Morning Gains Dwindle

Charles Schwab: On the Market

Posted: 7/27/2017 4:15 PM ET

Morning Gains Dwindle

U.S equities finished mixed, as early gains faded amid a rollover in technology stocks and mixed earnings and economic data. Treasury yields recovered as investors mulled the Fed's unchanged monetary policy decision yesterday, as well as a divergent durable goods orders report, while the trade deficit and wholesale inventories came in better than expected. Gold and the U.S. dollar were little changed and crude oil was higher.

The Dow Jones Industrial Average (DJIA) advanced 86 points (0.4%) to 21,797, the S&P 500 Index was 2 points (0.1%) lower at 2,475, and the Nasdaq Composite declined 41 points (0.6%) to 6,382. In heavy volume, 926 million shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.29 to $49.04 per barrel and wholesale gasoline was $0.03 higher at $1.62 per gallon. Elsewhere, the Bloomberg gold spot price inched $0.61 lower to $1,259.83 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly flat at 93.90.

Facebook Inc. (FB $170) reported Q2 earnings-per-share (EPS) of $1.32, versus the $1.12 FactSet estimate, as revenues grew 45.0% year-over-year (y/y) to $9.3 billion, above the Street's expectation of $9.2 billion. The social network's ad revenue topped forecasts, led by mobile, while its monthly active users also exceeded expectations. Shares were solidly higher.

Dow member Procter & Gamble Co. (PG $91) posted fiscal Q4 profits of $0.82 per share, or $0.85 ex-items, versus the expected $0.78, as revenues were unchanged y/y at $16.1 billion, topping the forecasted $16.0 billion. PG issued full-year guidance that was above estimates and shares were higher.

Dow component Verizon Communications Inc. (VZ $48) announced Q2 EPS of $1.07, or $0.96 ex-items, compared to the projected $0.96, with revenues declining 2.0% y/y to $30.5 billion, north of the forecasted $29.9 billion. VZ reaffirmed its full-year guidance. Shares moved decisively higher as the company's net subscriber additions trounced estimates, led by handset growth.

Twitter Inc. (TWTR $17) reported a Q2 loss of $0.16 per share, or profit of $0.08 per share ex-items, above the estimated $0.05, as revenues declined 5.0% y/y to $574 million, exceeding the expected $538 million. The company's monthly active users missed expectations, while advertising revenues declined. TWTR issued Q3 operating earnings guidance with a midpoint below estimates. Shares fell sharply. 

Mastercard Inc. (MA $129) posted Q2 EPS of $1.10, topping the expected $1.04, with revenues rising 13.0% y/y to $3.1 billion, above the forecasted $3.0 billion. The company left its full-year revenue outlook unchanged. Shares finished lower.

Durable goods orders mixed, jobless claims rise

June preliminary durable goods orders (chart) jumped 6.5% month-over-month (m/m), compared to the Bloomberg estimate of a 3.9% gain, and May's 0.8% decrease was revised to a 0.1% dip. Ex-transportation, orders were 0.2% higher m/m, compared to forecasts of a 0.4% gain and versus May's upwardly revised 0.6% rise. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, dipped 0.1%, versus projections of a 0.3% increase, and the upwardly revised 0.7% rise—from a 0.2% gain—posted in the month prior.

The headlined figure was fueled by the volatile transportation component, with orders for nondefense aircraft and parts surging 131.2% m/m. Orders for autos declined, along with demand for electrical equipment, appliances and components, while the fabricated metal, communications and machinery categories grew. The report was modestly positive as the strong upward revision to the business spending proxy more than offset the dip in June.

The latest Schwab Market Perspective: Are Danger Signs Rising…or Will the Bull Run Continue?, highlights that the latest industrial production reading provided by the Fed bested estimates, while capacity utilization looks to be heading in the right direction. Also, after a sharp decline, the U.S. Citi Economic Surprise Index has started to turn around, which should be another support for the ongoing bull market in stocks. Read more on the Markets & Economy page at www.schwab.com and be sure to follow us on Twitter: @schwabresearch.

