Stocks Finish Lower Day After Fed Decision

On the Market

Posted: 9/21/2017 4:15 PM EDT

Stocks Finish Lower Day After Fed Decision

U.S. stocks finished the trading session lower with technology issues leading decliners after the Fed decided to hold rates steady yesterday, while it bolstered rate hike expectations for later this year. Treasury yields were nearly unchanged and the U.S. dollar trimmed some its solid gains from the previous session. Gold declined and crude oil prices ticked lower. In other economic developments, weekly jobless claims fell, regional manufacturing activity surprisingly grew and leading indicators continued to climb. 

The Dow Jones Industrial Average (DJIA) decreased 53 points (0.2%) to 22,359, the S&P 500 Index lost 8 points (0.3%) to 2,501, and the Nasdaq Composite declined 33 points (0.5%) to 6,423. In moderate volume, 726 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil shed $0.14 to $50.55 per barrel and wholesale gasoline was $0.02 lower at $1.64 per gallon. Elsewhere, the Bloomberg gold spot price decreased $10.28 to $1,290.82 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 92.24.

Anadarko Petroleum Corp. (APC $48) announced that its Board of Directors authorized a $2.5 billion share-repurchase program that extends through the end of 2018. Separately, the company reaffirmed its production guidance for the deepwater Gulf of Mexico, DJ and Delaware basin assets. Shares traded solidly higher.

Ash Grove Cement Company (ASHG $520) rallied over 80% after the company announced an agreement to be acquired by Irish building materials company, CRH PLC. (CRH $37), in a transaction with an enterprise value of $3.5 billion.

Calgon Carbon Corp. (CCC $21) surged over 60% after agreeing to be acquired by Japanese synthetic fiber and chemicals maker, Kuraray Co. Ltd. (KURRY $58) for $21.50 per share in cash, or about $1.1 billion excluding debt.

Leading indicators continue upward momentum, jobless claims fall
The Conference Board's Index of Leading Economic Indicators (LEI) (chart) for August rose 0.4% month-over-month (m/m), above the Bloomberg projection to match July's unrevised 0.3% gain. This was the twelfth-straight monthly gain for the index, bolstered by ISM new orders, building permits, the yield curve and consumer expectations, which more than offset the negative impact of jobless claims, which jumped briefly after Hurricane Harvey.

As noted in the latest Schwab Market Perspective: A Cat and Mouse Fall, the LEI suggests limited risk of an economic recession, keeping us in the bull market camp, as Bear markets have rarely occurred outside of economic recessions. However, there are some near-term risks, and we think any corrective phase will be limited in both time and magnitude. One of the strongest areas of the U.S. economy continues to be the labor market and the leading indicator of jobless claims continues to indicate a robust employment environment. Read more on the Market Commentary page at www.schwab.com and follow us on Twitter: @schwabresearch.

Weekly initial jobless claims (chart) dropped by 23,000 to 259,000 last week, below forecasts of 302,000, with the prior week’s figure being revised lower by 2,000 to 282,000. The four-week moving average rose by 6,000 to 268,750, while continuing claims increased 44,000 to 1,980,000, north of estimates of 1,975,000. Claims have been volatile in the wake of the Hurricanes Harvey and Irma and Schwab's Chief Investment Strategist Liz Ann Sonders notes in her article, Trying to Reason with Hurricane Season: The Aftermath of "Harma", looking at the three costliest hurricanes, you see a familiar pattern: a quick and sharp hit, followed by a recovery-to-trend in the out weeks. In those three cases, by eight weeks following the hurricane, claims had finished their "round trips." Read more on the Market Commentary page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

The Philly Fed Manufacturing Index (chart) in September rose to 23.8 from 18.9 in August, with a reading above zero indicating expansionary activity, and compared to estimates of a decline to 17.1.
Treasuries were little changed, with the yields on the 2-year note and the 30-year bond nearly unchanged at 1.44% and 2.81%, respectively, while the yield on the 10-year note increased 1 basis point to 2.28%.

Bond yields continued a solid rebound and the U.S. dollar rallied yesterday following the Fed's unchanged monetary policy decision, which is discussed by Schwab's Liz Ann Sonders in her latest commentary, The Fed's on the QT, on the Market Commentary page at www.schwab.com. Liz Ann notes that the Fed, as expected, left rates unchanged but announced it would start to shrink its balance sheet in October. On balance, the statement was seen as more hawkish than expected, with the majority of FOMC participants expecting at least one more rate hike this year. We expect less impact on stocks and Treasuries, but more impact on the mortgage market.

Tomorrow, the economic calendar will yield the release of the September preliminary Markit Manufacturing and Services PMI Indexes, with economists anticipating readings of 53.0 and 55.7, respectively, with manufacturing ticking higher and services inching lower from the final August prints.

Europe mostly higher, Asia mostly lower
Most European equity markets traded higher, with the markets digesting the expected unchanged monetary policy decision in the U.S. and announcement that in October the Central Bank will begin to shrink its balance sheet. However, the Fed appeared to strike a more hawkish tone and expectations of another rate hike this year rose, boosting the U.S. dollar. This comes on the heels of recent hawkish signals from the European Central Bank and the Bank of England, and Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses the potential changes in global monetary policy in his latest article, How the Shift by Central Banks May Affect the Stock Market, noting that despite the coming shift by central banks towards trimming/tapering their balance sheets, we don't believe the bull market is at risk. Read more on the Market Commentary page at www.schwab.com including Jeff's view that earnings, not easing, remain the key support for stock markets around the world.

Financials led to the upside, amid rising bond yields in the region and speculation of large M&A activity as Italy's largest bank was reported to have shown interest in merging with Germany's second-largest, state-backed, lender. None of the companies commented on the speculation, but Bloomberg reported that the German Finance Ministry told it there are no current negotiations. The euro trimmed yesterday's fall against the U.S. dollar that came on the heels of the Fed's decision, while the British pound also pared yesterday's drop. In economic news, Switzerland's exports rebounded in August, while eurozone consumer confidence fell by a smaller amount than expected for September.

