Charles Schwab: On the MarketPosted: 7/6/2017 4:15 PM ET
Stocks Log Losses Ahead of June Jobs Report
U.S. stocks traded lower as the global markets continued to grapple with a recent uptick in hawkish central bank tones amid a rise in international bond yields. Treasuries were lower on the rising yields, crude oil prices rebounded on some bullish oil inventory data, gold dipped and the U.S. dollar declined. In economic news, ADP's employment data was below expectations ahead of tomorrow's June labor report. On the equity front, PriceSmart and L Brands reported figures that were shy of analysts' forecasts, while the tech sector and Tesla added to recent drops.
The Dow Jones Industrial Average (DJIA) lost 158 points (0.7%) to 21,320, the S&P 500 Index declined 23 points (0.9%) to 2,410, and the Nasdaq Composite dropped 61 points (1.0%) to 6,089. In moderate volume, 878 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.39 to $45.52 per barrel and wholesale gasoline added $0.03 to $1.53 per gallon. Elsewhere, the Bloomberg gold spot price dipped $1.96 to $1,225.08 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% lower at 95.81.
Costco Wholesale Corp. (COST $157) reported June same-store sales growth of 6.0% year-over-year (y/y), above the FactSet estimate of a 3.9% gain. Excluding the impact of changes in gasoline prices and foreign exchange, COST's same-store sales were 6.5% higher. Shares gave up early gains and finished mildly lower.
L Brands Inc. (LB $46) fell sharply after posting a 9.0% y/y drop in June same-store sales, versus the expected 6.8% decline, as sales tumbled at its Victoria's Secret stores.
PriceSmart Inc. (PSMT $81) reported fiscal Q3 earnings-per-share (EPS) of $0.62, versus expectations of $0.67, as revenues rose 3.7% y/y to $730 million, compared to the projected $735 million. Shares saw solid pressure.
Tesla Inc. (TSLA $309) continued a recent slide amid competition concerns toward the electric car maker and safety uncertainty after the Insurance Institute for Highway Safety (IIHS) announced that the Model S earned an "acceptable" rating, the second highest designation, in a collision test. TSLA responded by saying the most objective and accurate independent testing of vehicle safety is currently done by the U.S. Government, which found Model S and Model X to be the two cars with the lowest probability of injury of any cars that it has ever tested.
Yum China Holdings Inc. (YUMC $35) was under heavy pressure after the recently spun-off company posted softer-than-expected Q2 revenues and in line EPS, while same-store sales at Pizza Hut in the region missed forecasts, overshadowing upbeat results out of KFC.
For a look at the stock markets at the halfway point this year, Schwab's Chief Investment Strategist Liz Ann Sonders offers her commentary, 2017 Mid-year US Equity Outlook: Rattle and Hum. She adds that stocks have had a remarkable—and recently drama-free—run over the past eight-plus years. We are likely in a more mature phase, which could be marked by bouts of volatility and/or pullbacks—possible driven by Fed policy. But liquidity remains ample, financial conditions loose and earnings growth healthy; which have underpinned this bull for much of its history. Those are the key things on which to keep an eye as we head into the year's second half. Read these articles on the Markets & Economy page at www.schwab.com and follow us and Liz Ann on Twitter: @schwabresearch and @lizannsonders.
Services sector growth surprisingly accelerates, ADP employment report misses
The June Institute for Supply Management (ISM) non-Manufacturing Index (chart) rose to 57.4 from May's unrevised 56.9 level, and compared to the Bloomberg forecast of a dip to 56.5. A reading above 50 denotes expansion. New orders rose 2.8 points month-over-month (m/m) to 60.5 and business activity ticked higher and remained above the 60 mark, while employment declined 2.0 points to 55.8. Prices rose increased 2.9 points to 52.1. The ISM said the majority of comments from respondents were positive about business conditions and the overall economy.
The final Markit U.S. Services PMI Index was revised to 54.2 in June from the preliminary 53.0 level, where it was expected to remain, and up compared to the 53.6 figure posted in May. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently.
The data adds credence to our view in the latest Schwab Market Perspective: Shifting Sentiment?, that a solid economy—along with strong earnings—should foster a continuation of the stock market's grind higher but investors should be prepared for more turbulence as investors consider the path which Fed policy normalization will take. Read more on the Markets & Economy page at www.schwab.com.
The ADP Employment Change Report showed private sector payrolls rose by 158,000 jobs in June, below forecasts of a 188,000 gain, while May's increase of 253,000 jobs was revised to a gain of 230,000. Today’s ADP data, which does not include government hiring and firing, comes ahead of tomorrow's broader June nonfarm payroll report, expected to show an increase of 178,000 jobs to the headline rate and a rise of 169,000 jobs to private sector payrolls (economic calendar). The unemployment rate is forecasted to remain at 4.3%, and average hourly earnings are projected to rise 0.3% m/m.
