Charles Schwab: On the MarketPosted: 8/16/2017 4:15 PM ET
Stocks Shave Gains Following Fed Minutes
U.S. stocks pared solid early gains that developed on the heels of some upbeat retail sector news in the form of better-than-expected earnings reports from Target and Urban Outfitters. Stocks shaved their gains in the wake of the Fed's afternoon release of its July monetary policy meeting minutes and reports that President Trump disbanded both of his business advisory groups, the Strategic and Policy Forum and the manufacturing council. In other developments, housing starts and building permits both dropped, though weekly mortgage applications rose. Treasuries and gold were higher, while the U.S. dollar and crude oil prices were lower.
The Dow Jones Industrial Average (DJIA) gained 26 points to 22,025, the S&P 500 Index added 4 points (0.1%) to 2,468, and the Nasdaq Composite ticked 12 points (0.2%) higher to 6,345. In moderate volume, 717 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.77 lower to $46.78 per barrel and wholesale gasoline was $0.02 lower at $1.56 per gallon. Elsewhere, the Bloomberg gold spot price gained $10.70 to $1,282.23 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% lower at 93.50.
Target Corp. (TGT $56) reported Q2 earnings-per-share (EPS) of $1.22, or $1.23 ex-items, above the $1.19 FactSet estimate, as revenues grew 1.6% year-over-year (y/y) to $16.4 billion, topping the forecasted $16.3 billion. Q2 same-store sales rose 1.3% y/y, north of the expected 0.3% increase. The company said traffic growth was healthy, reflecting increases in both its store and digital channels. TGT issued Q3 guidance that exceeded expectations, while raising its full-year profit outlook and issuing a forecast for same-store sales that bested estimates. Shares finished nicely higher.
Urban Outfitters Inc. (URBN $20) posted Q2 EPS of $0.44, versus the projected $0.37, as revenues declined 2.0% y/y to $873 million, above the expected $862 million. Q2 same-store sales declined 4.9% y/y, compared to the estimated 6.5% drop. Shares rallied.
Bristol-Myers Squibb Co. (BMY $58) traded lower after reporting disappointing results from a study of its kidney cancer treatment.
Housing construction activity misses ahead of look at Fed meeting
Housing starts (chart) for July dropped 4.8% month-over-month (m/m) to an annual pace of 1,155,000 units, below the Bloomberg forecast of a 1,220,000 unit rate. June starts were downwardly revised to an annual pace of 1,213,000. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, fell 4.1% m/m in July to an annual rate of 1,223,000, after June's upwardly revised 1,275,000 rate, and south of the expected annual pace of 1,250,000 units.
Construction activity for multi-unit structures fell sharply m/m and is down noticeably compared to last year, while single-family activity was little changed m/m and is up solidly y/y. The data echoes yesterday's homebuilder sentiment report that noted rising demand in the new-home market due to ongoing job and economic growth, but builders continue to face supply-side challenges such as lot and labor shortages and rising building material costs.
Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, discuss our underperform rating on the real estate sector in his latest Schwab Sector Views: Time to "Energize" Your Portfolio?, noting that low interest rates can make dividend-paying equity real estate investment trusts (REITs) more attractive, a factor that has supported them in recent years but now appears to be lessening as rates tick higher. Apartment and office markets have been generally strong, supporting rents; however, supply is rising, which could pressure profitability. Also, an ongoing shift away from brick-and-mortar retailers could pressure mall REITs. Read more on the Markets & Economy page at www.schwab.com and follow us on Twitter: @schwabresearch.
At 2:00 p.m. ET, the Federal Reserve released the minutes from its July monetary policy meeting. The information contained in the report showed that labor market conditions continued to strengthen as total nonfarm payroll employment increased solidly in June, though the unemployment rate edged up to 4.4%. The minutes also indicated that total industrial production rose moderately and real PCE appeared to have rebounded in the second quarter. However, some participants addressed the uncertainty surrounding the course of federal government policy and how it may weigh down the spending and hiring plans of firms. Finally, in regard to discussions of the Fed's balance sheet, participants "generally agreed that, in light of their current assessment of economic conditions and the outlook, it was appropriate to signal that implementation of the program likely would begin relatively soon, absent significant adverse developments in the economy or in financial markets."
