Upbeat Manufacturing Reports Boost Stocks

Charles Schwab: On the Market

Posted: 10/2/2017 4:15 PM EDT

Upbeat Manufacturing Reports Boost Stocks

 

U.S. stocks were higher to start the week, as favorable reads on manufacturing activity out of China, Japan and the eurozone were followed by a thirteen-year high in the U.S report. However, gains were tempered a bit, as attention turned to the deadly shooting in Las Vegas. Treasury yields were modestly higher and the U.S. dollar extended a recent run, while gold and crude oil prices were lower.

The Dow Jones Industrial Average (DJIA) increased 153 points (0.7%) to 22,558, the S&P 500 Index was 10 points (0.4%) higher at 2,529, and the Nasdaq Composite advanced 21 points (0.3%) to 6,517. In moderate volume, 754 million million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil lost $1.09 to $50.58 per barrel and wholesale gasoline was $0.03 lower at $1.56 per gallon. Elsewhere, the Bloomberg gold spot price declined $6.54 to $1,276.21 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.6% higher at 93.60.

Cal-Maine Foods Inc. (CALM $42) reported a fiscal Q1 loss of $0.33 per share, versus the $0.18 shortfall that the FactSet estimate called for, with revenues rising 9.6% year-over-year (y/y) to $263 million, but below the projected $264 million. The egg producer said it was pleased with higher sales in the quarter despite ongoing challenges and price volatility in the egg markets. CALM noted that it will not pay a dividend for Q1. Shares were higher.

American International Group Inc. (AIG $62) announced that it welcomed the decision by the Financial Stability Oversight Council to rescind the company's designation as a Systemically Important Financial Institution (SIFI) as it reflects the substantial de-risking that it has achieved since 2008. AIG was higher.

Biohaven Pharmaceutical Holding Co. Ltd. (BHVN $36) fell sharply after announcing that a study of its treatment for spinocerebellar ataxia did not differentiate from placebo on the primary endpoint.

Manufacturing activity hits thirteen-year high, joining plethora of positive global data

The Institute for Supply Management (ISM) Manufacturing Index (chart) for September unexpectedly jumped to the highest level since May 2004, after rising to 60.8 from 58.8 in August, compared to the Bloomberg forecast calling for a dip to 58.0. A reading above 50 denotes expansion. ISM said comments from the survey reflect expanding business conditions, with news orders (64.6), production (62.2), employment (60.3), order backlogs (58.0), and export orders (57.0) all growing, while customer inventories remained at low levels (42.0). Prices surged 9.5 points to 71.5.

The final Markit U.S. Manufacturing PMI Index was revised to 53.1 for September from the preliminary reading of 53.0, where it was expected to remain, and above the 52.8 level posted in August. A reading above 50 denotes expansion. The release is independent and differs from ISM's manufacturing report, as it has less historic value and Markit weights its index components differently.

Construction spending (chart) rose 0.5% month-over-month (m/m) in August, versus projections of a 0.4% advance, and following July's downwardly revised 1.2% drop. Residential and non-residential spending both rose 0.5%.

The manufacturing data joined upbeat reads on the sector out of China, Japan and eurozone, while adding to the backdrop of heightened December Fed rate hike forecasts and cautious optimism regarding last week's tax reform framework, which has boosted Treasury yields and the U.S. dollar. The reports also kick off a week that will bring another speech by Fed Chairwoman Janet Yellen and culminate with Friday's September nonfarm payroll report (economic calendar).

As noted in the latest Schwab Market Perspective: Fourth Quarter Fun…or Folly?, there may be some Fed-induced volatility in the fourth quarter and we believe a December hike is firmly on the table in light of the uptick in inflation along with the Fed’s stated intentions. If inflation begins to kick in in earnest, it could push the Fed to be more aggressive than currently believed. While pullbacks are normal and can happen at any time, the fundamental trends that powered the steady rise in global stocks this year remain intact. The latest round of global leading economic indicators, including the September purchasing managers index for many countries around the world, point to continued economic strength that is lifting earnings and supporting the bull market. Read more on the Market Commentary page at www.schwab.com.

Treasuries were modestly lower, as the yields on the 2-year and 10-year notes, along with the 30-year bond, all ticked 1 basis point higher to 1.49%, 2.34% and 2.87%, respectively.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers analysis of the global monetary policy front in his article, How the Shift by Central Banks May Affect the Stock Market, on the Market Commentary page at www.schwab.com. Also, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend discusses the tax reform details his latest article, Tax Reform Framework Released, But The Road Ahead Is Long, on the Insights & Ideas page. Follow Schwab and Jeff on Twitter: @schwabresearch and @jeffreykleintop.

The stock market's resiliency in the face of a plethora of things to worry about is discussed by Schwab's Chief Investment Strategist Liz Ann Sonders in her article, Comfortably Numb? An Update on Investor Sentiment, on the Market Commentary page at www.schwab.com. Follow Liz Ann on Twitter: @lizannsonders.

Tomorrow's economic calendar will be void of any releases.

Europe and Asia mostly higher on data, but political concerns weigh on Spain
Most European equity markets gained ground, with some upbeat eurozone data joining favorable reports out of the U.S., Japan and China, while weakness in the euro and British pound supported the advance in the region. However, Spanish stocks fell amid political uneasiness as Catalonia said a large majority of people voted in favor of an independence referendum, but national authorities are calling the vote illegal. For analysis of the political front, see Schwab's Jeffrey Kleintop's, CFA, and Vice President of Trading and Derivatives, Randy Frederick's video, Political Risk: How Should Investors Respond?, on the Insights & Ideas page at www.schwab.com. Follow Randy on Twitter: @randyafrederick.

Markit's eurozone manufacturing activity report continued to suggest solid expansion and the region's unemployment rate held at a 2009 low. Switzerland's manufacturing growth unexpectedly accelerated last month, though U.K. output growth in the sector decelerated more than expected. The report put pressure on the British pound, which had spiked last month on signals from the Bank of England that it may begin to raise rates in the coming months. Bond yields in the region finished mixed. . For a look at the global markets, see Schwab's Jeffrey Kleintop's, CFA, article, U.S. vs International: What Do Earnings Tell Us About What May Be Ahead?, on the Market Commentary page at www.schwab.com.

Stocks in Asia finished mostly higher on the heels of some upbeat economic data, though volume was lighter than usual as markets in China, Hong Kong, India and South Korea were closed for holidays. Japanese equities advanced, with the yen losing some ground while the Q3 Tankan Large Manufacturing Index improved more than expected to 22 from 17 in Q2, above the expected tick up to 18, showing sentiment in the large manufacturing sector improved noticeably. However, the report did show that confidence in the sector is expected to decline to 19 in Q4. China reported over the weekend that growth in output from its key manufacturing and services sector accelerated in September, while South Korea also reported exports jumped more than expected last month. In the wake of the data, basic materials stocks gained ground, helping boost Australian stocks, along with strength in financials. Amid this backdrop, Schwab's Jeffrey Kleintop, CFA, and Randy Frederick note in the video, Is An Optimistic Outlook for Global Equities Warranted?, all of the world's top 20 economies are growing this year—a rare occurrence over the last decade. Read more on the Insights & Ideas page at www.schwab.com.

Tomorrow, the international economic calendar will offer the Reserve Bank of Australia's monetary policy decision, with no change to policy expected, consumer confidence from Japan, the unemployment rate from Spain, and PPI from the Eurozone.