With the labor market continuing to be quite tight and inflation in retreat, the wage component of the report will likely continue to foster scrutiny as the markets grapple with the trajectory of Fed policy normalization. Compared to the last year, wages are projected to accelerate slightly to a 2.6% rate from May's pace of 2.5%. Schwab's Director of Market and Sector Analysis Brad Sorensen, CFA, notes in his recent Schwab Sector Views: Christmas in July! (Status of the Consumer), that wages have started to move higher, although gains remain modest, and consumers haven't appeared to add to debt in a meaningful way after being forced to cut back on borrowing in the wake of the financial crisis. Read the whole article on the Markets & Economy page at www.schwab.com and follow Schwab on Twitter: @schwabresearch.
Bond yields have rebounded sharply over the past couple weeks, though Schwab's Kathy Jones notes in her Bond Market Mid-Year Outlook: Redefining the Borders of 'Lower for Longer' although we expect the Federal Reserve to continue to tighten monetary policy and reduce its balance sheet gradually, the yield curve is likely to continue to flatten in the absence of higher inflation. Kathy points out that this could be thwarted by an upside surprise in inflation if low unemployment leads to higher wages. Read more, including how we feel investors should position themselves in this environment on the Fixed Income page at www.schwab.com and follow Kathy on Twitter: @kathyjones.
Weekly initial jobless claims (chart) rose by 4,000 to 248,000 last week, above forecasts of 243,000, with the prior week’s figure being unrevised at 244,000. The four-week moving average increased by 750 to 243,000, while continuing claims gained 11,000 to 1,956,000, north of estimates of 1,940,000.
The trade balance (chart) showed that the deficit came in at $46.5 billion in May, compared to estimates of $46.3 billion. April's deficit was unrevised at $47.6 billion. Exports rose 0.4% m/m to $192.0 billion, while imports dipped 0.1% to $238.5 billion.
The MBA Mortgage Application Index rose 1.4% last week, following the previous week's 6.2% drop. The increase came as a 0.4% dip in the Refinance Index was more than offset by a 3.1% gain for the Purchase Index. The average 30-year mortgage rate rose 7 basis points (bps) to 4.20%.
Treasuries were lower, with the yield on the 2-year note flat at 1.40%, the yield on the 10-year note gaining 4 bps to 2.36% and the 30-year bond rate rising 5 bps to 2.90%.
Finally, for a look at the political front, which remains a source of market uncertainty, see Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's latest article, Washington Midyear Update: 4 Key Issues for Investors to Watch, on the Insights & Ideas page at www.schwab.com.
Europe lower, Asia mixed
European equities finished mostly lower, with the euro gaining ground, along with bond yields in the region, as the markets digested minutes from monetary policy meetings by the Fed and European Central Bank (ECB), with the latter preserving the recent uptick in hawkish sentiment. For a look at the global environment, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, article, Are bonds signaling a major stock market peak? on the Markets & Economy page at www.schwab.com, as well as Jeff's 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 Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick. Focus was on the political landscape as U.S. President Trump joined the G-20 summit in Germany, while geopolitical concerns lingered after North Korea's intercontinental ballistic missile (ICBM) test this week. In economic news, German factory orders rose at a smaller-than-expected amount. The British pound ticked higher versus the U.S. dollar. However, Italian stocks bucked the trend amid continued eased banking sector concerns in the nation on the heels of recent bailout announcements, while the global sector continued to get a boost from the rise in bond yields as of late.
Stocks in Asia finished mixed amid heightened geopolitical concerns following this week's test of an ICBM by North Korea, while the markets awaited a flood of economic data out of the U.S. For more, see Schwab's Jeffrey Kleintop's, CFA, article, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com. Japanese equities declined, with the yen recouping yesterday's drop, while Indian stocks advanced amid eased concerns in the banking sector. Australian securities finished lower even as the nation's trade surplus widened much more than expected in May. Mainland Chinese shares rose and those traded in Hong Kong declined amid weakness in energy stocks following yesterday's drop in crude oil prices and as property developers rebounded from a recent drop. South Korean equities finished flat. For a look at the global landscape, see Jeffrey Kleintop's, CFA, 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks on the International Investing page at www.schwab.com.
The international economic docket for tomorrow will begin with the Leading Index from Japan, foreign reserves from China and construction data from Australia. Releases from across the pond will include industrial production from Germany, retail sales from Italy and trade data, industrial production and manufacturing production from France and the U.K., while the latter will also release construction output.