Stocks Add to Record Highs

Charles Schwab: On the Market

Posted: 9/18/2017 4:15 PM ET

Stocks Add to Record Highs

U.S. equities extended recent record highs, continuing to show resiliency against lingering geopolitical and political concern, as well as monetary policy uncertainty ahead of decisions from the Fed and Bank of Japan this week. Treasury yields extended last week's run and the U.S. dollar was higher amid softer-than-expected home-builder sentiment, while gold was lower and crude oil prices gained slight ground.

The Dow Jones Industrial Average (DJIA) increased 63 points (0.3%) to 22,331, the S&P 500 Index gained 4 points (0.2%) to 2,504, and the Nasdaq Composite increased 6 points (0.1%) to 6,455. In moderate volume, 821 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.02 higher to $49.91 per barrel and wholesale gasoline gained $0.01 to $1.67 per gallon. Elsewhere, the Bloomberg gold spot price declined $11.73 to $1,308.46 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 92.08.

Northrop Grumman Corp. (NOC $262) announced an agreement to acquire aerospace and defense technology company, Orbital ATK Inc. (OA $132), for $134.50 per share or about $7.8 billion in cash plus the assumption of $1.4 billion in net debt. NOC said the deal is expected to be accretive to earnings-per-share (EPS) in the first full year after the deal closes, which is expected in the first half of 2018. NOC was nicely higher and OA rallied sharply.

Home-builder sentiment drops to kick off economic week headlined by Fed

The National Association of Home Builders (NAHB) Housing Market Index showed home-builder sentiment this month fell to 64, versus the Bloomberg forecast calling for it to match August's downwardly-revised 67 level. However, the index sits well above the 50 mark, the point of separation for good versus poor conditions. The NAHB said the recent hurricanes have intensified its members' concerns about the availability of labor and the cost of building materials, but once the rebuilding process is underway builder confidence is expected to return to the high levels seen this spring.

Tomorrow, we will get a look at August housing construction activity in the form of housing starts and building permits, with starts projected to rebound 1.7% month-over-month (m/m) to an annual rate of 1,174,000 units after July's 4.8% drop (economic calendar). Permits are expected to dip 0.8% to an annual rate of 1,220,000 units following the prior month's 4.1% fall. Also on tap is the Import Price Index, forecasted to have increased 0.4% m/m during August following the 0.1% rise seen in July.

Schwab's Chief Investment Strategist Liz Ann Sonders points out in her article, Trying to Reason with Hurricane Season: The Aftermath of "Harma", that we expect to see a dip in economic activity in the short-term, followed by a boost associated with the recovery/rebuilding efforts. She adds that real estate has been one of most consistent beneficiaries in the subsequent three-to-twelve months following the 10 costliest U.S. hurricanes. We believe the impact will unlikely dent the Fed's plans to continue monetary policy normalization. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter:@lizannsonders.

Treasuries were lower, as the yield on the 2-year note ticked 1 basis point (bp) higher to 1.39%, while the yields on the 10-year note and the 30-year bond gained 3 bps to 2.23% and 2.80%, respectively.

Bond yields rebounded sharply last week after hitting levels not seen since November and the U.S. dollar recovered modestly from multi-year lows, as an ongoing positive economic backdrop was met with consumer price inflation accelerating in August to keep the possibility of a December Fed rate hike in play. Also, The Bank of England (BoE) and European Central Bank (ECB) has signaled they may start to tighten highly accommodative monetary policy, the markets shrugged off another missile test by North Korea, and economic cost estimates of Hurricane Irma appeared to be less than feared.

Schwab's Chief Fixed Income Strategist, Kathy Jones, and Vice President of Trading and Derivatives, Randy Frederick, provide analysis of the bond markets in the video, The Economy is Picking Up, But Bond Yields Are Falling—What's That About?, on the Insights & Ideas page and follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his article, Missiles and Markets: An investor guide to geopolitical risks, 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.

This sets the stage for Wednesday's monetary policy decision from the Federal Open Market Committee (FOMC) (economic calendar). As noted in the latest Schwab Market Perspective: A Cat and Mouse Fall, the Fed is playing their own internal cat and mouse game with some officials citing low inflation as a reason to delay further tightening; while others want to stay on the steady path toward normalization, due to the tighter labor market. We continue to believe that the start to the slow winding down of the Fed's massive balance sheet will be announced this week; but that an additional rate hike before year end remains in question. We continue to believe the Fed's "quantitative tightening" (QT) could be the cause of some heightened volatility. Read more on the Markets & Economy page at www.schwab.com.

Europe and Asia move higher to begin the week

European equity markets traded higher, continuing to shrug off lingering geopolitical concerns, while monetary policy decisions from the Fed and Bank of Japan this week were in focus but appeared to not stymie conviction. The British pound gave back some of last week's surge against the U.S. dollar as the Bank of England (BoE) signaled that it may raise rates in the coming months. The pound lost ground despite BoE Governor Carney reiterating that a rate hike could be in the offing. The euro gave up modest gains and dipped late in the session even as the European Central Bank is expected to announce the start of dialing back its stimulus measures this fall. Bond yields in the region were mostly higher, except for in Portugal, which fell sharply after the nation received an upgrade of its credit rating to investment grade by Standard & Poor's. In economic news, eurozone consumer price inflation rose in line with expectations for August.

For a look at global investing, see Schwab's Jeffrey Kleintop's, CFA, article, U.S. vs international: what do earnings tell us about what may be ahead?, on the Markets & Economy page at www.schwab.com, and his video with Randy Frederick, Is An Optimistic Outlook for Global Equities Warranted?, on the Insights & Ideas page.

Stocks in Asia finished higher amid the recent global market resiliency in the face of festering North Korean tensions and monetary policy uncertainty, though attention on this week's Fed and Bank of Japan decisions ramped up. The yen continued to lose ground on the U.S. dollar, but markets in Japan were closed for a holiday. Mainland Chinese stocks rose modestly and those traded in Hong Kong rallied, as late-Friday's stronger-than-expected lending statistics were met with today's report showing August home prices cooled to ease concerns about further government efforts to curb housing activity. Markets in Australia advanced, led by financials, South Korean listings jumped and Indian equities gained ground in the wake of the nation's upbeat August trade report after Friday' close. Both South Korean and Indian markets moved back to near record highs and Schwab's Jeffrey Kleintop, CFA, offers his article, The Long Period of Underperformance for Emerging Market Stocks May Finally Be Over, on the Markets & Economy page at www.schwab.com. 

Stocks Mostly Flat amid Earnings and Political Uncertainty

Charles Schwab: On the Market

Posted: 7/20/2017 4:15 PM ET

Stocks Mostly Flat amid Earnings and Political Uncertainty

U.S. stocks finished mixed and near the flatline with health care listings the standout winners, though some disappointing earnings results from a couple of Dow constituents weighed on the blue chip index. Treasuries were higher amid some mixed domestic economic results, while in global central bank action, both the European Central Bank and the Bank of Japan kept their monetary policy stances unchanged as expected. Crude oil prices and the U.S. dollar were lower and gold saw minor gains.