Stocks in Asia finished mostly to the downside on the heels of yesterday's monetary policy decision by the Fed, which announced it would start to shrink its balance sheet in October, as expected, but appeared a bit more hawkish to preserve expectations of another rate hike this year. Also, the Bank of Japan left its monetary policy stance unchanged. The U.S. dollar rallied sharply following the Fed's decision, which weighed on the yen and helped Japanese equities rise. However, shares trading in mainland China and Hong Kong dipped. Stocks in Australia, South Korea and India finished lower. For analysis of the global markets, see Schwab's Jeffrey Kleintop's, CFA, article, What are fund flows telling us about trends and risks in the global stock market?, as well as his commentary, An important benefit to global investors is back after 20 years, on the Market Commentary page at www.schwab.com.

The international economic docket for tomorrow will be limited to preliminary Markit manufacturing and services PMIs from Germany, France and the Eurozone, while France is also expected to report Q2 GDP.

Fed to Begin Unwinding, Signals Another Hike

Charles Schwab: On the Market

Posted: 9/20/2017 4:15 PM ET

Fed to Begin Unwinding, Signals Another Hike

U.S. equities finished mixed, rebounding from a brief tumble that came after the Fed left rates unchanged, as expected, but signaled a December hike is likely to be in the cards. Treasury yields rose following the Fed decision, which included insight into the winding down of its behemoth balance sheet, while the U.S. dollar jumped and gold reversed to the downside. Meanwhile, crude oil prices rose following a mixed government oil inventory report and U.S. existing home sales unexpectedly dropped.

The Dow Jones Industrial Average (DJIA) increased 42 points (0.2%) to 22,413, the S&P 500 Index gained 2 points (0.1%) to 2,508, while the Nasdaq Composite declined 5 points (0.1%) to 6,456. In moderate volume, 837 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.79 to $50.69 per barrel and wholesale gasoline was unchanged at $1.66 per gallon. Elsewhere, the Bloomberg gold spot price decreased $10.39 to $1,300.76 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.8% higher at 92.49.

FedEx Corp. (FDX $221) reported fiscal Q1 earnings-per-share (EPS) of $2.19, or $2.51 ex-items, versus the $3.09 FactSet estimate, as revenues rose 4.1% year-over-year (y/y) to $15.3 billion, below the projected $15.4 billion. The company cited the negative impacts of the cyberattack at its TNT Express unit and Hurricane Harvey. FDX lowered its full-year profit outlook. Shares overcame early pressure and finished higher as analysts appeared to be looking past the TNT cyberattack-induced miss, noting an unchanged long-term outlook and strong fundamentals.

Bed Bath & Beyond Inc. (BBBY $23) posted fiscal Q2 EPS of $0.67, or $0.78 ex-items, compared to the forecasted $0.95, with revenues declining 1.7% y/y to $2.9 billion, missing the expected $3.0 billion. Q2 same-store sales fell 2.6% y/y, versus the estimated 0.7% decline. BBBY lowered its full-year guidance, and shares tumbled.

General Mills Inc. (GIS $52) announced fiscal Q1 profits of $0.69 per share, or $0.71 ex-items, versus the estimated $0.76, as revenues decreased 3.5% y/y to $3.8 billion, roughly in line with forecasts. GIS noted that its U.S. yogurt segment sales were down double-digits and its cereal and snacks unit sales also declined. The company's gross margin fell solidly due to higher input costs, deleverage, and unfavorable trade expense phasing. GIS reiterated its full-year guidance. Shares fell.

Adobe Systems Inc. (ADBE $150) reported Q3 EPS of $0.84, or $1.10 ex-items, versus the estimated $1.01, as revenues grew 26.0% y/y to $1.8 billion, mostly matching expectations. However, shares were lower as the company's experience cloud bookings missed expectations for the quarter, leading to a warning that its Adobe Marketing Cloud segment will not achieve its bookings goal for the year.

Fed to begin balance sheet unwinding, existing home sales surprisingly drop

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, agreeing to keep the target for its fed funds rate steady at a range of 1.00%-1.25%, a move that was widely expected. The FOMC also kept its near-term rate outlook intact, with 12 of 16 Committee members projecting at least one additional rate increase for 2017, but it lowered its longer-term outlook, indicating 11 of 16 Members forecasted three hikes in 2018. In its statement, the FOMC said that near-term risks to the economy are “roughly balanced,” that the labor market continues to be strong, and that the Committee "is monitoring inflation developments closely." In regards to the recent hurricanes, the Fed indicated that "disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term." In a separate statement, the Fed also provided details of its plan to begin to wind down its $4.5 trillion balance sheet. In a unanimous decision, the Fed will begin to taper its balance sheet by $10 billion per month—$6 billion from Treasuries and $4 billion from mortgage-backed securities—increasing by $10 billion per month every quarter for the first year.

As well, the Fed provided updated economic projections, showing a slight upward change to gross domestic product for this year, while lowering its forecasts for inflation and keeping its the unemployment rate expectations the same. In her press conference following the decision, Fed Chairwoman Janet Yellen said that she is heartened by the labor market improvement and expects the economy to expand at a moderate pace, but that the Committee is prepared to act if the economy begins to deteriorate. For more insightful analysis of the Fed’s decision, see Schwab's Chief Investment Strategist Liz Ann Sonders' article, The Fed's on the QT, on the Markets & Economy page at www.schwab.com, while you can also follow Liz Ann on Twitter: @lizannsonders.

Existing-home sales in August fell 1.7% month-over-month (m/m) to a 5.35 million annual rate—the lowest in a year—compared to the Bloomberg forecast of a 5.45 million pace, and versus July's unrevised 5.44 million rate. Sales of single-family homes dropped 2.1% m/m, but remained slightly above year ago levels, while purchases of multi-family structures rose 1.7%, but were lower y/y. The median existing-home price was up 5.6% y/y at $253,500. Unsold inventory came in at a 4.2-months pace at the current sales rate, down from the 4.5 months rate a year ago. Inventory of homes for sale declined 2.1% m/m, and are down 6.5% y/y, falling for 27 consecutive months. Sales jumped in the Northeast and rose in the Midwest, while sales fell in the South and West. Existing home sales are based on contract closings instead of signings and account for the majority of the housing sales market.

