Stocks Still Searching for a Catalyst

Charles Schwab: On the Market

Posted: 5/3/2017 4:15 PM ET

Stocks Still Searching for a Catalyst

U.S. equities were again mixed in today's session, showing little reaction to the expected Fed decision to keep monetary policy steady, while results on the earnings front varied. Treasury yields were mixed and the U.S. dollar gained modest ground following stronger-than-expected reads on the all-important services sector, while crude oil prices inched higher in the wake of a smaller-than-expected decline in the government's crude oil inventory report, and gold was lower.

The Dow Jones Industrial Average (DJIA) rose 8 points to 20,958, the S&P 500 Index declined 3 points (0.1%) to 2,388, and the Nasdaq Composite lost 23 points (0.4%) to 6,073. In moderately-heavy volume, 918 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.16 higher to $47.82 per barrel and wholesale gasoline added $0.02 to $1.53 per gallon. Elsewhere, the Bloomberg gold spot price tumbled $16.85 to $1,239.91 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 99.30.

Dow member Apple Inc. (APPL $147) reported fiscal Q2 earnings-per-share (EPS) of $2.10, compared to the $2.02 FactSet estimate, as revenues rose 4.5% year-over-year (y/y) to $52.9 billion, versus the projected $53.0 billion. iPhone shipments came in below forecasts, while those for iPad and Mac came in roughly in line with estimates. AAPL issued Q3 revenue and gross margin guidance that had midpoints below expectations. Separately, the company announced a $50 billion boost to its capital return program, which includes a $35 billion bump in share repurchases, while announcing a 10.5% increase in its quarterly dividend to $0.63 per share. Shares finished modestly lower.

Yum Brands Inc. (YUM $68) posted Q1 EPS of $0.77, or $0.65 ex-items, above the projected $0.59, with revenues declining 2.0% y/y to $1.4 billion, roughly in line with forecasts. The company noted that same-store sales growth of 8% y/y at its Taco Bell franchise and profit growth at KFC partially offset weakness at Pizza Hut. Shares were nicely higher.

Time Warner Inc. (TWX $99) announced Q1 earnings of $1.80 per share, or $1.66 ex-items, compared to the estimated $1.45, as revenues grew 6.0% y/y to $7.7 billion, roughly in line with expectations. TWX was lower.

Delphi Automotive PLC. (DLPH $87) reported Q1 earnings of $1.24 per share, or $1.59 per share ex-items, topping the projected $1.46, as revenues rose 6.0% y/y to $4.3 billion, above the expected $4.1 billion. The company reaffirmed its full-year guidance. Separately, DLPH announced plans to spin-off its powertrain systems segment. Shares rallied.

Fed stands pat, services sector activity tops forecasts

As widely expected, the Federal Open Market Committee (FOMC) made no change to its monetary policy stance following its two-day meeting, noting in its accompanying policy statement 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. No updated economic projections or post-meeting press conference by Chairwoman Janet Yellen were provided after the decision. Look for more insight into the Fed's decision later today from Senior Fixed Income Research Analyst, Collin Martin, CFA, on the Markets & Economy page at www.schwab.com.

The April Institute for Supply Management (ISM) non-Manufacturing Index (chart) improved more than expected to 57.5 from March's unrevised 55.2 level, and compared to the Bloomberg forecast of a gain to 55.8. A reading above 50 denotes expansion. New orders and business activity both rose month-over-month (m/m) to levels north of 60, while employment dipped but continued to signal growth. Prices rose 4.1 points to 57.6. The ISM said comments from respondents were mostly positive about business conditions and the overall economy.

The final Markit U.S. Services PMI Index was revised to 53.1 in April from the preliminary 52.5 level, where it was expected to remain, and compared to the 52.8 figure posted in March. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently.

The ADP Employment Change Report showed private sector payrolls rose by 177,000 jobs in April, slightly above forecasts of a 175,000 gain, while March's increase of 263,000 jobs was revised to a gain of 255,000. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday's broader April nonfarm payroll report, expected to show an increase of 190,000 jobs to the headline rate and to private sector payrolls. The unemployment rate is forecasted to tick higher to 4.6% from 4.5%, and average hourly earnings are projected to rise 0.3% month-over-month (m/m).

The MBA Mortgage Application Index dipped 0.1% last week, following the previous week's 2.7% increase. The slip came as a 4.7% drop for the Refinance Index was met with a 4.2% increase for the Purchase Index. The average 30-year mortgage rate rose 3 basis points (bps) to 4.23%.

Treasuries finished mixed, as the yield on the 2-year note rose 3 bps to 1.29%, the yield on the 10-year note moved 4 bps higher to 2.32%, while the 30-year bond rate declined 1 bp to 2.96%. For more on 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, as well as our latest article, Mixed Signals: What Does Recent Economic Data Mean for Bonds?, on the Insights & Ideas page at www.schwab.com. Follow Kathy on Twitter: @kathyjones.

Finally, 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.

Europe mixed, Asia lower ahead of U.S. monetary policy decision

European equities finished mixed, with basic materials and industrials leading to the downside amid weakness in metals prices and the recent soft economic data out of the U.S. and China, while the markets appeared cautious ahead of today's monetary policy decision from the U.S. Federal Reserve. Meanwhile, U.K. Brexit negotiations continued to foster political uncertainty as the nation heads for a June vote, while a German election looms and France's second round of its Presidential election is set for this weekend. 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. Preliminary eurozone Q1 GDP growth came in at a 0.5% quarter-over-quarter pace, matching expectations and Q4's expansion. The euro and British pound dipped versus the U.S. dollar, while bond yields were mostly lower.

Stocks in Asia finished lower, with the markets grappling with festering political and geopolitical uncertainty, along with mixed results from Apple in the U.S., while awaiting today's monetary policy decision by the U.S. Federal Reserve. However, volume was lighter than usual with markets in Japan, Hong Kong and South Korea closed for holidays. Mainland Chinese equities declined in the wake of recent soft readings on the nation's manufacturing and services sector activity, while securities in India also dipped. Markets in Australia fell sharply, with financials leading to the downside amid some continued disappointing earnings reports from the banking sector. 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's international economic calendar will offer the Services PMI Indexes from abroad, as well as trade data from Australia, employment data from Spain, and retail sales from the Eurozone.