Charles Schwab: On the MarketPosted: 7/13/2017 4:15 PM ET
Stocks Continue to Tick Higher
U.S. stocks finished with mild gains as Fed Chair Janet Yellen concluded her two-day monetary policy commentary in front of the Senate this afternoon. Tech and financial issues led the advance as Treasury yields rebounded from yesterday's declines and the Street is awaiting a plethora of key banking sector earnings reports tomorrow. The U.S. dollar was nearly unchanged, crude oil prices were higher and gold was lower.
The Dow Jones Industrial Average (DJIA) gained 21 points (0.1%) to 21,553, the S&P 500 Index advanced 5 points (0.2%) to 2,448, and the Nasdaq Composite increased 13 points (0.2%) to 6,274. In moderate volume, 768 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.59 to $46.08 per barrel and wholesale gasoline was $0.01 higher at $1.53 per gallon. Elsewhere, the Bloomberg gold spot price shed $2.13 to $1,218.38 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 95.74.
Target Corp. (TGT $53) got a boost after the retailer said it expects Q2 earnings-per-share (EPS) to be at the high end of its previous guidance, which was above the FactSet estimate. TGT cited improved traffic and sales trends through the first two months of the quarter.
TGT's report offered some optimism to the struggling retail sector and tomorrow the group will remain in focus as the economic calendar is set to deliver tretahe June retail sales report and the preliminary July University of Michigan Consumer Sentiment Index. Retails sales are projected to rebound from May's slip and consumer sentiment is forecasted to dip slightly. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers a relatively positive view on the American consumer in his latest Schwab Sector Views: Christmas in July! (Status of the Consumer), but points out some clouds on the horizon that keep us, and should keep you, at least somewhat cautious. Read more on our marketperform rating on the consumer discretionary sector on the Markets & Economy page at www.schwab.com and be sure to follow us on Twitter: @schwabresearch.
Delta Air Lines Inc. (DAL $55) reported Q2 EPS of $1.68, or $1.64 ex-items, versus estimates of $1.66, as revenues rose 3.3% year-over-year (y/y) to $10.8 billion, roughly in line with expectations. DAL offered mixed Q3 guidance. Shares traded lower.
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 notes that there don't seem to be any classic bubbles near bursting at the moment—at least not among the ones most commonly referenced as potential candidates. But remember that bubbles are sometimes only seen in hindsight, which is why we always council diversification. Read more on the Markets & Economy page at www.schwab.com, and be sure to follow Jeff on Twitter: @jeffreykleintop.
Jobless claims top forecasts, wholesale price inflation ticks higher
Weekly initial jobless claims (chart) declined by 3,000 to 247,000 last week, above the Bloomberg forecast of 245,000, with the prior week’s figure being revised higher by 2,000 to 250,000. The four-week moving average rose by 2,250 to 245,750, while continuing claims fell 20,000 to 1,945,000, south of estimates of 1,950,000.
The Producer Price Index (PPI) (chart) showed prices at the wholesale level in June were up 0.1% month-over-month (m/m), above expectations to match May's flat reading. The core rate, which excludes food and energy, was also up 0.1%, versus forecasts of a 0.2% advance and May's unrevised 0.3% increase. Y/Y, the headline rate was 2.0% higher, topping projections of a 1.9% increase, and the core PPI rose 1.9% last month, below estimates of a 2.0% gain. In May, producer prices were 2.4% higher and up 2.1% for the headline and core rates, respectively.
Federal Reserve Chairwoman Janet Yellen concluded her two-day semi-annual Congressional monetary policy testimony in front of the Senate Banking Committee. Her testimony didn't deviate much from what she told the House yesterday, which fostered a dovish takeaway in the markets and appeared to ease concerns about the pace of further rate hikes. Yellen noted that the Fed will begin to shrink the balance sheet this year and inflation continues to run below its target, partly due to a few unusual reductions in certain categories of prices. However, the part of her testimony that garnered the most attention was when 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."
Treasuries were under pressure, with the yields on the 2-year and 10-year notes gaining 2 basis points (bps) to 1.36% and 2.34%, respectively, while the yield on the 30-year bond rose 3 bps to 2.91%.
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. Kathy notes that we believe the Federal Reserve to continue to tighten monetary policy and reduce its balance sheet gradually, assuming inflation doesn't slip further. Read more on the Fixed Income page at www.schwab.com, where Kathy also discusses, Dollar Decline: Time to Shift to International Bonds? Maybe Not, on the Markets & Economy page. Follow Kathy on Twitter: @kathyjones.
Inflation, one of the two policy mandates for the Fed, has seen a recent retreat to boost the level of uncertainty regarding future Central Bank actions, setting the stage for tomorrow's Consumer Price Index (CPI) to possibly garner heightened scrutiny. The headline figure is expected to tick 0.1% higher m/m and core CPI is projected to rise 0.2%, resulting in y/y gains of 1.7%—below the Fed's 2.0% target—for both figures. As noted in the latest Schwab Market Perspective: Smooth Sailing for Stocks?, combine the upward move in yields with a modest rebound in some commodities, folks may be wondering if the reflation story is again gaining traction. We believe it's too early to buy into that, especially with inflation readings remaining low, but it is something to keep an eye on, and could potentially add some more choppiness to the waters as we sail through the summer months. Read more on the Markets & Economy page at www.schwab.com.
Additional releases on tomorrow's domestic docket will include the Fed's June industrial production and capacity utilization report, forecasted to show production increased 0.3% m/m and utilization ticked higher to 76.8%, and business inventories, expected to have increased 0.3% m/m in May after declining by 0.2% in April.
The political front continues to garner attention, with a revised Senate healthcare bill being revealed and scrutinized to see if it has the support to pass a procedural vote. 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, 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.
Europe modestly adds to yesterday's rally, Asia mostly higher following data and Fed
European equities mostly ticked to the upside following yesterday's broad-based rally that stemmed from the dovish takeaway of U.S. Fed Chairwoman Janet Yellen's monetary policy testimony that seemed to ease rate hike jitters. Also, global sentiment may have received a boost from some upbeat Chinese economic data. The euro declined and the British pound rose versus the U.S. dollar, while bond yields in the region gained ground. Schwab's Jeffrey Kleintop, CFA, offers his article, Are bonds signaling a major stock market peak? on the Markets & Economy page at www.schwab.com, while Jeff and Vice President of Trading and Derivatives, Randy Frederick offer the 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. Brexit negotiations continued to garner attention, while the economic calendar showed German consumer price inflation rose in line with forecasts.
Stocks in Asia finished mostly higher as the global markets cheered yesterday's testimony from U.S. Fed Chair Yellen that eased fed rate hike concerns, while some China data was favorable. Shares trading in mainland China and Hong Kong advanced, aided by reports that showed the nation's exports rose more than expected and key lending statistics topped forecasts. Schwab's Jeffrey Kleintop, CFA, offers analysis of the global economic outlook in his 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks on the International Investing page at www.schwab.com. Australian securities gained ground. South Korean equities managed a move higher after the Bank of Korea expectedly kept its benchmark interest rate unchanged, while Indian stocks advanced despite late-yesterday's data showing consumer price inflation came in a bit cooler than expected and industrial production rose at a smaller pace than projected. Both indexes reached record highs and 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. However, Japanese equities finished flat as the yen gained ground on the monetary policy comments out of the U.S. and as the markets digested the Bank of Japan's recent bond buying operations.
The international economic calendar will continue to be light tomorrow, offering industrial production and capacity utilization from Japan, wholesale prices from India and CPI and trade data from Italy.