The National Association of Realtors (NAR) noted that sales in the South were hampered by Hurricane Harvey but Chief Economist Lawrence Yun said, "What's ailing the housing market and continues to weigh on overall sales is the inadequate levels of available inventory and the upward pressure it's putting on prices." Despite the supply headwinds facing existing home sales, housing demand remains solid, buoyed by the positive employment front, a key area supporting our view in the latest Schwab Market Perspective: A Cat and Mouse Fall, that the bull market will likely continue. Read more on the Markets & Economy page at www.schwab.com, as well as Schwab's Liz Ann Sonders' article, Trying to Reason with Hurricane Season: The Aftermath of "Harma", where she notes that a boost associated with the recovery/rebuilding efforts is likely. Follow Schwab  on Twitter: @schwabresearch.

The MBA Mortgage Application Index dropped 9.7% last week, giving back most of the previous week's 9.9% jump. The fall came as an 8.5% drop in the Refinance Index was met with a 10.8% tumble for the Purchase Index. The average 30-year mortgage rate ticked 1 basis point (bp) higher to 4.04%.

Treasuries finished mostly lower, as the yield on the 2-year note rose 3 bps to 1.44%, the yield on the 10-year note gained 2 bps to 2.27%, and the 30-year bond rate was flat at 2.82%.

Tomorrow's economic calendar will begin with weekly initial jobless claims, which are forecasted to have moved higher to a level of 302,000 from the prior week's 284,000, as well as the Philly Fed Manufacturing Index, with economists anticipating a reading of 17.1 for September following August's 18.9, and culminating with the Index of Leading Economic Indicators (LEI) for August, anticipated to match July's 0.3% m/m increase.

Europe and Asia mixed as markets eye Fed decision

European equity markets finished mixed, with financials seeing some pressure though energy issues gained ground. The markets traded cautiously ahead of today's monetary policy meeting by the Fed in the U.S., which comes on the heels of the European Central Bank signaling that it will begin to discuss dialing back its stimulus measures this fall and the Bank of England noting that a rate hike could be announced in the coming months. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses the potential changes in global monetary policy in his latest article, How the Shift by Central Banks May Affect the Stock Market, noting that despite the coming shift by central banks towards trimming/tapering their balance sheets, we don't believe the bull market is at risk. Read more on the Markets & Economy page at www.schwab.com including Jeff's point that earnings, not easing, remain the key support for stock markets around the world. The euro was flat and the British pound advanced on the U.S. dollar, while bond yields in the region finished mixed. In economic news, U.K. retail sales grew much more than expected in August.

Stocks in Asia finished mixed as the markets treaded cautiously ahead of today's monetary policy meeting by the U.S. Federal Reserve, while looking to tomorrow's decision by the Bank of Japan. Mainland Chinese equities and those traded in Hong Kong gained modest ground, while markets in Australia and South Korea declined. Stocks in Japan slightly extended yesterday's jump, with the yen holding onto recent weakness and following the nation's trade report, which showed exports grew more than expected in August. Markets in India finished flat. Schwab's Jeffrey Kleintop, CFA, offers analysis of the global investing landscape in his articles, What are fund flows telling us about trends and risks in the global stock market?, and, An important benefit to global investors is back after 20 years, on the Markets & Economy page at www.schwab.com.

In addition to the Bank of Japan's monetary policy decision, the international economic calendar will offer the All-Industry Index from the island nation, industrial orders from Spain, and public sector net borrowing from the U.K.

Fed Raises Rates, Stocks Rally

On the Market

Posted: 3/15/2017 4:15 PM ET

Fed Raises Rates, Stocks Rally

U.S. stocks finished higher after the Federal Reserve hiked the target for its fed funds rate, as widely expected, while an increase in crude oil prices gave energy issues a boost. Treasury yields fell following the Fed's rate decision, while the economic calendar delivered in line reads on retail sales and consumer price inflation, as well as a 12-year high in homebuilder sentiment. Meanwhile, news on the equity front was light. The U.S. dollar declined, and gold jumped higher.

The Dow Jones Industrial Average (DJIA) increased 113 points (0.5%) to 20,950, the S&P 500 Index gained 20 points (0.8%) to 2,385, and the Nasdaq Composite advanced 43 points (0.7%) to 5,900. In moderately-heavy volume, 913 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.14 to $48.86 per barrel and wholesale gasoline was unchanged at $1.58 per gallon. Elsewhere, the Bloomberg gold spot price jumped $21.13 to $1,220.25 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—fell 1.0% to 100.71.

Capital One Financial Corp. (COF $90) finished lower after it announced that its February loan data showed U.S. borrowing decreased versus the prior month and its charge-off rate exceeded expectations, more than offsetting upbeat results from its auto loan segment.

Hostess Brands Inc. (TWNK $16) reported 4Q earnings-per-share (EPS) of $0.14, one penny above the FactSet estimate, as revenues increased 21.6% year-over-year (y/y) to $179 million, topping the projected $170 million. The company reaffirmed its 2017 revenue guidance. Shares were higher. 

Fed raises target for rates, economic news roughly in line with forecasts

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, agreeing to raise the target for its fed funds rate by 25 bps to a range of 0.75%-1.00%, a move that was widely expected. The FOMC also kept its rate outlook intact, indicating that most Committee members projected two additional rate increases for 2017. In its statement, the FOMC said the pace of any future rate increases would be gradual, and that near-term risks to the economy are “roughly balanced.” Regarding inflation, the Fed indicated that it has increased in recent quarters, moving closer to its 2% longer-run objective, while describing job gains as "solid" and that business investment "appears to have firmed somewhat." Minneapolis Fed president Neel Kashkari was the only member to dissent, opting in favor of a hold.

As well, the Fed provided economic projections, showing only a slight downward change to gross domestic product for next year, while keeping its forecast for inflation and the unemployment rate intact. In her press conference following the decision, Fed Chairwoman Janet Yellen said the economy continues to expand at a moderate pace and that job gains should strengthen further, while also noting that core inflation should reach its 2% benchmark in the next few years. As well, Yellen indicated that waiting too long to adjust policy could mean an increase in the rapidity of any increases in the future. Read more insightful analysis of the Fed’s decision in an article from Schwab’s Director of Fixed Income, Collin Martin, later today at www.schwab.com/marketinsight, while you can find our article Fed Rate Hike: What Does it Mean for Your Portfolio?, at www.schwab.com/insights, and you can also follow Schwab on Twitter: @schwabresearch.

