Markets Mixed Following Expected Fed Rate Hike

Charles Schwab: On the Market

Posted: 6/14/2017 4:15 PM ET

Markets Mixed Following Expected Fed Rate Hike

U.S. equities finished mixed and near the unchanged mark, with the Nasdaq taking a hit on pressure from tech stocks, after the Federal Reserve's decision to increase the target for its fed funds rate, as the move was widely expected. Treasuries pared gains in the wake of the Fed decision, after rallying on the heels of early morning reads on retail sales and consumer price inflation that missed expectations. Gold reversed course to finish lower, while the U.S. dollar trimmed its losses to end nearly unchanged, and crude oil prices tumbled following a bearish government inventory report.

The Dow Jones Industrial Average (DJIA) increased 46 points (0.2%) to 21,375, the S&P 500 Index declined 2 points (0.1%) to 2,438, and the Nasdaq Composite lost 25 points (0.4) to 6,195. In moderate volume, 881 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil declined $1.73 to $44.73 per barrel and wholesale gasoline was $0.07 lower at $1.43 per gallon. Elsewhere, the Bloomberg gold spot price decreased $7.31 to $1,259.24 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was flat at 96.97.

H&R Block Inc. (HRB $29) rallied after the company announced Q4 financial results of $1.96 per share from continuing operations, topping the $1.91 FactSet consensus estimate, while revenues increased 1.3% year-over-year (y/y) to $2.3 billion, roughly matching expectations. The company also raised its quarterly dividend by 9% to $0.24 per share.

Technology issues recently experienced a sharp pull-back, prior to yesterday's advance, that some have attributed to a possible rotational trade. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA discusses in his latest Schwab Sector Views: Technology—Too Far or Room to Run?, that the technology sector has been on a remarkable run. It was the best-performing sector over the past three- and 12-month periods, as well as the best year-to-date performer—and it really isn’t all that close. After a run like that, it makes sense that investors are asking if tech may have gone too far. Could a retrenchment be in store? Some might even be wondering if we’re at risk of repeating the collapse that started in 2000, when tech saw its weighting fall from 33% of the S&P 500 to 14% a mere three years later. Read more on the Markets & Economy page at www.schwab.com and follow Schwab on twitter: @schwabresearch.

Fed hikes rates, retail sales and consumer price inflation miss estimates

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, agreeing to raise the target for its fed funds rate by 25 bps to a range of 1.00%-1.25%, a move that was widely expected. The FOMC also kept its rate outlook intact, indicating that most Committee members projected one additional rate increase for 2017, while continuing to forecast three hikes in 2018. In its statement, the FOMC said that near-term risks to the economy are “roughly balanced,” but that the Committee "is monitoring inflation developments closely." However, the Fed indicated that, “Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the committee’s 2 percent objective over the medium term.” In a separate statement, the Fed also provided details of its plan to wind down its bloated balance sheet, by gradually shedding a fixed amount of assets on a monthly basis, but without providing a starting point for the program. The Committee said it anticipates the initial cap to be $10 billion per month--$ 6 billion from Treasuries and $4 billion from mortgage-backed securities—to increase every three months in those amounts to reach $30 billion and $20 billion, respectively.

As well, the Fed provided updated economic projections, showing only a slight upward change to gross domestic product for this year, while lowering its forecasts for inflation and the unemployment rate. In her press conference following the decision, Fed Chairwoman Janet Yellen said the upcoming rate of economic growth warrants further gradual rate hikes, while also noting that "one-off" price declines is what is behind recent softer-than-expected inflation readings. Regarding the program of trimming the balance sheet, she didn't indicate a firm timeframe, only saying she expects it to be initiated this year and that it could take a few years to complete. Read more insightful analysis of the Fed’s decision in an article from Schwab’s Chief Fixed Income Strategist, Kathy Jones, later today at www.schwab.com, while you can also read Kathy's article, Will the Fed Reduce Its Balance Sheet? What Bond Investors Should Know, where she discusses the Fed's potential changes to its inflated balance sheet and the impact on the bond markets, on the Fixed Income page. Follow Kathy on Twitter: @kathyjones.

Advance retail sales (chart) for May declined 0.3% month-over-month (m/m), below the Bloomberg forecast of a flat read and compared to April's unrevised 0.4% gain. Last month's sales ex-autos were also down by 0.3% m/m, missing of expectations of a 0.1% gain, and following the positive revision to a 0.4% rise from the 0.3% reading seen in the previous month. Sales ex-autos and gas were flat m/m, missing estimates of a 0.3% rise, and versus April's favorably revised 0.5% gain. The retail sales control group, a figure used to help calculate GDP, was unchanged, compared to the projected 0.3% rise, and the prior month's figure was revised higher to a 0.6% increase from the previously reported 0.2% increase.

