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Thursday, June 01, 2017

Markets Break Out of Two-Day Slide

Charles Schwab: On the Market
Posted: 6/1/2017 4:15 PM ET

Markets Break Out of Two-Day Slide

Upbeat manufacturing, auto sales, and employment reports helped the U.S. equity markets to escape a two-day losing streak, ahead of tomorrow's highly-anticipated nonfarm payroll report. Treasury yields and the U.S. dollar gained modest ground, while gold saw slight pressure. Crude oil prices finished nearly flat, as gains that came amid some bullish oil inventory data were tempered in late-day action. Meanwhile, Deere & Co agreed to acquire Wirtgen Group for about $5.2 billion, while Hewlett Packard Enterprise disappointed with its guidance.

The Dow Jones Industrial Average (DJIA) rose 136 points (0.7%) to 21,144, the S&P 500 Index increased 18 points (0.8%) to 2,430, and the Nasdaq Composite moved 48 points (0.8%) higher to 6,247. In heavy volume, 973 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.04 higher to $48.36 per barrel and wholesale gasoline was unchanged at $1.60 per gallon. Elsewhere, the Bloomberg gold spot price declined $1.16 to $1,267.76 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 97.20.

Deere & Co. (DE $125) announced an agreement to acquire German-based privately-held road construction equipment company, Wirtgen Group in an all-cash transaction totaling about $5.2 billion. DE gained solid ground.

Hewlett Packard Enterprise Co. (HPE $18) reported a Q2 loss of $0.37 per share, or earnings-per-share (EPS) of $0.25 ex-items, compared to FactSet's projected profit of $0.35, on revenues of $9.9 billion, above the projected $9.7 billion. The company said it faced margin pressure during the quarter, though it expects improvement through the remainder of the year as it mitigates commodities cost pressure and eliminates costs associated with spin-mergers and acquisitions. HPE issued Q3 EPS guidance that was below forecasts, while reaffirming its full-year profit outlook. Shares finished lower.

Dollar General Corp. (DG $78) reported Q1 earnings of $1.02 per share, or $1.03 ex-items, versus the expected $1.00, as revenues increased 6.5% year-over-year (y/y) to $5.6 billion, roughly in line with estimates. Q1 same-store sales gained 0.7% y/y, matching projections. DG reaffirmed its full-year earnings and same-store sales outlook, while raising its revenue forecast. Shares were nicely higher.

The major automakers reported May's sales today, with General Motors Co's (GM $34) sales declining 1.3% y/y, compared to FactSet's projected 4.2% increase, while noting that it remains on track to achieve its year-end guidance. Fiat Chrysler Automobiles NV's (FCAU $11) Chrysler sales were 0.9% lower, compared to the expected 4.2% fall. Ford Motor Co (F $11) reported a 2.2% rise in sales, versus the expected decline of 0.5%. Toyota Motor Corp (TM $108) announced a 0.5% decrease in sales, compared to the 1.0% drop that was expected. There was one more selling day this year compared to the prior year. Shares of all four automakers were higher.

Manufacturing activity tops forecasts, ADP payroll report jumps

The Institute for Supply Management (ISM) Manufacturing Index (chart) for May unexpectedly ticked further into expansion territory (above 50) after rising to 54.9 from 54.8 in April, where the Bloomberg forecast called for it to remain. New orders and employment growth both accelerated, while expansion in production and new export orders decelerated. The ISM said comments from the survey generally reflected stable to growing business conditions.

The final Markit U.S. Manufacturing PMI Index was revised to 52.7 for May from the preliminary reading of 52.5 for April, where it was expected to remain, but was slightly lower from the 52.8 level posted in April. A reading above 50 denotes expansion. The release is independent and differs from ISM's manufacturing report, as it has less historic value and Markit weights its index components differently.

Weekly initial jobless claims (chart) increased by 13,000 to 248,000 last week, above the Bloomberg forecast of 238,000, with the prior week’s figure being revised higher by 1,000 to 235,000. The four-week moving average rose by 2,500 to 238,000, while continuing claims declined by 9,000 to 1,915,000, south of estimates of 1,920,000.

The ADP Employment Change Report showed private sector payrolls rose by 253,000 jobs in May, well above forecasts of a 180,000 gain, while April's increase of 177,000 jobs was revised to a gain of 174,000.

Construction spending (chart) fell 1.4% month-over-month (m/m) in April, versus projections of a 0.5% advance, but following March's solid upward revision to a 1.1% gain from the previously reported 0.2% decline. Residential spending declined 0.9%, while non-residential spending fell 1.7%.