Advance retail sales (chart) for February ticked 0.1% higher month-over-month (m/m), matching the Bloomberg forecast, and compared to January's upwardly revised 0.6% rise. Also, last month's sales ex-autos were up by 0.2% m/m, topping expectations of a 0.1% gain, and following the positive revision to a 1.2% gain seen in the previous month. Sales ex-autos and gas were higher by 0.2% m/m, in line with estimates, and versus January's favorable revision to a 1.1% gain. The retail sales control group, a figure used to help calculate GDP, rose 0.1%, compared to the projected 0.2% rise, but the prior month's figure was revised solidly higher to a 0.8% increase from the previously reported 0.4% gain.

The Consumer Price Index (CPI) (chart) was up 0.1% m/m in February, above estimates of a flat reading, while January's 0.6% increase was unrevised. The core rate, which strips out food and energy, gained 0.2% m/m, matching expectations and compared to January's unrevised 0.3% rise. Y/Y, prices were 2.7% higher for the headline rate, in line with forecasts, while the core rate was up 2.2%, also matching projections. January y/y figures showed an unrevised 2.5% rise and an unadjusted 2.3% increase for the headline and core rates respectively.

The Empire Manufacturing Index showed output from the New York region slipped but remained solidly in expansion territory (a reading above zero) for March. The index dipped to 16.4 from February's unrevised 18.7 level, with forecasts calling for a 15.0 reading.

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month jumped to 71—the highest level since June 2005—compared to expectations for it to remain at February's unrevised 65 level, with a 50 mark separating good and poor conditions. The NAHB said builders are buoyed by President Trump's actions on regulatory reform, and while they are clearly confident, it expects some moderation moving forward amid a number of challenges, including rising material prices, higher mortgage rates, and shortages of lots and labor.

Business inventories (chart) rose 0.3% m/m in January, matching forecasts, and versus December's unrevised 0.4% gain.

The MBA Mortgage Application Index rose 3.1% last week, following the previous week's 3.3% gain. The increase came as a 4.1% gain for the Refinance Index was met with a 2.3% rise for the Purchase Index. The average 30-year mortgage rate jumped 10 basis points (bps) to 4.46%.

Treasuries moved higher following the Fed's decision, as the yield on the 2-year note fell 9 bps to 1.30%, the yield on the 10-year note was down 10 bps to 2.50% and the 30-year bond rate declined 7 bps to 3.11%.

For additional analysis on the stock markets and the potential increased volatility, see our article, End of an Era: Why Volatility May Return to the Stock Market at www.schwab.com/insights. Schwab’s Chief Investment Strategist Liz Ann Sonders offers her latest article, Big Machine: Why Large Caps Are Likely to Outperform at www.schwab.com/marketinsight, while Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers analysis of the political front in his latest article,  Return of the Debt Ceiling: What It Means for Investors, at www.schwab.com/insights. Follow Liz Ann on Twitter: @lizannsonders.

The domestic economic calendar will continue to be busy tomorrow, beginning with housing starts and building permits, forecasted to show starts rose 1.4% m/m during February to an annual rate of 1,264,000, and permits declined 1.9% to a 1,268,000 pace, followed by weekly initial jobless claims, with economists expecting a level of 240,000, down slightly from the prior week's 243,000. Rounding out the day will be the Philly Fed Manufacturing Index, expected to decline to a level of 30.0 for March from the 43.3 posted last month, as well as the Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, with the report anticipated to show that 5.56 million jobs were available to be filled in January, above the 5.50 registered in the month prior.

Europe higher, Asia mixed ahead of Fed decision

European equities traded modestly higher, with oil & gas issues leading the way as crude oil prices recovered from a recent tumble following some bullish oil inventory data. The markets appeared cautious ahead of today's monetary policy decision in the U.S., which is expected to deliver a rate hike. Political uncertainty in the region continued to garner heavy attention, with flared-up U.K. Brexit uneasiness as Prime Minister May was granted the right to trigger Article 50 yesterday, which will begin the formal process of negotiating the nation's exit from the European Union. This came as Scottish First Minister Sturgeon said earlier this week that she will start the legal process of preparing for a second independence referendum.

The markets also focused on today's Dutch election, which is considered a test of whether populism in Europe will threaten to break up the euro. This will set the stage for next month's key French Presidential election as discussed by Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives, Randy Frederick in the video, Why Should the French Presidential Election Be Important to Investors? at www.schwab.com/insights. Follow Jeff on Twitter: @jeffreykleintop. Also, be sure to check out Jeff's articles, Five Reasons to Stay Invested Despite Heightened Uncertainty and The future of Europe: EU 2.0 and its impact on the markets at www.schwab.com/oninternational, where you can also find Director of International Research, Michelle Gibley's CFA, article, Europe Votes: Could More Countries Reject the EU?. In economic news, eurozone 3Q employment rose, while U.K. employment topped forecasts. The euro and British pound gained ground on the U.S. dollar, while bond yields in the region were mostly lower.

Stocks in Asia finished mixed ahead of today's highly expected rate hike in the U.S., while European political uncertainty remained elevated. Japanese equities declined, while those in China were mixed, as mainland listings ticked higher and shares in Hong Kong declined, with Premier Li concluding its annual National People's Congress by offering a relatively upbeat economic tone but expressing a mixed outlook for trade relations with the U.S. Stocks in Australia gained ground after the nation reported a slight increase in consumer confidence, while South Korea's markets finished flat and India's traded modestly lower. Schwab's Michelle Gibley, CFA, provides timely analysis of global investing in her articles, Currency Hedging: 5 Things You Need to Know and Emerging Markets: Why They Deserve a Place in Your Portfolio at www.schwab.com/oninternational, and be sure to check out our release, Why Your Portfolio Needs International Stocks—Despite 2017 Risks at www.schwab.com/insights.

Reports set for release on tomorrow's international economic calendar include employment data from Australia, and CPI from the Eurozone, while both the Bank of Japan and the Bank of England will conduct their respective monetary policy meetings, with economists expecting no change to the stance of either nation.

