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Wednesday, July 12, 2017

Stocks Climb Following Fed Chief's Speech

Charles Schwab: On the Market
Posted: 7/12/2017 4:15 PM ET

Stocks Climb Following Fed Chief's Speech

U.S. stocks rallied on the heels of remarks from Fed Chief Janet Yellen as she began her two-day semi-annual Congressional monetary policy testimony. Treasury yields pulled back from a recent rebound following the Chairwoman's speech, hamstringing financials ahead of Friday's key earnings reports out of the sector. Crude oil prices extended gains, the U.S. dollar was modestly higher in choppy trading and gold saw minor gains.

The Dow Jones Industrial Average (DJIA) gained 123 points (0.6%) to 21,532, the S&P 500 Index advanced 18 points (0.7%) to 2,443, and the Nasdaq Composite rallied 68 points (1.1%) to 6,261. In moderate volume, 794 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.45 to $45.49 per barrel and wholesale gasoline was unchanged at $1.52 per gallon. Elsewhere, the Bloomberg gold spot price gained $2.62 to $1,220.33 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.1% higher at 95.73.

Fastenal Co. (FAST $43) reported Q2 earnings-per-share (EPS) of $0.52, versus the $0.50 FactSet estimate, as revenues rose 10.6% year-over-year (y/y) to $1.1 billion, roughly in line with forecasts. The wholesale distributor of industrial and construction supplies said its sales rose due to improvement in underlying market demand, growth in its industrial vending business, and growth in new and existing onsite locations. Separately, the company announced a new stock repurchase program of up to 5 million shares. Shares gave up early gains and traded lower amid analyst concerns about potential margin headwinds facing the industry, exacerbated by competitor MSC Industrial Direct Co. Inc's (MSM $75) quarterly report that included a miss on gross margin and weaker-than-expected guidance.

NRG Energy Inc. (NRG $21) surged nearly 30% after the company announced a transformational plan aimed at billions in cost and margin improvements, targeted asset sales and the removal of debt.

For more on the stock markets, which remain near record high levels, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, latest article, Where's the Next Bubble?, in which he discusses the four most popular candidates for bubbles based on the questions he gets from investors: cryptocurrencies, (low) volatility, internet retailers, and central bank assets. However, he points out that remarkably, none of these seem to fit the classic profile of a potentially damaging bubble, but that doesn’t mean they don't carry risks for investors. Read more on the Markets & Economy page at www.schwab.com, and be sure to follow Jeff on Twitter: @jeffreykleintop.

Fed Chair Yellen sparks dovish takeaway

Federal Reserve Chairwoman Janet Yellen began her two-day semi-annual Congressional monetary policy testimony in front of the House Financial Services Committee. Yellen noted that she expects the balance sheet to shrink this year, while appearing to foster a dovish reaction in regard to the trajectory of further rate hikes as the Fed strives for policy normalization. She said, the fed funds rate remains somewhat below its neutral level and "because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance." Yellen added that because they also anticipate that the factors that are currently holding down the neutral rate will diminish somewhat over time, additional gradual rate hikes are likely to be appropriate over the next few years to sustain the economic expansion and return inflation to its goal.

The Fed Chief said a few unusual reductions in certain categories of prices have limited inflation and is being closely monitored. Yellen pointed out that continued strength in the labor market should support wage gains and consumer spending, while global economic growth, favorable financial conditions, the ongoing recovery in drilling activity should support business investment. "These developments should increase resource utilization somewhat further, thereby fostering a stronger pace of wage and price increases," she added.

The Federal Reserve's Beige Book, a look at business activity across the nation used as a preparation tool for the Fed's next two-day monetary policy meeting set to conclude on July 26th, was released in afternoon action. The report showed that the U.S. economy expanded across all twelve Districts in June, with the pace of growth ranging from slight to moderate. The report also indicated that employment maintained a "modest to moderate pace of expansion," across most Districts, though the Atlanta and St. Louis Districts reported flat employment levels. Meanwhile, the report indicated that "prices continued to rise modestly in the majority of Districts, and a few Districts noted that price pressures had eased slightly."