The Dow Jones Industrial Average (DJIA) lost 29 points (0.1%) to 21,612, the S&P 500 Index was flat at 2,473, and the Nasdaq Composite increased 5 points (0.1%) to 6,390. In moderate volume, 752 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.40 to $46.92 per barrel and wholesale gasoline was $0.01 lower at $1.61 per gallon. Elsewhere, the Bloomberg gold spot price increased $2.56 to $1,243.81 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% lower at 94.31.

Dow member Travelers Companies Inc. (TRV $125) reported Q2 earnings-per-share (EPS) of $2.11, or $1.92 ex-items, versus the $2.11 FactSet estimate, as net written premiums rose 5.0% year-over-year (y/y) to $6.6 billion, roughly in line with forecasts. The insurer said profits were impacted by high levels of catastrophe and non-catastrophe weather-related losses caused by significant U.S. tornado and hail activity. TRV traded lower.

Dow component American Express Co. (AXP $85) posted Q2 EPS of $1.47, above the projected $1.43, as revenues increased 1.0% y/y to $8.3 billion, topping the estimated $8.2 billion. AXP maintained its full-year profit outlook and shares finished lower.

Qualcomm Inc. (QCOM $54) announced fiscal Q3 earnings of $0.83 per share, in line with forecasts, with revenues decreasing 11.0% y/y to $5.4 billion, exceeding the $5.3 billion estimate. The chipmaker issued Q4 EPS guidance that came in below expectations. Shares were under pressure.

Sears Holdings Corp. (SHLD $10) rallied after the company announced the launch of Kenmore products on Amazon.com (AMZN $1,029), including Alexa-enabled smart appliances.

Jobless claims fall, Leading Indicators continue gains

Weekly initial jobless claims (chart) fell by 15,000 to 233,000 last week, below the Bloomberg forecast of 245,000, with the prior week’s figure being revised higher by 1,000 to 248,000. The four-week moving average declined by 2,250 to 243,750, while continuing claims rose 28,000 to 1,977,000, north of estimates of 1,949,000.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) for June rose 0.6% month-over-month (m/m), above projections of a 0.4% gain, and compared to last month's downwardly adjusted 0.2% increase. This was the tenth-straight monthly gain for the index, bolstered by building permits, ISM new orders and the yield curve.

The Philly Fed Manufacturing Index (chart) in July fell to 19.5 from 27.6 in June, though a reading above zero indicates expansionary activity, and compared to estimates of a decline to 23.0.

Treasuries traded mostly higher, with the yield on the 2-year note nearly unchanged at 1.35%, the yield on the 10-year note declining 1 basis point (bp) to 2.26% and the 30-year bond rate decreasing 2 bps to 2.83%.

Bond yields and the U.S. dollar have stumbled as of late amid the backdrop of mixed economic data and subdued inflation, exacerbated by Fed Chair Janet Yellen dovish semi-annual monetary policy testimony last week. 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, where Kathy also discusses, Dollar Decline: Time to Shift to International Bonds? Maybe Not, on the Markets & Economy page. Follow Kathy on Twitter: @kathyjones.

The political front remains in focus as the markets grapple with the fallout from the Senate healthcare bill failure, and what the implications may be on other business-friendly policy implementation. Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's Washington Midyear Update: 4 Key Issues for Investors to Watch, where he points out 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.

The U.S. economic calendar will be void of any major releases tomorrow.

Europe turns lower as ECB causes volatility, Asia mostly higher after BoJ decision

European equities turned to the downside, with the European Central Bank (ECB) leaving its monetary policy stance unchanged as expected. The euro reversed early losses and rallied to weigh on the markets as the customary press conference by ECB President Mario Draghi following the decision appeared to cause some confusion. The ECB President said its highly accommodative policy remains necessary and there are no signs that inflation is picking up—though he reiterated that he is confident that inflation will return and added that the reasons for a 2.0% target were still valid. Draghi also said the central bank did not discuss tapering its stimulus measures but he did note for the first time that this topic will be discussed in the fall. On the economy, he pointed out that there was "unquestionable improvement" in the growth outlook. Bond yields finished mixed in volatile action, notably in Germany, following the comments, which came as Draghi jolted the markets a few weeks ago by appearing to offer a more hawkish view.

The British pound was lower versus the greenback as Brexit negotiations roll on and despite a stronger-than-expected read on the nation's retail sales. Political uncertainty remained and for analysis see Schwab's Chief Global Investment Strategist 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, where you can also find our article, Brexit Begins: What's Next for the U.K?. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick.

Stocks in Asia finished mostly to the upside, with Japanese equities rising as the yen weakened after the Bank of Japan (BoJ) kept its monetary policy stance unchanged as expected but lowered its inflation forecast again. The markets digested ramped up Q2 earnings season and awaited the monetary policy decision from the European Central Bank. Shares trading in mainland China and Hong Kong finished higher. Australian securities advanced as strength in oil & gas issues and financials more than offset a slide in technology stocks and a dip in the basic materials sector. South Korean stocks extended a record high run, while Indian listings declined amid some choppiness as the index remains near all-time highs. For a look at the global markets, see Schwab's Jeffrey Kleintop's CFA, The Long Period of Underperformance for Emerging Market Stocks May Finally Be Over on the International Investing page at www.schwab.com, where you can also find his 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks on the International Investing page.

The international economic docket will be light tomorrow, offering department store sales from Japan, trade data from South Korea and public sector borrowing from the U.K.

Markets Mixed to Finish the Week

Charles Schwab: On the Market

Posted: 6/16/2017 4:15 PM ET

Markets Mixed to Finish the Week

U.S. equities finished a choppy session and week mixed amid some disappointing economic data and continued pressure from technology stocks. Treasuries were higher following an economic calendar that showed housing starts and building permits surprisingly fell and a preliminary read on consumer sentiment cooled. Meanwhile, crude oil prices were modestly higher, as was gold and the U.S. dollar lost ground. In equity news, Amazon.com inked a deal to acquire Whole Foods Market for roughly $13.7 billion.

The Dow Jones Industrial Average (DJIA) rose 24 points (0.1%) to 21,384, the S&P 500 Index inched nearly a point higher to 2,433, while the Nasdaq Composite lost 14 points (0.2%) to 6,152. In very heavy volume due to quadruple-witching, the simultaneous expiration of the futures and options contracts for stocks and indexes, 2.2 billion shares were traded on the NYSE and 3.0 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.28 to $44.74 per barrel and wholesale gasoline was $0.01 higher at $1.45 per gallon. Elsewhere, the Bloomberg gold spot price increased $0.77 to $1,254.75 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 97.12. Markets were mixed for the week, as the DJIA advanced 0.5%, the S&P 500 Index ticked 0.1% higher, and the Nasdaq Composite fell 0.9%.

In M&A activity, Amazon.com Inc. (AMZN $989) inked a deal to acquire Whole Foods Market Inc. (WFM $43) for $42 per share in an all-cash transaction valued at approximately $13.7 billion. It was announced that WFM will continue to operate stores under the Whole Foods Market brand, John Mackey will remain as CEO and the headquarters will remain in Austin, TX. Shares of AMZN were higher, while WFM rallied nearly 30%.