As noted in the latest Schwab Market Perspective: Things are Looking Good … But are They Too Good?, the Federal Reserve continues its slow and steady approach to monetary policy normalization; leaving interest rates steady at its latest meeting, but hinting strongly that the winding down of the Fed’s balance sheet will likely begin in September. Investors shouldn't be complacent about the Fed, however. With the labor market tight, and commodity prices rising, inflation could start to flare up. At the same time, the Fed is sailing uncharted waters as it begins quantitative tightening (QT) by shrinking its balance sheet. Read more on the Markets & Economy page at www.schwab.com.
The MBA Mortgage Application Index ticked 0.1% higher last week, following the previous week's 3.0% gain. The slight increase came as a 1.6% rise in the Refinance Index was met with a 1.5% drop for the Purchase Index. The average 30-year mortgage rate declined 2 basis points (bps) to 4.12%.
Treasuries ticked higher, with the yield on the 2-year note losing 2 bps to 1.33%, the yield on the 10-year note decreasing 4 bps to 2.23% and the 30-year bond rate declining 3 bps to 2.82%.
Tomorrow, the U.S. economic calendar 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 76.7%. Additionally, we will also receive weekly initial jobless claims, with economists expecting a slight downtick to a level of 240,000 from the prior week's 244,000, as well as the Philly Fed Manufacturing Index, forecasted to decline to 18.0 for August from the 19.5 posted in July, while the Index of Leading Economic indicators (LEI) will round out the day, anticipated to have increased 0.3% for July following the 0.6% rise in June. .
Europe higher following data, Asia mixed following two-day rebound
European equities finished higher, as yesterday's upbeat U.S. economic data was followed by a favorable read on eurozone GDP, while geopolitical concerns continued to ease. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA points out in his article, What are fund flows telling us about trends and risks in the global stock market?, that the money coming into ETFs is flowing into a broad range of stock markets featuring a preference for international stocks and revealing a surprising disconnect with the performance and geopolitical risk of the underlying markets. Read more on the Markets & Economy page at www.schwab.com and follow Jeff on Twitter: @jeffreykleintop. Q2 eurozone GDP growth accelerated to a 2.2% y/y pace of growth, from the 1.9% expansion posted in Q1, and compared to the forecasted 2.1% increase. In the U.K., June employment growth topped expectations. The British pound dipped versus the U.S. dollar. The euro saw some pressure after reports suggested European Central Bank President Mario Draghi will not deliver a new policy message at next week's key Fed symposium in Jackson Hole, Wyoming. Bond yields in the region were mixed, with the markets awaiting today's release of the July U.S. monetary policy meeting minutes.
Stocks in Asia finished mixed on the heels of the two-day rally that came as geopolitical concerns eased along with tensions between North Korea and the U.S., with the former opting to not go through with a plan to fire missiles at the U.S. territory of Guam. Schwab's Jeffrey Kleintop, CFA, notes in his article, Missiles and Markets: An investor guide to geopolitical risks investors are best served when grim headlines are in the news by remembering that geopolitical risks are a regular part of investing and that a long history of geopolitical developments shows us that holding a well-diversified portfolio may buffer the short-term market moves that are most often the result. Investors should avoid overreacting to geopolitical developments and stick to their long-term financial plans. Read more on the International Investing page at www.schwab.com.
The markets also grappled with a slight increase in Fed monetary policy uncertainty in the wake of yesterday's much stronger-than-expected retail sales report in the U.S. Japanese equities dipped, even as the yen continued to lose ground on the U.S. dollar following the data, while stocks in both South Korea and India advanced, with each country's market playing catch up after being closed yesterday for holidays. Australian securities advanced, with earnings season in the nation getting under way. Mainland Chinese shares declined, while equities in Hong Kong moved higher, with the markets digesting yesterday's mostly stronger-than-expected July lending statistics.
Tomorrow, the international economic docket will include trade data from Japan, employment figures for Australia, retail sales from the U.K. and the trade balance and CPI from the Eurozone.