As noted in the latest Schwab Market Perspective: Smooth Sailing for Stocks?, the mixed economic picture, combined with the recent retreat in some inflation measures, has raised the level of uncertainty regarding future Federal Reserve actions. The Fed is intent on continuing the normalization process, with balance sheet reduction gaining a share of the spotlight from rate hikes. The environment for U.S. and global stocks continues to be in decent shape, but some risks are elevated and the possibility of a pullback exists. A notable potential driver of bouts of volatility could be U.S. and global central bank policy as they sail toward monetary policy normalization. Read more on the Markets & Economy page at www.schwab.com and be sure to follow us on Twitter: @schwabresearch.

Following Yellen's comments, Treasury yields gave back some of a recent rebound, with the yield on the 2-year note declining 3 basis points (bps) to 1.34%, while the yields on the 10-year note and the 30-year bond dropped 4 bps to 2.32% and 2.89%, respectively. Schwab's Chief Fixed Income Strategist Kathy Jones notes in her Bond Market Mid-Year Outlook: Redefining the Borders of 'Lower for Longer' in the second half of 2017, we expect 10-year Treasury yields to remain in a 2% to 2.5% range, consistent with the eight-year "lower for longer" theme in the bond market. Read more on the Fixed Income page at www.schwab.com and follow Kathy on Twitter: @kathyjones.

The MBA Mortgage Application Index fell 7.4% last week, following the previous week's 1.4% gain. The decline came as a 13.0% drop in the Refinance Index was met with a 2.5% decrease for the Purchase Index. The average 30-year mortgage rate rose 2 bps to 4.22%.

The political front continues to garner attention, with the Senate healthcare bill remaining uncertain, and Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend discusses in his latest article, Washington Midyear Update: 4 Key Issues for Investors to Watch, ambitious plans for sweeping policy changes—health care reform, an overhaul of the tax code, infrastructure spending and deregulation, among other things—were announced and the markets reacted positively. But midway through 2017, Republicans have few major policy accomplishments. Dysfunction, drama and ethical issues in the White House have combined with Republican infighting on Capitol Hill to bog down the policy agenda. There's growing concern among congressional Republicans that the much-anticipated policy changes will need to be significantly scaled back—or that they may not happen at all. Read more on the Insights & Ideas page at www.schwab.com.

Tomorrow, the U.S. economic calendar will deliver the latest Producer Price Index (PPI), with a flat m/m reading expected for June, matching the result registered in May, while the core rate, which excludes food and energy, is forecasted to have increased 0.2% m/m after rising 0.3% in May. We will also receive weekly initial jobless claims, expected to have declined by 3,000 to a level of 245,000.

European stocks gain ground on oil, Asia mostly lower

European equities rallied broadly, with the markets digesting some upbeat data in the region and today's monetary policy testimony from U.S. Fed Chief Yellen, which appeared to ease rate hike concerns. Oil & gas issues were higher on the heels of some bullish oil inventory data. The markets seemed to look past yesterday's flare-up in U.S. political uncertainty following emails released from President Donald Trump's son. The euro was lower and the British pound gained ground on the U.S. dollar, while bond yields in the region were lower. In economic news, eurozone industrial production rose more than expected, along with the U.K. employment change. For a look at the global markets, see Schwab's Jeffrey Kleintop's, CFA, article, 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks as we reach the halfway point of 2017on the International Investing page at www.schwab.com, where you can also find his and Vice President of Trading and Derivatives, Randy Frederick's video, How Do U.S. Equity Market Valuations Compare to Other Developed Markets?, on the Insights & Ideas page at www.schwab.com. Follow Randy on Twitter: @randyafrederick.

Stocks in Asia finished mostly lower amid some caution ahead of today's monetary policy testimony in the U.S., while yesterday's flare-up in political uncertainty following emails released by President Donald Trump's son may have hampered conviction. Japanese equities declined as the yen gained ground, while weakness in financials and healthcare issues overshadowed a continued rebound in basic materials to weigh on Australian securities. Mainland Chinese shares decreased and stocks in Hong Kong gained ground. South Korean equities traded lower and Indian listings continued a record run ahead of data on inflation and manufacturing output. After the closing bell, India's consumer price inflation came in a bit cooler than expected and industrial production rose at a smaller pace than projected. For a look at emerging markets, 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.

The international economic docket for tomorrow will be light, offering consumer inflation expectations from Australia and CPI from Germany and France.

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