The Consumer Price Index (CPI) (chart) was down 0.1% m/m in May, below estimates calling for no change, while April's 0.2% increase was unrevised. The core rate, which strips out food and energy, rose 0.1% m/m, below expectations of a 0.2% increase and compared to April's unrevised 0.1% rise. Y/Y, prices were 1.9% higher for the headline rate, just shy of forecasts of a 2.0% rise, while the core rate was up 1.7%, below projections of a 1.9% gain. April y/y figures showed an unrevised 2.2% rise and an unadjusted 1.9% increase for the headline and core rates respectively.

The MBA Mortgage Application Index increased 2.8% last week, following the previous week's 7.1% rise. The advance came as a 9.2% jump in the Refinance Index was met with a 2.8% decline for the Purchase Index. The average 30-year mortgage rate decreased 1 basis point (bp) to 4.13%.

Business inventories (chart) declined 0.2% m/m in April, matching forecasts, and versus March's unrevised 0.2% increase.

Treasuries were higher, as the yield on the 2-year note declined 2 bps at 1.35%, while the yields on the 10-year note and the 30-year bond fell 7 bps to 2.15% and 2.80%, respectively.

Tomorrow's economic calendar will again be busy, beginning with weekly initial jobless claims, forecasted to decline to 241,000 from the prior week's 245,000, followed by the Import Price Index, with economists anticipating a 0.1% m/m decline for May, and then the Empire Manufacturing Index and Philly Fed Manufacturing Index will be released. Later in the morning, the Fed's May industrial production and capacity utilization report will be released, forecasted to show production increased 0.2% m/m and utilization ticked higher to 76.8%, while the NAHB Housing Market Index will round out the day, with a reading of 70 expected for June, matching that seen in May.

Europe erases early gains, Asia markets diverge ahead of Fed decision

European equities erased early tech fueled gains and closed mostly lower following the disappointing economic reads from the U.S., while caution ahead of today's Fed decision also likely kept gains and conviction in check. German Bundesbank president and European Central Bank (ECB) Governing Council member, Jens Weidmann, made remarks aimed at highlighting the risks of continuing extraordinary stimulative monetary measures for too long just days after the ECB dropped its reference to the possibility of further declines in interest rates. In other economic news in the region, jobs data reported out of the U.K. showed that fewer payroll additions were made than expected and a miss on wage growth has intensified in the three months through April, imposing the biggest loss of household purchasing power in almost three years, per Bloomberg. The Bank of England (BoE) is expected to make its next policy decision tomorrow and BoE Governor Mark Carney has warned of possible challenging times for the rest of the year as the uncertainty surrounding Brexit is helping to keep pay subdued.

Political uncertainty remains in the U.K. following its recent elections which saw Prime Minister Theresa May's party losing its majority resulting in a hung parliament, while the U.K.'s Brexit department has seen two of its four ministers depart this week, just days before negotiations with the European Union are set to start. For commentary on the political front check out Schwab's Chief Global Investment Strategist Jeffrey Kleintop, 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, and follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick.

The euro and British pound erased early losses and gained ground against the U.S. dollar and bond yields in the region were lower. Schwab's Jeffrey Kleintop, CFA, discusses the recent action in the global bond markets and what it may be signaling in his latest article, Are bonds signaling a major stock market peak? on the Markets & Economy page at www.schwab.com.

Stocks in Asia finished mixed as market participants eyed some data from China and awaited this afternoon's Federal Reserve monetary policy decision. Mainland Chinese securities declined 0.7%, while those traded in Hong Kong ticked higher, as a couple of mostly in line reads on retail sales and industrial production showcased some economic resiliency for the world's second largest economy as regulators continue to pursue a reduction of shadow banking risks. Japanese reports on industrial production and capacity utilization showed growth that matched the previous month's increase, but weren't enough to influence a positive finish as stocks in the island nation dipped, while the Bank of Japan gets sent to begin its two-day monetary policy meeting tomorrow. South Korean equities declined, despite a larger-than-expected decline in the country's unemployment rate to 3.6%, but the jobless figure for young people is still more than twice the overall level. Meanwhile, markets in Australia rallied, aided by strength in financial listings and despite a report that showed a decline in consumer sentiment. For a more detailed picture of our current global economic landscape, see the latest video from Schwab's Jeffrey Kleintop, CFA, What's the Current State of the Global Economy? on the Insights & Ideas page at www.schwab.com.

In addition to the Bank of England meeting, tomorrow's international economic calendar will include employment data from Australia, India's trade balance, CPI from France and Italy, retail sales from the U.K., and the Eurozone's trade balance.