Stocks Continue Post Fed Advance

Charles Schwab: On the Market

Posted: 9/22/2016 4:15 PM ET

Stocks Continue Post Fed Advance

U.S. stocks joined in a broad-based global equity advance as the markets continued to react positively to yesterday's Fed decision to hold off on raising rates, though it hinted at a year-end rate hike the central bank also lowered its projection for the pace of future increases. Treasuries and gold were higher, while the U.S. dollar was under pressure and crude oil prices extended an advance. In economic news, weekly jobless claims surprisingly fell, existing home sales dropped and the Leading Index declined.

The Dow Jones Industrial Average (DJIA) rose 99 points (0.5%) to 18,392, the S&P 500 Index gained 14 points (0.7%) to 2,177, and the Nasdaq Composite increased 44 points (0.8%) to 5,340. In moderate volume, 839 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.98 to $46.32 per barrel, wholesale gasoline was unchanged at $1.40 per gallon and the Bloomberg gold spot gained $2.11 to $1,337.28 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 95.41.

Bed Bath & Beyond Inc. (BBBY $43) reported 2Q earnings-per-share (EPS) of $1.11, below the $1.16 FactSet estimate, as revenues declined 0.2% year-over-year (y/y) to $3.0 billion, compared to the projected $3.1 billion. 2Q same-store sales declined 1.2% y/y, versus the expected 0.5% gain. BBBY reaffirmed its full-year EPS outlook. Shares finished nicely higher.

Red Hat Inc. (RHT $80) posted 2Q earnings ex-items of $0.55 per share, one penny north of estimates, as revenues grew 19.0% y/y to $600 million, compared to the projected $590 million. RHT issued stronger-than-expected 3Q guidance and raised its full-year outlook. Shares rallied.

AutoZone Inc. (AZO $748) announced fiscal 4Q EPS $14.30, versus the expected $14.25, as revenues rose 3.3% y/y to $3.4 billion, roughly in line with estimates. 4Q same-store sales increased 1.0% y/y, below the forecasted 2.1% rise. AZO announced an additional $750 million to its share repurchase program. Shares lost modest ground.

Dow member Cisco Systems Inc. (CSCO $32) and Salesforce.com Inc. (CRM $75) announced a global strategic alliance. The two companies will jointly develop and market solutions that join Cisco's collaboration, IoT and contact center platforms with Salesforce Sales Cloud, IoT Cloud and Service Cloud. Shares of both companies closed higher.

Existing home sales decline, jobless claims surprisingly drop

Existing-home sales in August decreased 0.9% month-over-month (m/m) to a 5.33 million annual rate compared to the Bloomberg forecast of a rise to a 5.45 million pace. July's figure was downwardly revised to a 5.38 million annual rate. Compared to last year, sales were 0.8% higher. The median existing-home price was up 5.1% y/y at $240,200. Housing supply came in at a 4.6-month pace at the current sales rate. Sales were solidly higher in the Northeast, while declining in all other regions, as single-family home sales declined, while condominium and co-op sales jumped. National Association of Realtors (NAR) Chief Economist Lawrence Yun said recent job growth is not yielding higher home sales as inventory is not picking up to tame price growth and replace what is being quickly sold.

As noted in the Schwab Market Perspective: Round and Round We Go…, economic data appeared to be perking up in June and July, aided by better housing reports, but the recent round of data has thrown some cold water on the hopes for a sustainable uptick in growth. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his article, Real Estate Sector: Marketperform, positives of low interest rates, an improving economy, and favorable apartment trends are counterbalanced by the potential for rising rates, a changing consumer, and a potential inflection point for the favorable apartment trends, leading to our marketperform rating. Read these articles at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Weekly initial jobless claims (chart) decreased by 8,000 to 252,000 last week, versus estimates of an increase to 261,000, with the prior week's figure unrevised at 260,000. The four-week moving average declined by 2,250 to 258,500, while continuing claims dropped 36,000 to 2,113,000, south of the estimated level of 2,140,000.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) declined 0.2% m/m in August, versus projections calling a flat reading. Support came from the components pertaining to stock prices and the yield curve, while the index was bogged down by average workweek and ISM new orders.

The Kansas City Fed Manufacturing Activity Index for September rose to 6 from August's -4 level, compared to forecasts of a gain to -3, with a reading north of zero depicting expansion.

Treasuries were higher, with the yield on the 2-year note flat at 0.77%, while the yields on the 10-year note and the 30-year bond decreased 3 basis points to 1.62% and 2.34%, respectively. Bond yields extended yesterday's declines as the Fed held its monetary policy steady, noting 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." For more on this topic, see our latest article, Fed Stands Pat, but Hints at Future Rate Hike at www.schwab.com/insights, and follow Schwab on Twitter: @schwabresearch.

Tomorrow, the U.S. economic calendar will cool down, with the lone major release expected to be Markit's preliminary Manufacturing PMI Index for September, which is forecasted to remain at the 52.0 level posted in August, with a reading above 50 denoting expansion in activity.

Europe and Asia higher following Fed decision

European equities traded nicely higher, amid a broad-based rally across the sectors, while the global markets digested the decision by the U.S. Federal Reserve to hold off on raising rates, but hint at a possible rate hike this year. However, the Fed lowered its projections to a more gradual pace of hikes down the road, which is weighing on the U.S. dollar and the nation's bond yields. The euro and British pound moved higher versus the greenback, while bond yields in the region lost ground. Amid the likely continued volatility surrounding the timing of the next Fed rate hike, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, reminds investors, Three Reasons Why Now is Not the Time to Retreat from Global Diversification and why Your portfolio may be less diversified than you think. Read these articles at www.schwab.com/oninternational, and follow Jeff on Twitter: @jeffreykleintop. In economic news, French business confidence unexpectedly improved for September.

Stocks in Asia finished higher on the heels of yesterday's decision in the U.S. to not hike rates, which followed the Bank of Japan's decision to change its monetary policy focus to targeting the yield curve and committing to overshooting its inflation target, boosting the global financial sector. However, volume was light as Japanese markets were closed for a holiday. Stocks in China and Australia increased, with basic materials stocks rallying and oil & gas issues showing some strength. South Korean and Indian equities also rallied in the wake of the U.S. monetary policy decision. For a look at the global economic front, Schwab's Jeffrey Kleintop, CFA, offers his article, World Tour: An Around The World Look At the Economic Landscape at www.schwab.com/oninternational.