After the closing bell on Thursday, Finisar Corp. (FNSR $28) announced Q4 GAAP earnings of $1.13 per share and non-GAAP earnings of $0.50, matching the FactSet consensus estimate of $0.50, while revenues for the quarter rose 12.1% year-over-year (y/y) to $357.5 million. The company announced that revenues for fiscal-year 2017 rose 14.7% from 2016 levels to a record of approximately $1.5 billion. FNSR traded nicely higher.

The Nasdaq continued its move downward with the tech sector again trading in the red, exacerbating the losses accumulated this week as the index lagged the Dow and S&P 500 due to the persistent pressure that left the benchmark lower for four of the last five days. As a spotlight remains on tech, Schwab's Director of Market and Sector Analysis Brad Sorensen, CFA, addresses the situation in his recent Schwab Sector Views: Technology—Too Far or Room to Run?. Brad informs us that the technology sector has been on a remarkable run. It was the best-performing sector over the past three- and 12-month periods. After a run like that, it makes sense that investors are asking if tech may have gone too far. Could a retrenchment be in store? Read the whole article on the Markets & Economy page at www.schwab.com and follow Schwab on Twitter: @schwabresearch.

Housing starts and building permits surprisingly miss expectations

Housing starts (chart) for May dropped 5.5% month-over-month (m/m) to an annual pace of 1,092,000 units, below the Bloomberg forecast of a 1,220,000 unit rate. April starts were downwardly revised to an annual pace of 1,156,000. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, decreased 4.9% m/m in May to an annual rate of 1,168,000, after April's downwardly revised 1,228,000 rate, and south of the expected annual pace of 1,249,000 units.

The preliminary University of Michigan Consumer Sentiment Index (chart) declined more than forecasted, dropping to 94.5 from the prior month's 97.1 level, and compared to expectations for it to dip to 97.0. The current economic conditions component unexpectedly declined m/m, while the expectations measure decreased to its lowest level since October. The 1-year inflation forecast remained at 2.6%, while the 5-10 year inflation outlook increased to 2.6% from 2.4%.

Treasuries were higher following the data, as the yield on the 2-year note decreased 4 basis points (bps) to 1.31%, while the yields on the 10-year note and the 30-year bond declined 1 bp at 2.15% and 2.78%, respectively. On Wednesday, the Fed raised its target range for the federal funds rate and Schwab's Chief Fixed Income Strategist, Kathy Jones addresses this latest decision in her recent article Fed Raises Rates, Sticks With Plans for One More Hike This Year. Read the whole piece to find out what Kathy found surprising as well as detailed analysis on the Fixed Income page at www.schwab.com and follow Kathy on Twitter: @kathyjones.

European equities traded nicely higher, Asia mixed following BoJ decision

European equities traded higher as the markets took the latest of a string of central bank decisions in stride, as the Bank of Japan announced no changes to its current monetary policy. New loan agreements were extended to Greece by its creditors, ending speculation over whether the country would be able to meet large bond payments coming due in July. The International Monetary Fund has also joined the bailout program with a standby agreement that will likely not allow for the dispersion of funds until next year when the eurozone details debt relief measures. The latest developments in the Brexit situation seem to detail a change in the U.K.'s strategy as it is reportedly meeting European demands that the initial stage of talks be focused on settling elements of the split prior to arranging any future trade relationships, with the negotiations expected to begin in Brussels on Monday, per Bloomberg. In economic news in the region, European car sales bounced back in the month of May, jumping 7.7% after falling 6.8% the month prior, eurozone consumer price inflation matched forecasts of a 1.4% rise and Italy's trade balance narrowed in April.

The euro and British pound moved higher versus the U.S. dollar. Bond yields in the region were mostly higher, though sovereign yields in Greece plummeted. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses the recent action in the global bond markets and what it may be signaling in his latest article, Are bonds signaling a major stock market peak? on the Markets & Economy page at www.schwab.com and follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed following the declines in the U.S. yesterday and as the Bank of Japan (BoJ) concluded its two-day monetary policy meeting. Japanese equities traded higher with banks and electronic makers leading the advance as the yen lost ground versus its main counterparts following the BoJ's decision to keep its current monetary stance unchanged. Mainland Chinese stocks were lower, and markets in Hong Kong ticked slightly higher, the Hang Seng was lower on the week after registering gains for the previous five straight. Additionally, the People's Bank of China has injected approximately 160 billion yuan through open market operations and a net 410 billion yuan through reverse-repurchase agreements this week, per Bloomberg. Meanwhile, Australian securities gained modest ground, South Korean stocks finished flat and those traded in India ticked lower.

Schwab's Jeffrey Kelintop, CFA, informs us in his article The Long Period of Underperformance for Emerging Market Stocks May Finally Be Over, a diversified asset allocation that includes emerging market stocks has felt the impact as they underperformed developed markets in recent years. Despite the risks, emerging market stocks may benefit portfolios in the years ahead if the trends in these underlying drivers continue to unfold. And for a more detailed picture of our current global economic landscape, see Jeff's latest video, What's the Current State of the Global Economy? on the Insights & Ideas page at www.schwab.com.

Equities mixed for the week after tech troubles

U.S. equity markets closed out the week in mixed fashion with the Nasdaq underperforming its peers courtesy of extended pressure on the technology sector. A string of central bank decisions throughout the week created a leery landscape loaded with mostly lackluster economic reports. Of course, a few bright spots appeared in the form of some upbeat regional manufacturing activity and a decline in weekly jobless claims.

As noted in the latest Schwab Market Perspective: Goldilocks…or the Three Bears?, modest growth, low inflation and a cautious Fed are combining to make things "just right" for investors. But, as always, there are clouds on the horizon and pullbacks are possible at any time so it's important for investors to remain vigilant in keeping a diversified portfolio with appropriate risk exposure. Our experts point out three potential pitfalls, or bears, worth watching. To find out what they are, read the whole article on the Markets & Economy page at www.schwab.com.

Next week, the U.S. economic calendar will lighten up considerably, but will bring us more housing data with the releases of new and existing home sales. Manufacturing and business activity will also likely see discussion with the release of Markit's preliminary Manufacturing and Services PMIs.

International reports due out next week include: Australia—new vehicle sales, housing prices and the minutes from the Reserve Bank of Australia's June meeting. China—property prices and leading indicators. Japan—All Industry Activity Index, machine tool orders, house prices, trade balance and department store sales. Eurozone—construction output, current account, consumer confidence, preliminary Markit Manufacturing and Services PMIs, German import prices and PPI, French GDP and business confidence and Italian industrial orders. U.K.—house prices and public finances.

Tech Decline Continues to Weigh on Equities

Charles Schwab: On the Market

Posted: 6/12/2017 4:15 PM ET

Tech Decline Continues to Weigh on Equities

U.S. stocks traded lower, with technology stocks again leading the decline, while market participants appeared cautious ahead of this week's monetary policy decisions from the Federal Reserve, Bank of England, Bank of Japan and Swiss National Bank. Treasury yields ticked higher, crude oil prices recovered a bit of ground and the U.S. dollar and gold were little changed. In equity news, Dow member General Electric announced its CEO Jeff Immelt will retire.