Tomorrow, we will get the first look (of three) at Q2 GDP, projected to show growth accelerated to a 2.5% quarter-over-quarter annualized pace from Q1's 1.4% expansion (economic calendar). Personal consumption is estimated to increase 2.8% after rising 1.1% in Q1. However, core PCE—the Fed's favored measure of inflation—is projected to slow decisively to a 0.7% pace from Q1's and the Fed's target 2.0% rate. However, the data is backward looking and Schwab's Chief Investment Strategist Liz Ann Sonders points out in her 2017 Mid-year US Equity Outlook: Rattle and Hum, the ascending correlation between stocks and the following year's real GDP, noting that she believes the stock market is accurate in telling a still-decent story about economic growth and limited recession risk. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Weekly initial jobless claims (chart) rose by 10,000 to 244,000 last week, above forecasts of 240,000, with the prior week’s figure being revised higher by 1,000 to 234,000. The four-week moving average was unchanged at 244,000, while continuing claims declined 13,000 to 1,964,000, north of estimates of 1,960,000.

The advance goods trade deficit narrowed more than expected to $63.9 billion in June, from the downwardly revised $66.3 billion in May, and compared to expectations of $65.5 billion.

Preliminary wholesale inventories rose 0.6% m/m in June, versus forecasts for a 0.3% increase, and following May's unrevised 0.4% rise.

The Kansas City Fed Manufacturing Activity Index for July dipped to 10, from June's 11 reading, below forecasts of a rise to 12, with a level north of zero depicting expansion.

Treasuries were lower, as the yield on the 2-year note was flat at 1.36%, while the yield on the 10-year note rose 3 basis points (bps) to 2.31% and the 30-year bond rate gained 4 bps to 2.93%. Bond yields and the U.S. dollar rebounded on the data and after yesterday's unchanged policy decision by the Fed.

Schwab's Liz Ann Sonders notes in her latest article, Fed Keeps it on the QT, the Fed kept rates unchanged, in a unanimous vote, and the addition of the words "relatively soon" point to a September start point to balance sheet shrinkage, or quantitative tightening (QT). Next up is the Jackson Hole annual conference, at which Yellen will speak, which could provide an opportunity to further steer the consensus around QT's timing. There is a September timing risk however, given that we could be in the midst of a debt ceiling stand-off, so stay tuned. Read more on the Markets & Economy page at www.schwab.com.

For a look at the bond markets and the U.S. dollar, see Schwab's Chief Fixed Income Strategist Kathy Jones' article, Bond Market Mid-Year Outlook: Redefining the Borders of 'Lower for Longer' on the Fixed Income page at www.schwab.com, and Dollar Decline: Time to Shift to International Bonds? Maybe Not, on the Markets & Economy page. Follow Kathy on Twitter: @kathyjones.

In addition to the GDP report, other items on tomorrow’s economic calendar include the Q2 Employment Cost Index, expected to show a 0.6% increase following the 0.8% rise in Q1, as well as the final July University of Michigan Consumer Sentiment Index, forecasted to remain at the preliminary level of 93.1, but down from the 95.1 registered in June.

Europe mixed, Asia higher on earnings and Fed

European equities finished mixed, with the markets digesting the Fed's unchanged monetary policy stance yesterday and a flood of earnings reports as the season kicks into high gear. The euro and the British pound lost ground on the U.S. dollar to help limit losses, while bond yields in the region finished mostly lower. In economic news, German consumer confidence rose slightly more than expected. For a look at global investing, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, latest article, An important benefit to global investors is back after 20 years where he notes that the degree to which the world's stock markets move in sync with each other has fallen to the lowest level in 20 years. Jeff adds that the lower correlation enhances the risk-reducing benefits of diversification, which may be especially good news right now since stocks could be due for a pullback. Read more on the Markets & Economy page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mostly higher on the heels of the expected unchanged monetary policy decision in the U.S., while the markets cheered a plethora of upbeat global earnings reports. Japanese equities rose modestly, as gains may have been limited by late-yesterday's increase in the yen after the U.S. monetary policy decision. Mainland Chinese stocks and those traded in Hong Kong increased, with small-cap stocks rebounding from a recent bout of selling pressure, markets in Australia and South Korea also advanced, while Indian securities finished flat. Amid the all-time highs for markets in India and South Korea, Schwab's Jeffrey Kleintop CFA, offers his article, The Long Period of Underperformance for Emerging Market Stocks May Finally Be Over on the International Investing page at www.schwab.com, where you can also find his 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks.

A slew of reports from Japan will dominate tomorrow’s international economic calendar, including CPI, jobs data, personal income, the trade balance and retail sales, while other reports from abroad will comprise of PPI from Australia, GDP and CPI from France and Spain, as well as sentiment figures from the Eurozone.