The international economic docket for tomorrow will be limited, offering the All Industry Activity Index from Japan and Markit's preliminary Manufacturing PMIs for Germany, France and the Eurozone.

Stocks Finish Fairly Flat

Charles Schwab: On the Market

Posted: 5/23/2016 4:15 PM ET

Stocks Finish Fairly Flat

U.S. equities closed the regular session lower, but near the flatline as some decent strength in materials issues was unable to influence stocks higher with health care and consumer discretionary listings lagging. Treasuries were mixed and little changed following an unexpected slip in Markit's preliminary U.S. manufacturing report. The U.S. dollar was mostly flat and gold and crude oil prices ticked lower.

The Dow Jones Industrial Average (DJIA) declined 8 points to 17,493, the S&P 500 Index decreased 4 points (0.2%) to 2,048, and the Nasdaq Composite lost 4 points (0.1%) to 4,766. In moderately-heavy volume, 804 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.33 lower to $48.08 per barrel, wholesale gasoline was unchanged at $1.64 per gallon, and the Bloomberg gold spot price lost $2.23 to $1,252.52 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 95.26.

Bayer AG (BAYRY $95) announced that it has made an offer to acquire Monsanto Co. (MON $106) for $122 per share in cash, valued at about $62 billion. Bayer said it is fully committed to pursuing the transaction and is prepared to proceed immediately to due diligence and negotiations and to quickly agree to a transaction. The company also added that it expects the acquisition to be accretive to core earnings-per-share (EPS) by a double-digit percentage after the first full year. MON did not comment on the announcement. MON traded nicely higher.

Markit's preliminary May manufacturing report unexpectedly dips

The preliminary Markit U.S. Manufacturing PMI Index for May dipped to 50.5 from April's 50.8 level, and below the modest increase to 51.0 that economists surveyed by Bloomberg were forecasting, though a reading above 50 denotes expansion in activity.

The report kicks off the week's U.S. economic front, which will bring other key releases of new home sales, preliminary durable goods orders, the second look (of three) at 1Q GDP, and the final University of Michigan Consumer Sentiment Index. However, the attention of the global markets will likely remain on the Fed, with another plethora of officials set to speak, including a speech from Chairwoman Janet Yellen on Friday.

As noted in the Schwab Market Perspective: Corporate Caution…Global Recession?, the Fed appears stuck, as the economy has recovered, employment has improved, housing has bounced back, and asset prices have appreciated. However, the economy is still not firing on all cylinders. We expect economic activity to pick up in the second quarter from the weak first quarter, but whether it will be enough to allow the Fed to raise rates again, it’s too soon to tell. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Treasuries were mixed, with the yield on the 2-year note rising 2 basis points (bps) to 0.90%, while the yield on the 10-year note declined 1 bp to 1.83% and the 30-year bond rate was flat at 2.63%. Bond yields have jumped as of late amid resurfaced Fed rate hike expectations in the wake of some hawkish commentary from Central Bank officials and the April monetary policy meeting minutes which showed the possibility of a June rate hike has not been ruled out.

For our latest analysis on the bond markets see the video by Schwab's Chief Fixed Income Strategist, Kathy Jones and Managing Director of Trading and Derivatives, Randy Frederick, titled Is the Market Underestimating the Fed?, at www.schwab.com/insights. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick. Also check out Kathy Jones' articles, Mixed Signals From the Bond Market: Something's Got to Give, and Bond Index Investing: Why You Should Track More Than One Benchmark, at www.schwab.com/marketinsight.

Tomorrow, the U.S. economic calendar will include the aforementioned housing data in the form of new home sales for April, expected to show a 2.3% increase to an annual rate of 523,000 units. Also, some regional data will take shape with the release of the Richmond Fed Manufacturing Index for May, forecasted to decline to 8 from the prior month's level of 14, but a reading above 0 denotes expansion in activity.

Europe mostly lower and Asia mixed as Fed continues to command attention

European equities traded mostly lower, as the global markets continued to grapple with the possibility of a near term rate hike by the Fed, while oil & gas issues saw some pressure amid the weakness in crude oil prices. Basic materials stocks also weighed on the markets. In economic news, the preliminary Markit Eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—dipped to 52.9 in May from 53.0 in April, compared to the expected rise to 53.2. However, a reading above 50 denotes expansion, while growth in French services sector activity unexpectedly accelerated and German business activity came in stronger than expected. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses Europe in his article, Eight Years Later: Europe's Economy is Back and its Stocks are Leading Global Markets. Moreover, festering concerns about the possibility of a U.K. exit from the EU, known as a Brexit, remain and Jeffrey Kleintop discusses the possible implications in his article, Brexit: 5 Things Investors Need to Know. Read more at www.schwab.com/oninternational, and be sure to follow Jeff on Twitter: @jeffreykleintop. The euro and the British pound lost ground versus the U.S. dollar, while bond yields in the region were mixed.

Stocks in Asia finished mixed with the global markets remaining focused on the potential for a summer rate hike out of the U.S., while lower oil prices weighed on the energy sector. Japanese equities declined, with the yen strengthening to pressure sentiment on the heels of this weekend's G-7 meeting between world finance chiefs in Japan, which delivered little major developments but focus was on the apparent disagreement regarding foreign exchange policy. Japan reported an unexpected widening of its April trade surplus as exports fell slightly more than expected, while imports dropped by a larger amount than projected. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers analysis of Japan in his latest article, Japan: Another Recession Coming?, at www.schwab.com/oninternational. Stocks in mainland China finished higher, while those trading in Hong Kong declined. Australian securities decreased amid weakness in oil & gas issues, which was met with declines in financials and basic materials stocks. Finally, Indian stocks traded lower on the festering uncertainty regarding a potential Fed rate hike and South Korean equities moved higher.

The international economic docket for tomorrow will include the release of the Leading Index from China, 1Q GDP and the Zew Economic Sentiment Survey from Germany, manufacturing and business confidence from France and public sector borrowing from the U.K.

Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

Stocks Manage Nice Gains

Charles Schwab: On the Market

Posted: 5/20/2016 4:15 PM ET

Stocks Manage Nice Gains

U.S. stocks finished the trading week in positive fashion as the equity markets reclaimed some of the recent losses that commenced on the heels of the release of the minutes from the Fed's April monetary policy meeting. In light economic news, existing home sales topped forecasts, while on the equity front, Applied Materials reported upbeat results to help boost the tech sector. Treasuries and the U.S. dollar were nearly unchanged, gold was a touch lower and crude oil prices were mixed.

The Dow Jones Industrial Average (DJIA) advanced 66 points (0.4%) to 17,501, the S&P 500 Index increased 12 points (0.6%) to 2,052, and the Nasdaq Composite rallied 57 points (1.2%) to 4,770. In moderately-heavy volume, 962 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.26 lower to $48.41 per barrel, wholesale gasoline increased $0.01 to $1.64 per gallon, and the Bloomberg gold spot price lost $2.23 to $1,252.52 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 95.35. Markets were mixed for the week, as the DJIA declined 0.2%, while the S&P 500 Index added 0.3% and the Nasdaq Composite increased 1.1%.

Deere & Co. (DE $78) reported fiscal 2Q earnings-per-share (EPS) of $1.56, above the $1.48 FactSet estimate, with sales of its equipment operations declining 3.9% year-over-year (y/y) to $7.1 billion, compared to the expected $6.7 billion. The heavy machinery company said its 2Q performance reflected the continuing impact of downturn in the global farm economy and further weakness in the construction equipment sector. However, DE added that its businesses benefitted from the strength of a broad product portfolio and its success creating a more flexible cost structure. Looking ahead, the company forecasted lower results this year in light of ongoing market pressures. Shares closed solidly lower.

Applied Materials Inc. (AMAT $23) posted 2Q EPS ex-items of $0.34, topping the projected $0.32, with y/y revenues roughly flat at $2.5 billion, north of the estimated $2.4 billion. The chip manufacturing equipment maker said its 2Q orders were up 52.0% quarter-over-quarter (q/q) and 37.0% y/y. AMAT issued stronger-than-expected 3Q guidance and shares rallied sharply.

Foot Locker Inc. (FL $55) achieved 1Q profits of $1.39 per share, as revenues rose 3.7% y/y to $2.0 billion, both roughly in line with expectations, though same-store sales grew 2.9% y/y, below the forecasted 4.5% increase. The footwear retailer said it continues to manage the business tightly, particularly in terms of inventory, occupancy expense and wages. Shares finished lower. For our latest analysis of the all-important U.S. consumer, see the video by Schwab's Chief Investment Strategist, Liz Ann Sonders and Managing Director of Trading and Derivatives, Randy Frederick, titled Could the Consumer Help Stocks Break Out?, at www.schwab.com/insights. Follow Liz Ann and Randy on Twitter: @lizannsonders and @randyafrederick.

Campbell Soup Co. (CPB $60) reported fiscal 3Q EPS ex-items of $0.65, one penny above projections, as revenues declined 2.0% y/y to $1.9 billion, roughly in line with expectations. CPB reaffirmed its full-year revenue outlook, while raising its profit guidance. CPB traded sharply lower after the company noted a continued challenging consumer environment and that it was "unsatisfied" with its 3Q organic sales growth, which was largely due to a weaker U.S. soup season.

Existing home sales top forecasts

Existing-home sales in April rose 1.7% month-over-month (m/m) to a 5.45 million annual rate, compared to the Bloomberg forecast of a 5.40 million pace. March's figure was revised upward to a 5.36 million annual rate. Compared to last year, sales were 6.0% higher and the median existing-home price was up 6.3% at $232,500. Housing supply came in at a 4.7-month pace at the current sales rate. Sales were mixed regionally, with the Northeast gaining ground and the Midwest jumping, while declines were seen in South and the West. Single-family home sales rose modestly, while condominium and co-op sales jumped.

National Association of Realtors (NAR) Chief Economist Lawrence Yun said the report signaled slowly building momentum for the housing market this spring. Yun added, "The temporary relief from mortgage rates currently near three-year lows has helped preserve housing affordability this spring, but there's growing concern a number of buyers will be unable to find homes at affordable prices if wages don't rise and price growth doesn't slow."

The report adds credence to Schwab's Chief Investment Strategist Liz Ann Sonders' article, Recession: Your Time is Gonna Come … But Not Yet, where she points out that U.S. data has improved markedly since the beginning of this year. Liz Ann offers data that support her conclusion that although we’re unlikely to exit from a muddle-through state, the risk of recession is objectively low. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Treasuries were mostly flat, with the yields on the 2-year and 10-year notes nearly unchanged at 0.89% and 1.85%, respectively, while the yield on the 30-year bond dipped 1 basis point to 2.64%. Bond yields have been choppy after Wednesday's jump that followed the release of the Federal Reserve's April meeting minutes, which showed the Central Bank hadn't ruled out the possibility of a June rate hike. For our latest analysis on the bond markets see the video by Schwab's Chief Fixed Income Strategist, Kathy Jones and Managing Director of Trading and Derivatives, Randy Frederick, titled Is the Market Underestimating the Fed?, at www.schwab.com/insights. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick. Also check out Kathy Jones' articles, Mixed Signals From the Bond Market: Something's Got to Give, and Bond Index Investing: Why You Should Track More Than One Benchmark, at www.schwab.com/marketinsight.

Europe trades higher, Asia finishes mostly to the upside

European equities traded higher, led by healthcare stocks, while commodity-related issues rebounded from recent weakness that has been exacerbated by increased U.S. Fed rate hike expectations. The global markets recovered from the flared-up rate hike concerns in the U.S. that have come from hawkish commentary from the Fed and the Central Bank's April meeting minutes. Also, the U.K. markets moved nicely higher, aided by this week's polls that suggested support for the nation to vote against leaving the European Union (EU), known as a Brexit. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses the possible implications in his article, Brexit: 5 Things Investors Need to Know. Read more at www.schwab.com/oninternational, and be sure to follow Jeff on Twitter: @jeffreykleintop. Travel-related issues rebounded from initial pressure as the investigation of the EgyptAir plane that disappeared during a flight between Paris and Cairo continued. The euro ticked higher and the British pound was lower compared to the U.S. dollar, while bond yields in the region finished mixed.