The Dow Jones Industrial Average (DJIA) decreased 36 points (0.2%) to 21,236, the S&P 500 Index lost 2 points (0.1%) to 2,429, and the Nasdaq Composite shed 32 points (0.5%) to 6,175. In heavy volume, 951 million shares were traded on the NYSE and 2.6 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.25 to $46.08 per barrel and wholesale gasoline was $0.01 lower at $1.49 per gallon. Elsewhere, the Bloomberg gold spot price decreased $1.42 to $1,265.34 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.1% lower at 97.20.

Dow member General Electric Co. (GE $29) announced that Chairman and Chief Executive Officer (CEO) Jeff Immelt will retire and John Flannery, current President and CEO of GE Healthcare has been named CEO of the company, effective August 1, 2017. GE noted that Immelt will remain Chairman through his retirement on December 31, 2017 and the leadership change is the result of a succession plan that had been run by the Board since 2011. Flannery will become Chairman and CEO January 1, 2018. Shares traded nicely higher.

The technology sector remained in focus today, extending Friday's selloff that gave back some of a decisive rally that has led to a plethora of record highs for the stock markets. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest Schwab Sector Views: Technology—Too Far or Room to Run?, the tech run likely won't go on forever—nothing does—but we don't see the unabashed enthusiasm for the group that would make us more concerned, and valuations aren't extended to the point that we believe investors should start to worry. That doesn't mean investors who have developed too large a position in tech relative to their risk tolerances shouldn't rebalance and take some profits. But we continue to see positive developments and believe the run in the tech sector still has further to go. Read more on the Markets & Economy page at www.schwab.com. Follow Schwab on Twitter: @schwabresearch.

Fed monetary policy headlines heavy weekly economic calendar

Treasuries ticked lower as the economic calendar was void of any major release today. The yield on the 2-year note increased 2 basis points (bps) to 1.35%, while the yields on the 10-year note and the 30-year bond added 1 bp to 2.21% 2.87%, respectively.

Treasury yields modestly extended a recent rebound from heightened domestic and European political uncertainty, mixed economic data, the Fed's highly expected rate hike this week and the likelihood that the Fed could begin the process of shrinking its large balance sheet later this year. Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the Fed's potential changes to its bloated balance sheet and the impact on the bond markets in her article, Will the Fed Reduce Its Balance Sheet? What Bond Investors Should Knowon the Fixed Income page at www.schwab.com. Follow Kathy on Twitter: @kathyjones. Also, Chief Investment Strategist Liz Ann Sonders addresses the recent mixed economic data in her latest article, Turn Down For What: Why is Job Growth Slowing?, on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

The markets are looking to this week's fully-loaded economic calendar, highlighted by the Consumer and Producer Price Indexes (CPI & PPI), NFIB Small Business Optimism, retail sales, industrial production and capacity utilization, the NAHB Housing Market Index, housing starts and building permits, and the preliminary University of Michigan Consumer Sentiment Index. However, the headlining event will likely be Wednesday's Federal Open Market Committee's (FOMC) monetary policy decision. A 25 bp hike to the target fed funds rate is highly expected, but the accompanying statement, updated economic projections and subsequent press conference by Chairwoman Janet Yellen are poised to garner heavy attention.

As noted in the latest Schwab Market Perspective: Goldilocks…or the Three Bears?, we believe the market will likely largely look past the expected FOMC rate hike, and focus more on any information with regard to the Fed’s balance sheet. It is now expected that the Fed will begin the process of slowly reducing its bloated balance sheet by the end of this year, but that process (and commentary surrounding it) could be a source of elevated volatility in the months to come. Read more on the Markets & Economy page at www.schwab.com, including our continued belief that the bull market has legs, but why investors should be aware that risks are elevated.

Tomorrow, the U.S. economic calendar  will commence with the latest National Federation of Independent Business (NFIB) Small Business Optimism Index, forecasted to remain near historical record highs at a level of 104.5 for May, which will be followed by the Producer Price Index (PPI) for May, expected to have not changed m/m after increasing 0.5% in April, while excluding food and energy, the core rate is anticipated to have increased by 0.1%.

European equities down on politics, Asian stocks also see some pressure

European equities lost ground, with technology issues decisively lower on the heels of Friday's selloff in the sector in the U.S., while traders appeared cautious amid looming monetary policy decisions this week out of the U.S., U.K. Switzerland and Japan. The British pound extended late last week's slide versus the U.S. dollar, to lend some relative support to U.K. stocks. The markets grappled with the recent U.K. election that surprisingly resulted in a hung parliament and fostered uncertainty regarding the timing of Brexit negotiations and whether they will yield hard or softer exit terms. Political uncertainty was also supported by local elections in Italy, which faces a national election later this year, showing the populist Five Star Movement suffered a setback. Fallout from France's recent election remained in focus, with President Macron appearing set to gain a large parliamentary majority following this weekend's first round vote. Germany is also headed for an election later this year. For commentary on the political front check out Schwab's Chief Global Investment Strategist 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, where you can also find our article, Brexit Begins: What's Next for the U.K?. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick. 

In economic news, French business sentiment held steady in May, while Italian industrial production missed expectations for April. The euro ticked higher versus the greenback and bond yields in the region were mostly lower. However, the oil & gas sector was the lone group in the green as crude oil prices rebounded somewhat from a recent tumble in the wake of last month's disappointing OPEC production cut extension and last week's noticeably bearish U.S. oil inventory data.

Stocks in Asia finished lower as Friday's selloff in the technology sector in the U.S. carried over to the region, causing a flare-up in uneasiness toward the group that has led the rally in the stock markets. The global markets are awaiting this week's key monetary policy decisions, with the Bank of England, Bank of Japan and Swiss National Bank set to deliver statements after Wednesday's highly-anticipated announcement from the Fed in the U.S., which is expected to deliver a rate hike. Moreover, political uncertainty remained on the heels of last week's U.K. election that led to a hung parliament. Japanese equities declined, with the yen gaining some ground and following a report that showed the nation's machine orders—a gauge of capital spending—unexpectedly fell in April. Stocks trading in mainland China and Hong Kong decreased, Indian securities traded lower and South Korean shares dropped. Australian markets were closed for a holiday. For a look at the global economic front, see Jeffrey Kleintop's video, What's the Current State of the Global Economy? on the Insights & Ideas page at www.schwab.com.

The international economic docket for tomorrow will deliver the BSI All Industry Index and a manpower survey from Japan, business confidence from Australia, CPI, PPI and housing data from the U.K., the Wholesale Price Index from Germany and non-farm payrolls from France.

Financial Review

Fed Day

Sinclair Noe — September 21, 2016

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW + 163 = 18,293
SPX + 23 = 2163
NAS + 53 = 5295
10 Y – .02 = 1.67%
OIL + 1.57 = 45.62
GOLD + 20.30 = 1335.90

Today is Fed Day.  The Federal Open Market Committee left interest rates unchanged, although it was a split decision. Their statement noted that the labor market continued to strengthen and economic activity has picked up in the second half; household spending is growing but business fixed investment remains soft.

Inflation remains tame and “Near-term risks to the economic outlook appear roughly balanced.”  After a two-day session the Committee decided “that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.”

