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Thursday, June 15, 2017

Stocks Lower Amid Mixed Economic News

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

Stocks Lower Amid Mixed Economic News

While off the worst levels of the day, U.S. equities finished lower after the domestic economic calendar offered a host of mixed reports. Homebuilder sentiment cooled, industrial production and capacity utilization came in just shy of estimates, while weekly jobless claims fell and regional manufacturing activity continued to be upbeat. Treasuries were lower, as was gold, while the U.S. dollar was nearly flat.

The Dow Jones Industrial Average (DJIA) fell 15 points (0.1%) to 21,356, the S&P 500 Index declined 5 points (0.2%) to 2,433, and the Nasdaq Composite lost 29 points (0.5%) to 6,166. 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 $0.27 to $44.46 per barrel and wholesale gasoline was $0.01 higher at $1.44 per gallon. Elsewhere, the Bloomberg gold spot price decreased $6.53 to $1,254.33 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 97.47.

Kroger Co. (KR $25) announced Q1 net earnings of $0.32 per diluted share or $0.58 ex-items compared to the FactSet expectation of $0.58 per share, while revenues increased 4.9% year-over-year (y/y) to $36.3 billion, topping forecasts. The company also lowered its 2017 GAAP net earnings guidance. Shares of KR were down over 15%.

Product solutions company Jabil Inc. (JBL $29) reported Q3 earnings results that showed a loss of $0.14 per share or a positive $0.31 ex-items, compared to the $0.29 FactSet consensus estimate, while revenues rose 4.1% to approximately $4.5 billion, roughly matching expectations. JBL traded lower.

The Nasdaq was again decisively to the downside with the recent pressure on technology issues persisting. As a spotlight remains on tech, Schwab's Director of Market and Sector Analysis Brad Sorensen, CFA, addresses the situation in his recent Schwab Sector Views: Technology—Too Far or Room to Run?. Brad informs us that the technology sector has been on a remarkable run. It was the best-performing sector over the past three- and 12-month periods. 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? Read the whole article on the Markets & Economy page at www.schwab.com and follow Schwab on Twitter: @schwabresearch.

Heavy dose of economic data points

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month declined to 67 from May's downwardly revised level of 69 and while it may be at a four-month low in June, remains near the highest levels in approximately 12 years. The 50 mark is the point of separation for good versus poor conditions. The NAHB said that although still quite strong, the figures might be hinting at an easing of optimism in an industry where more workers are desperately needed to break ground on new projects. And businesses might also be less confident since post-election buoyancy has given way to legislative gridlock.

Industrial production (chart) was unchanged month-over-month (m/m) in May, falling shy of estimates calling for a 0.2% increase, and following April's upwardly revised 1.1% rise, which was the strongest surge in nearly seven years. Manufacturing production declined, while mining and utilities output ticked higher. Capacity utilization ticked lower to 76.6%, compared to April's unrevised 76.7%, and shy of forecasts expecting a tick higher to 76.8%.

Weekly initial jobless claims (chart) declined by 8,000 to 237,000 last week, below the Bloomberg forecast of 241,000, with the prior week’s figure unrevised at 245,000. The four-week moving average decreased by 1,000 to 243,000, while continuing claims increased by 18,000 to 1,935,000, north of estimates of 1,920,000.

The Empire Manufacturing Index showed output from the New York region jumped further-than-expected into expansion territory (a reading above zero) for June. The index leaped to 19.8 from May's unrevised -1.0 level, with forecasts calling for a reading of 5.0.

The Philly Fed Manufacturing Index (chart) in June declined to 27.6 after rising to 38.8 in May, though a reading above zero indicates expansionary activity, and compared to estimates of a decline to 24.9.

The Import Price Index (chart) declined 0.3% month-over-month (m/m) for May, below the Bloomberg projection of a 0.1% decline, and compared to April's downwardly revised 0.2% increase. Compared to last year, prices were up by 2.1%, short of forecasts calling for 2.9% and following April's downwardly revised 3.6% increase.

Treasuries were lower, as the yields on the 2-year note and the 30-year bond increased 2 bps to 1.35% and 2.79%, respectively, while the yield on the 10-year note gained 3 bps to 2.16%. Yesterday, the U.S. Federal Reserve raised the target range for the federal funds rate by 25 bps. Schwab's Chief Fixed Income Strategist, Kathy Jones addresses the latest Fed decision in her recent article Fed Raises Rates, Sticks With Plans for One More Hike This Year. Read the whole article to find out what Kathy found surprising as well as detailed analysis on the Fixed Income page at www.schwab.com and follow Kathy on Twitter: @kathyjones.

More housing data is in store on tomorrow’s economic calendar, with housing starts and building permits scheduled for release, with starts forecasted to have increased 0.4% m/m during May to an annual rate of 1,223,000 units and permits to have risen 0.2% m/m to an annual rate of 1,249,000 units, followed by the preliminary University of Michigan Consumer Sentiment Index, expected to remain at the prior month’s 97.1 level.

European and Asian shares saw pressure

European equities traded broadly lower with retailers and commodity producers leading the decent. The decline developed on the heels of yesterday's Fed decision and in the wake of the Bank of England (BoE) keeping its monetary policy unchanged as expected, though the number of officials at the BoE calling for a rate hike has now increased to three versus the five officials who voted to stay the current policy path. In other central bank action, the Swiss National Bank kept both its target range and the rate charged on sight deposits unchanged, as expected. In economic developments in the region, consumer price inflation reports out of France and Italy were mostly in line with projections, retail sales figures in the U.K. were well short of expectations and the trade balance for the Eurozone was narrower than anticipated.

The euro moved lower versus the U.S. dollar, while the British pound erased an early decline that ensued following the BoE decision and traded higher against the greenback. Bond yields in the region were mostly higher. Schwab's Chief Global Investment Strategist 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 and follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia traded mostly lower with energy issues leading the decline on the heels of yesterday's Fed decision to increase the target range for the federal funds rate by 25 basis points and as crude oil prices continued to slide. Mainland Chinese stocks ticked to the upside, as the People's Bank of China (PBoC) appears to be holding off on any immediate increases to borrowing costs. The PBoC raised money-market costs shortly following its U.S. counterpart tightening in March. However, securities in Hong Kong fell sharply, with property firms under heavy pressure after the city's monetary authority raised borrowing costs shortly following the U.S. Fed's monetary policy decision yesterday. Japanese equities slipped, with exporters underperforming as the yen advanced versus the U.S. dollar and held gains, while traders in the island nation await Friday's decision from the Bank of Japan when it concludes its latest monetary policy meeting. Markets in Australia also fell, despite a report showing the country's jobless rate declined to its lowest level in over four years with the strong jobs report also sending the Australian dollar higher versus all of its major peers. Finally, stocks in India declined.

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 conclusion of the aforementioned Bank of Japan monetary policy meeting, tomorrow’s international economic calendar will hold Italy’s trade balance and CPI from the Eurozone.

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