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Tuesday, June 13, 2017

Stocks Advance Ahead of Fed's Policy Stance

Charles Schwab; On the Market
Posted: 6/13/2017 4:15 PM ET

Stocks Advance Ahead of Fed's Policy Stance

U.S. stocks traded higher as technology issues recovered from a two-session slide to lead the advance, though gains may have been limited ahead of tomorrow's Fed monetary policy decision, with a rate hike widely anticipated. Treasuries were mixed but mostly flat despite a hotter-than-expected wholesale price inflation report. The U.S. dollar dipped, gold saw minor gains and crude oil prices were also higher.

The Dow Jones Industrial Average (DJIA) increased 93 points (0.4%) to 21,328, the S&P 500 Index gained 11 points (0.5%) to 2,440, and the Nasdaq Composite jumped 45 points (0.7%) to 6,220. In moderately-heavy volume, 825 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.38 to $46.46 per barrel and wholesale gasoline was $0.01 higher at $1.50 per gallon. Elsewhere, the Bloomberg gold spot price increased $0.74 to $1,266.92 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 97.00.

Dow member Merck & Co. Inc. (MRK $63) announced that it has paused the enrollment in two trials of its treatment for blood cancer, multiple myeloma, as it looks into reports of deaths for patients using the drug. MRK traded lower.

Cheesecake Factory Inc. (CAKE $53) fell sharply after the restaurant reported that it expects Q2 same-store sales to decline 1.0% year-over-year (y/y), versus the FactSet expectation of a 1.7% gain. The company noted heightened volatility in week-to-week sales trends, indicative of uncertainty on the part of many consumers, as well as pockets of softness, notably in the East and Midwest.

The technology sector recovered somewhat from a rollover that led a two-day slip in the equity markets from record high territory. Concerns have flared up about the rally in the group that has led the stock market run. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest Schwab Sector Views: Technology—Too Far or Room to Run?, the tech run likely won't go on forever—nothing does—but we don't see the unabashed enthusiasm for the group that would make us more concerned, and valuations aren't extended to the point that we believe investors should start to worry. That doesn't mean investors who have developed too large a position in tech relative to their risk tolerances shouldn't rebalance and take some profits. But we continue to see positive developments and believe the run in the tech sector still has further to go. Read more on the Markets & Economy page at www.schwab.com. Follow Schwab on Twitter: @schwabresearch.

Producer price inflation mostly tops forecasts, small business optimism holds steady

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in May were flat month-over-month (m/m), matching the Bloomberg expectation and compared to April's unrevised 0.5% gain. The core rate, which excludes food and energy, was up 0.3%, versus forecasts of a 0.1% advance and April's unrevised 0.4% increase. Y/Y, the headline rate was 2.4% higher, above projections of a 2.3% increase, and the core PPI increased 2.1% last month, topping estimates of a 1.9% gain. In April, producer prices were 2.5% higher and up 1.9% for the headline and core rates, respectively.

The National Federation of Independent Business (NFIB) Small Business Optimism Index for May remained at April's unrevised 104.5 level, matching expectations.

Treasuries were mixed and little changed, with the yield on the 2-year note increasing 1 basis point (bp) to 1.36%, while the yields on the 10-year note and the 30-year bond decreased 1 bp to 2.21% and 2.86%, respectively.

Recently, bond yields have rebounded somewhat from a bout of pressure that stemmed from heightened political uncertainty on both sides of the Atlantic, as well as some mixed economic data. Also, the two-day Federal Open Market Committee's (FOMC) monetary policy meeting, which began today (economic calendar), is expected to yield a 25 bp increase to the target federal funds rate. However, the markets have grappled with the timing and frequency of further rate hikes and the likelihood that the Central Bank will begin the process of shrinking its huge balance sheet later this year. Tomorrow's statement accompanying the decision, as well as updated economic projections and subsequent press conference by Chairwoman Janet Yellen, are poised to garner heavy scrutiny. For analysis of the Fed meeting, see our article, Will the Fed Hike Rates This Week? on the Insights & Ideas page at www.schwab.com.

Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the Fed's potential changes to its bloated balance sheet and the impact on the bond markets, pointing out in her article, Will the Fed Reduce Its Balance Sheet? What Bond Investors Should Know that we don't believe it should be cause for alarm as the Treasury market should be able to absorb a gradual decline in the Fed’s bond holdings without pushing yields significantly higher. However, she adds, the impact on the mortgage-backed securities market might be greater. Read more on the Fixed Income page at www.schwab.com and follow Kathy on Twitter: @kathyjones.

Also, Chief Investment Strategist Liz Ann Sonders notes in her recent article, Gimme Three Steps … and a Stumble?, 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.

Before the FOMC concludes its meeting tomorrow, we will get some key May economic reports, with the Consumer Price Index expected to show core inflation was just shy of the Fed's target of 2.0% y/y, along with retail sales, projected to continue to nudge higher m/m. Weekly MBA mortgage applications will also be released, as well as April business inventories.

As noted in the latest Schwab Market Perspective: Goldilocks…or the Three Bears?, modest growth, low inflation and a cautious Fed are combining to make things "just right" for investors. Additionally, the apparent improving global trade trend could help contribute to further stock market gains and support large-cap outperformance. But the risk of a pullback and/or sharp acceleration in volatility is elevated courtesy of both domestic and world political uncertainty, and the potential of a Fed misstep. Read more on the Markets & Economy page at www.schwab.com.

Europe mostly higher and Asia stabilizes as tech stocks rebound 

European equities finished mostly higher, with the technology sector rebounding from yesterday's drop, while the markets looked ahead to tomorrow's monetary policy decision in the U.S., as well as decisions out of the U.K., Switzerland and Japan this week. The U.K. remained in focus amid heightened political uncertainty as Prime Minister May deals with the fallout from last week's surprising election that resulted in a hung parliament. The election fostered uncertainty regarding the timing of Brexit negotiations and whether they will yield hard or softer exit terms. 

For commentary on the political front check out Schwab's Chief Global Investment Strategist 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, and follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick. Also, U.K. consumer price inflation came in hotter than expected, sending the British pound higher versus the U.S. dollar to hamstring U.K. stocks. Bond yields in the nation are getting a boost from the data. Schwab's Jeffrey Kleintop 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. In other economic news, German investor confidence came in mixed, with the current conditions component unexpectedly improving, while the outlook portion surprisingly declined. The euro was little changed versus the greenback and bond yields in the region were mixed.

Stocks in Asia finished mixed to mostly higher on the heels of yesterday's decline that came courtesy of the rollover in the U.S. technology sector from a recent rally, while the markets look to monetary policy decisions out of the U.S., Japan and the U.K. this week. Japanese equities dipped with the yen paring some of yesterday's gains on increased global uncertainties and a disappointing read on the nation's capital spending. Indian stocks finished flat, as the markets pause near record highs and digest data showing the nation's consumer price inflation was cooler than expected, though industrial production topped forecasts. Shares trading in mainland China and Hong Kong advanced, while South Korean listings also moved to the upside, with technology issues showing some signs of stabilization in the region from the flare-up in volatility yesterday. Australian securities returned to action from yesterday's holiday in positive fashion, rallying amid a recovery in the financial sector. For a look at the global economic front, see Jeffrey Kleintop's video, What's the Current State of the Global Economy? on the Insights & Ideas page at www.schwab.com.

Tomorrow, the international economic docket will include industrial production and capacity utilization from Japan, retail sales and industrial production from China, wholesale prices from Australia, CPI from Germany, industrial production from the Eurozone and employment data from the U.K.

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