The last time the Fed raised interest rates was December 2015; and they expected to raise rates twice in 2016. They have now held six straight policy meetings with no action. Now the focus will shift to December as the Fed’s likely last chance to raise interest rates in 2016 — a move that depends on how the economy, inflation and markets fare in the months surrounding the presidential election.

The lack of action is not due to a weak economy, rather a lack of urgency. Fed Chair Janet Yellen said at the start of her press conference, “Our decision does not reflect a lack of confidence in the economy. Since monetary policy is only modestly accommodative, there appears little risk of falling behind the curve in the near future.”

The target range for the benchmark federal funds rate remains at 0.25 percent to 0.5 percent, where it’s been since a quarter-point increase in December 2015 that ended seven years of near-zero rates.

Fed officials cut their median growth projection for 2016 to 1.8 percent from 2 percent, mirroring the drop in the longer-run forecast, based on median estimates.

Inflation is projected at 1.3 percent in the fourth quarter, down from a forecast of 1.4 percent in June. Policy makers again projected that inflation will reach the 2 percent target in 2018.

The decision to hold rates steady was not unanimous. Ester George, Loretta Mester, and Eric Rosengren wanted to hike rates. George and Mester are long-time hawks. Rosengren had been dovish until about 2 weeks ago when he announced he thought it was time for a hike, news that shook the markets.

Yellen said differences among Fed officials were easy to overstate. Board members agreed that continued growth would warrant a rate increase. In a new round of economic projections published on Wednesday, 14 of 17 Fed officials said they expected to raise the benchmark rate at least once this year.

Because November’s FOMC meeting comes within a week of the presidential election and isn’t followed by a press conference with Yellen, the Fed’s December meeting is probably the earliest realistic chance for a rate increase.

Yellen said at a news conference after the Fed’s announcement: “We’re generally pleased with how the economy is doing. The economy has a little more room to run than might have previously been thought. That’s good news.” It was certainly good news for Wall Street, which loves accommodative monetary policy, which is to say – access to cheap money.

The Bank of Japan also wrapped up its policy meeting today, before the Fed; the BOJ held rates steady at negative – 0.1%. Instead of targeting an annual increase in the nation’s monetary base of about 80 trillion yen, the bank will now target the shape of the Japanese yield curve, announcing that it will purchase Japanese government bonds, with the aim of keeping the 10-year bond rate “more or less at the current level” of about 0%.

So while the scale of asset purchases is expected to be roughly the same as it was previously, the bank is now targeting interest-rate levels, not just the size of its asset purchases. They will do this by scrapping the previous stance of purchasing securities with a set time frame to maturity of seven to 12 years.

The Japanese yen was higher (after an initial slide) on the news and the Nikkei rallied 1.3%. Japanese Bond yields, now central to BOJ monetary policy moving forward, have also lifted. The 10-year Japanese Government Bond yield sits at negative-0.022%, having briefly traded at 0%, a level that had not been seen since the middle of March.

The world economy remains in a “low-growth trap” and weaker conditions in advanced economies will persist into 2017, The Organization for Economic Co-operation and Development, or OECD predicts global growth this year will expand by only 2.9%, the lowest rate since the financial crisis.

The economic think-tank also backtracked on its warning that the U.K. would suffer instant damage from a Brexit vote and has thrown its weight behind Theresa May’s plans to provide fresh post-referendum support.

Brazil’s former president will stand trial. Lula da Silva will be tried on corruption and money laundering charges linked to the state-owned Petrobas oil company. Lula was seen as a possible presidential candidate for the 2018 election—a conviction would bar him from running.

The United Nations secretary general, Ban Ki-moon, announced that he has secured enough commitments from world leaders, enough to ensure that the 2015 Paris climate accord will enter into legal force this year, binding the next American president, whoever it is.

The accord requires all countries to devise plans to achieve the goal of keeping the rise of temperatures within two degrees Celsius (3.6 Fahrenheit) above pre-industrial levels. Scientists say that such a temperature rise still poses risks but could save the planet from the worst effects of climate change, including worsening flooding, storms and droughts that may cause food shortages, species extinction and significant human displacement.

To come into force, the Paris agreement needs ratification from 55 countries that account for at least 55 percent of the planet’s greenhouse gas emissions responsible for climate change. With Wednesday’s event, a total of 60 countries have joined the Paris accord, meeting the threshold. And 14 other countries had signaled they would ratify the accord this year, meaning the agreement is virtually certain to come into force.

Replacements for only half of the 1 million Galaxy Note 7 phones recalled in the U.S. will be available in stores today. The rest will arrive at retail outlets by the end of the month. Samsung is also pushing out two new software updates: One will show a green battery icon (instead of white) to confirm a new Note 7 device. The other will tell owners of old Note 7 phones to get a replacement.

Google released an AI-centric messaging app. The much-anticipated Allo will compete against WhatsApp, Apple’s iMessage, and Facebook Messenger. Users can strike up a conversation with Google Assistant, an artificial-intelligence helper that, while still a work in progress, can solve math problems and translate phrases.

On its official blog, Google wrote that its Allo app for Android and iOS “can help you make plans, find information, and express yourself more easily in chat” and “the more you use it, the more it improves over time.”

AT&T says it has discovered a new way to deliver high-speed broadband over electrical power lines, a method it claims would make it cheaper and easier to bring internet to hard-to-reach places. The company has filed patents for the technology and is looking for a place to conduct field trials next year. Even if it goes well, AT&T warned it would still be several years before the system is commercially available.

Tesla updated its software after hackers remote-controlled a vehicle. Researchers in China remotely manipulated the brake system of a Model S while it was on the move and also opened a car door without using a key. The hackers, from Keen Security Lab, shared their efforts on YouTube.

The U.S. IPO market is heating up… There are nine new listings on the calendar over the next three days, marking the busiest week of 2016, and if next week’s proposed calendar comes through, September will be the busiest month of the year as well.

Among them: The Trade Desk (TTD) which traded today and jumped 67% from its offer, Novan (NOVN), CapStar (CSTR), e.l.f. Beauty (ELF), AC Immune (ACIU), Apptio (APTI), Full Spectrum (FMAX), Gridsum (GSUM) and Valvoline (VVV).

The SEC has charged Leon Cooperman of insider trading. Cooperman is the longtime head of Omega Advisors, a hedge fund he founded. The SEC complaint says an executive of Atlas Pipeline Partners shared information about the sale of a nat gas facility because he believed Cooperman wouldn’t trade on it.

Cooperman was one of Atlas Pipeline’s top investors, but he had been actively selling his holdings and saying bad things about the company; until he allegedly received the inside information, then he started buying out-of-the-money call options that on one day accounted for over 90% of the day’s trading volume.

Mylan Chief Executive Heather Bresch testified before the House Oversight Committee today, trying to defend price gouging on the company’s EpiPen allergic reaction treatment. The company hiked prices 500% since 2007. At the same time Bresch saw her compensation package increase 671%.

The EpiPen treats allergic shock and can be a lifesaver. There are no other options on the market. The lawmakers called the price hikes greedy, unfair and monopolistic, and that was all pretty accurate. Now let’s see if they do anything about it.