Today’s plethora of mostly upbeat data, notably the ADP jobs report and the employment component of the ISM's release, comes ahead of tomorrow's broader May nonfarm payroll report, expected to show an increase of 180,000 jobs to the headline rate and 173,000 to private sector payrolls (economic calendar). The unemployment rate is forecasted to remain at 4.4%, and average hourly earnings are projected to rise 0.2% month-over-month (m/m). The only other item on tomorrow’s docket is the April trade balance, forecasted to show the deficit widened to $46.1 billion.

As noted in the latest Schwab Market Perspective: Unprecedented! Or Maybe Not?, leading indicators continue to show a growing economy, bouncing back from the weak first quarter, while the labor market continues to tighten, and globally, we are seeing improving growth. This should help the bull market continue. Read more on the Markets & Economy page at www.schwab.com.

Treasuries were lower, as the yields on the 2-year and 10-year notes, along with the 30-year bond, rose 2 basis points to 1.30%, 2.22% and 2.88%, respectively. For analysis of the bond markets amid the expected Fed interest rate action, see our article, Mixed Signals: What Does Recent Economic Data Mean for Bonds?, on the Insights & Ideas page at www.schwab.com, as well as Schwab's Chief Fixed Income Strategist, Kathy Jones' article, Three Reasons to Own Bonds When the Fed is Raising Interest Rates on the Fixed Income page at www.schwab.com. Follow Kathy on Twitter: @kathyjones.

Amid elevated expectations of a Fed rate hike later this month and its potential beginning of the process of shrinking its bloated balance sheet later this year, Schwab’s Chief Investment Strategist Liz Ann Sonders offers her latest article, Gimme Three Steps … and a Stumble?, noting that reducing the gargantuan balance sheet is a form of tightening and the transition from quantitative easing (QE) to quantitative tightening (QT) begs the question whether we are heading into another period of heightened volatility. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Europe mostly higher, Asia mixed amid uncertainties and plethora of data 

European equities finished mostly higher, following upbeat economic data in the U.S., and as the euro lost ground versus the U.S. dollar. The markets showed some resiliency in the face of elevated political uncertainty on both sides of the Atlantic, as well as lingering uncertainty regarding the timing of when the European Central Bank may begin to rein in its highly accommodative monetary policy. Polls have suggested the race is narrowing in the U.K. ahead of next week's election as Brexit negotiations continue, while votes loom in Germany and Italy later this year. The British pound overcame early weakness and finished flat versus the greenback. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives, Randy Frederick offer the 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?. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick. Spanish stock markets lagged behind amid a flare-up in the country's banking sector uneasiness, amid a drop in Banco Popular Espanol SA (BPESY $2) on concerns it may need to be wound down if it does not find a buyer. In economic news, the final Markit Eurozone Manufacturing PMI Index was unrevised at 57.0 in May, up from the 56.7 level posted in April, with a reading above 50 denoting expansion. Bond yields in the region traded mixed.

Stocks in Asia finished mixed as the markets digested a flood of economic data, while continuing to grapple with festering political uncertainty in the U.S. and Europe. Japanese securities rose sharply, with the yen giving back some recent gains, while reports showed the nation's Q1 capital spending rose more than expected and manufacturing output continued to expand in May. Mainland Chinese stocks and those traded in Hong Kong also gained ground, as the yuan was set at the strongest level in seven months, per Reuters, while the Caixin China PMI Manufacturing Index fell to a level depicting contraction in May for the first time in 11 months. The report contrasted yesterday's official government manufacturing release, which showed continued expansion out of the sector. Meanwhile, Australian equities advanced modestly on the heels of a stronger-than-expected April retail sales report, while South Korean stocks dipped after the nation reported a larger-than-forecasted deceleration in export growth for last month, and India's markets finished flat in the wake of late-yesterday's Q1 GDP report that showed growth unexpectedly slowed.

For a look at the global markets and economy, see Schwab's Jeffrey Kleintop's, CFA, article, The Long Period of Underperformance for Emerging Market Stocks May Finally Be Over on the Markets & Economy page at www.schwab.com, as well as his video, What's the Current State of the Global Economy? on the Insights & Ideas page at www.schwab.com.

Tomorrow’s international economic calendar will be fairly light, with reports slated for release to include GDP from South Korea, consumer confidence from Japan, employment data from Spain, and PPI from the Eurozone.

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