Market Stocks Aren't All the Same on the Insights & Ideas page at www.schwab.com.

Tomorrow, the international economic docket will again be light, offering CPI from Japan and consumer confidence from South Korea and Italy.

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