Financial Review

Tomorrow, Tomorrow

Sinclair Noe — September 20, 2016

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW + 9 = 18,129
SPX + 0.64 = 2139
NAS + 6 = 5241
10 Y – .01 = 1.69%
OIL + .57 = 44.43
GOLD + 1.80 = 1315.60

The Federal Reserve FOMC has started a 2-day meeting. The Fed is likely to hold interest rates steady this week…, however, it might be a closer call than the markets expect. In the past week, the Fed has increased its portfolio. A build up in reserves supports markets. That may give added cushion to markets heading into their FOMC decision tomorrow.

Before we find out what the Fed will do, we will get a statement from the Bank of Japan, which is still pushing on a string, still trying to underpin stocks and real estate, still trying to turn deflationary realities into some kind of magical 2% inflationary panacea.

The BOJ will probably push interest rates even deeper into negative territory. They’ll probably buy more government bonds, more corporate bonds, and more equities if they have to. They’ll buy foreign government bonds to lower those rates to manipulate the yen down to spur export growth if they have to. At least that’s the best estimate.

We have to wait for the announcement. And the Fed will probably stand pat, but they could shake things up with hawkish comments. Whatever happens, tomorrow is a big day.

The U.S. economy is on track to grow at a 2.9 percent annualized rate in the third quarter, that according to the latest update of the Atlanta Federal Reserve’s GDP Now forecast model. The latest third-quarter GDP estimate was lower than the 3.0 percent figure calculated on Sept. 15

Housing starts fell more than expected in August as building activity declined broadly after two straight months of solid increases, but a rebound in permits for single-family dwellings suggested demand for housing remained intact. Groundbreaking decreased 5.8 percent. Permits for single-family homes, the largest segment of the market, increased 3.7 percent.

Gasoline prices in the southeastern United States have seen significant increases following the shutdown of a major fuel pipeline in the region that’s heading into a second week, and prices are expected to spike even higher. Some retailers have run out of gas. According to AAA, the national average for regular gasoline is $2.20 a gallon Monday, up from $2.18 a week ago.

Wells Fargo CEO John Stumpf faced questions today from the Senate Banking Committee over the widespread creation of sham bank accounts and credit cards by Wells Fargo employees trying to meet strict sales goals. Stumpf said he, “accept[s] full responsibility for all unethical sales practices in our retail banking business and I am fully committed to fix this issue.”

Last week Stumpf and other senior executives first placed the blame on certain Wells Fargo employees and denied any problem with the bank’s culture. “Under-performers” was the term they used to define the culprits. Wells Fargo has already fired 5,300 lower level employees, who, we are to believe, orchestrated a mass fraud on banking consumers.

The person who was in charge of the entire consumer banking division was allowed to retire. Praised as the model of what a banker should be, by the CEO and given millions of dollars with absolutely no claw-back for the abuses. Stumpf claimed he didn’t know about the abuses until recently, even though Wells Fargo was the only major bank in the US, that broke out in its 10-Q and 10-K financial statements, filed with the SEC, how much money they were getting from these cross-selling operations.

Stumpf admitted the bank will go back, and investigate banking practices from 2009 through 2011 to see if there were even more violations; which is probably something he should have done before negotiating a $185 million settlement with the CFPB. Meanwhile Stumpf is still employed.

Downing Street met Wall Street late Monday as Theresa May landed in New York to consult with some of America’s largest firms over how her country should proceed with Brexit. The prime minister held two gatherings: a round-table discussion with big investors in the UK including Goldman Sachs, Morgan Stanley, BlackRock, IBM, and Amazon. She then hosted a reception for about 60 American executives, as well as British businesses that invest in the US.

The big issue is whether UK and US banks will keep passporting rights for banking. If not, those banks will need to obtain Euro Union licenses to do business, and they will have to put personnel in the Eurozone, not the UK. Core services such as cross border lending and accepting deposits could be affected by Brexit, as well as law firms and accounting firms that support those core services.

The Euro Union says it won’t cut sweetheart deals; the Brits can’t have passporting rights unless they accept the free movement of labor. The Germans have already said no to any special deals; in fact they said, “Hell no!” So Prime Minister May is talking to US banks to determine important strategic direction. Good luck with that. Three months after the Brexit vote and it doesn’t look like much progress has been made.

A federal judge in New York has ruled that bitcoin constitutes a form of money. The ruling comes from the ongoing case involving the now-defunct bitcoin exchange Coin.mx and one of its former operators. Anthony Murgio, who was indicted for money laundering, sought to dismiss the charges against him in part by arguing that bitcoins don’t count as “funds” in the context of U.S. law.

The world’s biggest IPO this year is getting off to a lukewarm start. Postal Savings Bank of China is planning to price its Hong Kong listing at the lower end of its marketed range, raising $7 to $8 billion, with around three quarters of shares going to just six anchor investors. The bank has 40,000 branches throughout China, 505 million retail customers and is the nation’s fifth largest lender by assets.

Allergan has agreed to acquire Tobira Therapeutics in a deal valued at up to $1.7 billion. Allergan will pay $28.35 per Tobira share. Tobira closed trading on Monday at $4.74 a share, with a market cap of just $89 million. But wait, there’s more. The purchase price could climb to $49.84 per share in contingent value rights, that are payable on the meeting of certain milestones. Tobira makes 2 drugs to treat liver disease. The milestone is that the drugs actually have to be approved, and if that happens, the acquisition price jumps 1,800% compared to yesterday’s close.

Speaking of high prices for drugs, you might remember Mylan, the company behind the much vilified price-hike of EpiPens, the autoinjector used to treat severe allergic reactions. West Virginia is investigating Mylan for Medicaid fraud for inflating the price of the EpiPen by 500%.

The inquiry seeks to force Mylan to turn over company documents related to EpiPen. Similar requests have been made in the last month by lawmakers in Washington, and on Wednesday Mylan Chief Executive Officer Heather Bresch is to testify at a congressional hearing about the product’s price.

Bayer might drop the Monsanto name. The German drug and chemical maker is considering moving Monsanto products under the Bayer CropScience label to remove the stigma of the Monsanto name.

FedEx will raise shipping rates starting next year, including an average increase of 3.9% at its air-shipping Express division and 4.9% for its ground and home-delivery services. The hike comes after UPS unveiled an average rate increase of 4.9% to help pay for system upgrades and expansion.

Starting in February, FedEx also will adjust its fuel surcharges weekly instead of monthly. Meanwhile, FedEx boosted its outlook for full-year profit after topping analysts’ estimates for first-quarter earnings on continuing growth in e-commerce.

Self-driving cars are quickly moving from science fiction to reality, and the US government is trying not to pump the brakes. In its most comprehensive statement yet on autonomous vehicles, the U.S. Transportation Department said it would consider seeking the power to approve technology for self-driving cars and said U.S. states should not issue separate rules.

Regulation around self-driving cars has been patchwork at best, with some states passing laws allowing for self-driving cars to be tested on their roads, and others refusing to do so. Right now, only Florida allows autonomous vehicles to drive on its roads without a person behind the wheel, and eight other states allow autonomous vehicles to be tested in some capacity, as long as there is a human driver that can take over as needed.

The DOT’s rules will aim to set a national framework through which these vehicles can be tested and deployed, while also ensuring that road rules traditionally set by states—such as speed limits—remain intact. The Transportation Department also included a 15-point set of “safety assessment” guidelines, covering issues like cyber-security, black box recordings and how a vehicle would deal with potential ethical conundrums.

Mortgages, car loans, credit card debt – it all gets “securitized”, or package together and sold to investors. Now add to that list mobile-phone payments. Verizon has become the first company to sell a bond deal backed by monthly mobile phone payments. Verizon’s $1.2 billion sale into a broader marketplace was the first step into what many analysts believe could explode into a multi-billion-dollar market within the next year.

Fence-Sitting Persists

Charles Schwab: On the Market

Posted: 8/22/2016 4:15 PM ET

Fence-Sitting Persists

Last week's uncertainty has carried over to this week, as U.S. equities finished mixed and near the unchanged mark, amid evident caution ahead of the start to the Federal Reserve's annual symposium in Jackson Hole, Wyoming this week, which culminates with Friday's speech by Fed Chairwoman Janet Yellen. A pullback in crude oil prices from last week's rally also fostered some negative sentiment, while some M&A news gave the healthcare sector a boost. Treasuries finished higher and the U.S. dollar was flat, while gold was lower.

The Dow Jones Industrial Average (DJIA) decreased 23 points (0.1%) to 18,529, the S&P 500 Index shed 1 point (0.1%) to close at 2,183, while the Nasdaq Composite gained 6 points (0.1%) to 5,245. In lighter volume, 693 million shares were traded on the NYSE and 1.5 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.70 to $47.41 per barrel, wholesale gasoline lost $0.03 to $1.48 per gallon and the Bloomberg gold spot price declined $3.03 to $1,338.44 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 94.55.

Dow member Pfizer Inc. (PFE $35) announced an agreement to acquire oncology bio-pharmaceutical company Medivation Inc. (MDVN $80) for $81.50 per share in cash for a total enterprise value of about $14.0 billion. PFE said the deal is expected to be immnew ediately accretive to its earnings upon closing and it does not expect it to impact its current 2016 guidance. PFE was modestly lower, while shares of MDVN rallied nearly 20%.

Domestic economic docket dormant but Fed gathering set to command attention

Treasuries were higher amid a dormant economic calendar, as the yield on the 2-year note dipped 1 basis point (bp) to 0.74%, the yield on the 10-year note declined 4 basis points (bps) to 1.54%, and the 30-year bond rate fell 5 bps to 2.24%.For analysis on the fixed income markets see the video from Schwab's Managing Director of Trading and Derivatives, Randy Frederick and Fixed Income Director Collin Martin, CFA, titled Tempered Expectations for Bond Returns: Why Hold Bonds? Also, for commentary on the record high stock market, see the video from Schwab's Chief Investment Strategist, Liz Ann Sonders and Randy Frederick, titled Long-Running Bull Finally Attracting Believers? See both at www.schwab.com/insights and follow us on Twitter: @randyafrederick, @lizannsonders and @schwabresearch.

Fed policy focus and accompanying volatility is likely to begin to ramp back up this week, with the U.S. economic calendar yielding key data on the housing sector in the form of tomorrow's new homes sales, with economists expecting a 2.0% month-over-month decline during July to an annual rate of 580,000 units, as well as Wednesday's release of existing home sales. As well, some manufacturing data may also likely garner some attention, with Thursday's durable goods orders report in focus, as well as two reports tomorrow—Markit's Manufacturing PMI Index, forecasted to tick lower to 52.7 during July from the 52.9 posted in June, with a reading above 50 denoting expansion in activity, as well as the Richmond Fed Manufacturing Index. For a look at the housing market, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: There's a New Sector Coming. However, the highlight of the week will likely be the Fed's highly-anticipated annual monetary policy symposium in Jackson Hole, Wyoming, which will culminate with Friday's speech by Federal Reserve Chairwoman Janet Yellen.

As noted in the Schwab Market Perspective: The Calm Before the…., a period of peace has reigned in the market over the past month, but the lull in volatility likely won’t last. However, we do believe the secular bull market has further to run. The third quarter is shaping up to improve on lackluster first half U.S. economic results but weak corporate confidence remains an impediment to stronger growth. Fed uncertainty is likely to heat up heading toward the September Federal Open Market Committee (FOMC) meeting. Read the whole perspective and our sector views at www.schwab.com/marketinsight.

Europe and Asia mixed on commodity weakness and Fed focus

European equities finished mixed, with basic materials and oil & gas issues seeing pressure as commodity prices fell, led by crude oil prices amid lingering supply speculation. The U.S. dollar gained modest ground as Fed rate hike expectations continued to resurface following comments over the weekend from Fed Vice Chair Stanley Fischer that the Central Bank was close to reaching its targets for full employment and 2.0% inflation. The euro dipped compared to the greenback, while bond yields in the region moved to the downside. However, the British pound was higher versus the dollar, continuing its recent rebound from a sell-off that followed the Bank of England's (BoE) decision earlier this month to cut its benchmark interest rate further and boost its asset purchases. The BoE's decision was aimed at bolstering the economy on the heels the late-June vote by the U.K. to leave the European Union, known as a Brexit. The pound has also found support from last week's July economic data that showed retail sales easily topped forecasts, jobless claims unexpectedly declined and consumer price inflation surprisingly rose. For more on the potential impact of the Brexit vote, see the Schwab Center for Financial Research's article, Brexit: What Investors Should Know, at www.schwab.com/marketinsight.

Stocks in Asia finished mixed, with the global markets continuing to focus on the divergent monetary policy landscape following comments over the weekend by U.S. Fed Vice Chair Fischer and ahead of this week's annual Fed policy gathering. Also, Bank of Japan (BoJ) Governor Kuroda hinted at further stimulus measures, while uncertainty regarding more policy action in China persisted. The yen weakened versus the U.S. dollar, though crude oil prices gave back some of a recent run. For more on Japan's potential increased stimulus measures see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, article, What investors need to know about helicopter money, and amid the heightened uncertainty, Jeff offers Three Reasons Why Now is Not the Time to Retreat from Global Diversification. Read both articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop. Japanese equities, as well as those traded in Hong Kong, advanced, while mainland Chinese fell. Meanwhile, securities traded in Australia, South Korea and India all saw declines for the session.

Tomorrow's international economic calendar will be dominated by the Markit Manufacturing PMI from around the globe, as well as trade data from the U.K.

Schwab Center for Financial Research - Market Analysis Group

Financial Review

Waiting on the Fed

Sinclair Noe — March 15, 2016

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW + 22 = 17,251
SPX – 3 = 2015
NAS – 21 = 4728
10 Y – .02 = 1.96%
OIL – .84 = 36.34
GOLD – 3.20 = 1232.80

Retail sales dipped 0.1 percent last month as automobile purchases fell and cheaper gasoline undercut receipts at service stations. January’s retail sales were revised down to show a 0.4 percent decline instead of the previously reported 0.2 percent increase. Retail sales excluding automobiles, gasoline, building materials and food services were unchanged after a downward revised 0.2 percent increase in January.

Last month’s weak core retail sales reading, together with January’s modest gain, suggest that consumer spending will probably remain tepid in the first quarter after growing at a 2.0 percent annualized rate in the fourth quarter.

Cheaper gas played a big part in weak retail sales in the first two months of the year and that’s a good thing. Car sales dropped 0.2% last month after a small decline in the first month of the year. The disparity indicates that dealers used sharp discounts to lure buyers to keep sales steady. Only restaurants, building-supply stores and sellers of sporting goods and hobby items posted 1% or more increases in sales.

In a separate report, the Labor Department said its producer price index dropped 0.2 percent last month on lower energy and food costs, after edging up 0.1 percent in January. In the 12 months through February, the PPI was unchanged after falling 0.2 percent in the year through January. It was the first time since January 2015 that the year-on-year PPI did not decline. Excluding the volatile categories of food, energy and trade, core prices edged up 0.1% in February.

With the dollar losing some momentum after gaining 20 percent against the currencies of the United States’ main trading partners between June 2014 and December 2015, imported deflation is starting to wane. That could curb further declines in producer prices.

The National Association of Home Builders housing market index came in unchanged in March at a 58 level which however remains well above break-even 50. Demand for new homes is solid but lack of available lots and shortages in construction labor are holding back growth. Buyer traffic hints at the drawing power of low mortgage rates and speaks to the strength of the labor market. But there hasn’t been much acceleration in housing nor is any expected in tomorrow’s permits data. The housing sector, which was billed as a strength for 2016, has yet to build any momentum this year.

The reports came as Federal Reserve officials gathered for a two-day policy meeting. The U.S. central bank is expected to leave interest rates unchanged as policymakers monitor developments on global financial markets, domestic inflation and the labor market. Tomorrow afternoon the Fed will wrap up its FOMC meeting and they will release a policy statement, updated economic projections including an interest rate “dot plot,” and Fed Chairwoman Janet Yellen will hold a press conference.

Best guess is that the Fed will signal that the economy has improved and they will try to prepare the markets for a rate hike in the very near future. The Fed should go very slowly here, though, not only because of the market gyrations that followed its first rate hike, but because there are some real signs that the Fed’s years-long effort to help the labor markets are starting to take root in a meaningful way—and it would be a pity to jeopardize this. For instance, labor force participation has shown a surprising uptick in recent months as people are being drawn back to work.

These gains could be a blip. Or they could be the start of a very good thing. And the Fed should see how much further it can go in order to pull people back to work. After all, if the economy depends on consumers to consume, today’s retail sales report was another reminder that consumers are still holding tight to a dollar; it probably wouldn’t hurt if a few more of them had jobs.

The Bank of Japan wrapped up its two-day meeting on monetary policy with no changes. The BOJ blindsided global markets on January 29 by unexpectedly announcing it will apply a negative rate to some excess reserves that financial institutions place at the bank, and they will hold those rates at negative 0.1% for a while to assess their impact. The central bank maintained its pledge to increase base money at an annual pace of $700 billion as widely expected, but clarified that money reserve funds would be excluded from the negative rates it introduced at the end of January.

Russian President Vladimir Putin has unexpectedly directed his country’s armed forces to start withdrawing from Syria, stating that “principal tasks…have been accomplished.” The two Air Force and Naval bases in Syria will stay and operate normally. Putin now believes Russia’s military intervention beginning in September helped turn the tide of war in Assad’s favor after months of gains in western Syria by rebel fighters, who were aided by foreign military supplies including U.S.-made anti-tank missiles. It stretches credulity to believe this was a unilateral and unexpected move by Russia. So, the question is – what did Putin get in return?

With its finances strained by low oil prices, Saudi Arabia is opening a fresh austerity drive by ordering ministries to cut their spending on contracts by at least 5%. The government ran a record budget deficit of nearly $100 billion last year. It is laying plans to boost non-oil revenues with taxes, but that will take years to have much impact, leaving spending cuts as the main way to bring state finances under control.

Valeant Pharmaceuticals cut its 2016 revenue forecast by about 12 percent and said a delay in filing its annual report could mean a debt default, causing its shares to plunge. Valeant, which has incurred a heavy debt load because of a string of acquisitions, is now looking to sell some non-core assets. Valeant’s old mergers and acquisitions business model is dead, customers are demanding big price cuts or not reimbursing various medicines, and the company cannot file audited financial statements.

The Canadian drug maker, the target of U.S. investigations into its business and accounting practices, reiterated that it would put off filing its annual report with U.S. regulators but for the first time raised the specter of a default. If it cannot produce audited results within 60 days, investors can then demand that Valeant repay a chunk of its debt. The company says it is trying to file as fast as it can. But at this point, nobody outside the company knows what is going on and if anything they say can be trusted. Valeant lost 51% today.

The average price of branded prescription drugs in the U.S. has doubled in the past five years, a finding that threatens to fuel political backlash against high prices. Express Scripts, the country’s largest pharmacy group, said the average wholesale price of branded medicines (which are protected by patents) rose 16% last year and was up a total of 98% since 2011.

Avon Products is cutting about 8% of its workforce, or about 2,500 jobs worldwide, as part of its three-year turnaround program. The firm also plans to shift its corporate headquarters “over time” to the UK, where it already has significant commercial operations, but will continue to be incorporated in New York. As a result of the restructuring, Avon expects to record charges of about $60 million in the first quarter.

Puedes escucharme ahora? Verizon has expanded on last fall’s offer of roaming wireless services in Cuba through a direct connection agreement with state telecom monopoly. Verizon previously had to use third parties to connect the calls, adding to costs and lowering quality. A trade embargo remains in place, but relaxed rules in telecom were allowed to benefit ordinary Cubans…, and big telecoms.

Remember GT Advanced Technologies? The Mesa Arizona based sapphire glass maker expects to emerge from Chapter 11 “as soon as possible,” after a court entered an order confirming the debtors’ amended joint plan of reorganization. GT Advanced filed for bankruptcy in October 2014 after its scratch-resistant sapphire glass was left out of Apple’s iPhone 6 and 6 plus.

Outerwall said it would begin exploring “strategic and financial alternatives” – a move that could mean either a break up or outright sale. Outerwall, which owns Redbox video rental, is bringing in Morgan Stanley to assist in the process.

Sony is acquiring the other half of Sony/ATV Music Publishing from the estate of pop star Michael Jackson for $750 million. The world’s largest music publisher has a huge catalog that holds most of the Beatles’ songs, along with those by the Rolling Stones, Bob Dylan, Queen, and Taylor Swift. In October, Sony seemed ready to sell off its half of the business – thought to be worth $2 billion overall at the time – though it would have had to give the Jackson estate a chance to counter any offers.

Almost 300 institutional investors in Germany have filed a €3.3-billion-euro suit against Volkswagen for what they see as breaches of its capital markets duty as a result of its emissions scandal. Separately, VW’s US unit is being accused by a former employee of deleting documents after it was accused of cheating on emissions tests.

According to study published today in the journal Nature Climate Change, researchers from the University of Georgia say up to 13.1 million people could be at risk from sea level rise in coastal communities in the United States by the end of this century. This, researchers say, is three times greater than previously estimated.

The researchers’ projections show that a 6-foot sea-level rise will subject more than 13 million people to flooding and other hazards from rising seas. The study looked at 2100 population forecasts for all 319 coastal counties in the continental US. They expect the hardest hit areas would include New Orleans, Miami, and New York.