Stocks in Asia finished mostly higher to close out the week, shrugging off the flared-up U.S. rate hike expectations that have come from hawkish commentary from Fed officials and exacerbated by Wednesday's April meeting minutes. An advance for Japanese equities was aided by some late-day weakness in the yen, while the G-7 meeting in Japan is set to begin. Japanese stocks posted back-to-back weekly gains, bolstered by stronger-than-expected 1Q GDP and machine orders reports and Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, notes in his latest article, Japan: Another Recession Coming?, Japan’s economy struggled in the first quarter and the second quarter is not shaping up to be much better. Yet economists expect a sharp rebound in economic growth this year. We see hefty headwinds offsetting the potential positives for Japan. Stocks trading in mainland China, Hong Kong, Australia and South Korea advanced. Bucking the global trend, Indian equities declined on the increased Fed rate hike focus which has boosted the U.S. dollar versus emerging market currencies including the rupee, which posted its worst weekly drop since January, per Bloomberg.

Stocks eke out weekly gain despite rate hike concern flare-up

U.S. stocks finished the week modestly higher, though volatility ramped up as Fed rate hike expectations resurfaced. The markets appeared to be surprised by the April monetary policy meeting minutes that showed the Central Bank may have been closer to raising rates for a second time than anticipated. Moreover, domestic economic data showed inflation continued to gain steam, housing starts topped forecasts, and industrial production easily bested estimates. The reports accompanied a plethora of hawkish rhetoric from Fed officials to boost the financial sector, along with Treasury yields and the U.S. dollar. Crude oil prices rose to lift the energy sector, despite some pressure from the stronger dollar, supported by supply disruptions in Canada and Nigeria, as well as a decline in U.S. output and an upbeat oil price forecast from Goldman Sachs.

Technology issues also rallied, aided by upbeat earnings reports from Dow component Cisco Systems Inc. (CSCO $28) and Applied Materials. However, consumer discretionary stocks declined as disappointing retail sector results continued to pour in, headlined by Target Corp's (TGT $69) softer-than-expected sales and Dow member Home Depot Inc's (HD $132) stronger-than-expected 1Q results being overshadowed by signs of slowing sales growth. However, Dow member Wal-Mart Stores Inc. (WMT $70) was a standout winner after surging on its 1Q results and favorable outlook. As noted in our article, What Will It Take to Get Stocks to New Highs?, we continue to have a “neutral” view of U.S. stocks though bouts of volatility are likely to persist amid uncertainty over the Fed, the upcoming U.S. elections, and how fast the global economy will grow. Increased capital investments from businesses is what we think is needed to push the S&P 500 past its all-time high, a level that it has failed to eclipse three times in the last year. Read more at www.schwab.com/insights. Be sure to follow Schwab on Twitter: @schwabresearch.

Fed set to remain in focus next week

Next week's U.S. economic front will bring the key releases of Markit's business activity reports, new home sales, preliminary durable goods orders, the second look (of three) at 1Q GDP, and the final University of Michigan Consumer Sentiment Index. However, the attention of the global markets will likely remain on the Fed, with another plethora of officials set to speak, including a speech from Chairwoman Janet Yellen on Friday. As noted in the Schwab Market Perspective: Corporate Caution…Global Recession?, the Fed appears stuck, as the economy has recovered, employment has improved, housing has bounced back, and asset prices have appreciated. However, the economy is still not firing on all cylinders. We expect economic activity to pick up in the second quarter from the weak first quarter, but whether it will be enough to allow the Fed to raise rates again, it’s too soon to tell. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

International reports due out next week include: China—industrial profits. Japan—trade balance and consumer inflation. Eurozone—Markit's eurozone business activity reports, along with 1Q GDP, investor and business confidence reports out of Germany. U.K.—1Q GDP.

Stocks Close Red with Continued Focus on Fed

Charles Schwab: On the Market

Posted: 5/19/2016 4:15 PM ET

Stocks Close Red with Continued Focus on Fed

U.S. equities closed the trading session lower amid heightened expectations of a possible June rate hike, which transpired following yesterday's release of the Central Bank's April monetary policy meeting minutes. The decline for stocks ensued despite some stronger-than-expected earnings releases from Dow members Wal-Mart and Cisco and domestic reports that showed a drop in jobless claims and a nice rise for the Leading Index. Treasuries and the U.S. dollar were higher, while gold and crude oil prices were lower.

The Dow Jones Industrial Average (DJIA) declined 91 points (0.5%) to 17,435, the S&P 500 Index was 8 points (0.4%) lower at 2,040, and the Nasdaq Composite shed 27 points (0.6%) to 4,713. In moderately-heavy volume, 934 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil dipped $0.11 to $48.67 per barrel, wholesale gasoline decreased $0.02 to $1.63 per gallon, and the Bloomberg gold spot price lost $4.03 to $1,254.47 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 95.32.

Dow member Wal-Mart Stores Inc. (WMT $69) reported 1Q earnings-per-share (EPS) of $0.98, above the $0.88 FactSet estimate, as revenues rose 0.9% year-over-year (y/y) to $115.9 billion, topping the expected $113.2 billion. U.S. same-store sales grew 1.0% y/y, compared to the projected 0.5% rise. The world's largest retailer said it is off to a good start to the year, with strong performance outside the U.S. and improved inventory position that contributed to strong cash flow performance. WMT issued mostly stronger-than-projected 2Q EPS and same-store sales guidance, based on its views of the global operating environment. The company said there is momentum in many parts of its business. Shares rallied.

For our latest analysis of the all-important U.S. consumer, see the video by Schwab's Chief Investment Strategist, Liz Ann Sonders and Managing Director of Trading and Derivatives, Randy Frederick, titled Could the Consumer Help Stocks Break Out?, at www.schwab.com/insights. Follow Liz Ann and Randy on Twitter: @lizannsonders and @randyafrederick.

Dow component Cisco Systems Inc. (CSCO $28) posted fiscal 3Q earnings ex-items of $0.57 per share, north of the projected $0.55, with revenues growing 3.0% y/y to $12.0 billion, roughly in line with forecasts. The internet networking company's gross margin and operating margin figures exceeded forecasts and it noted that it executed well despite the challenging environment, as it transitions to a more software and subscription focus. CSCO issued 4Q EPS guidance that topped expectations, while its revenue outlook had a midpoint that was slightly above estimates. Shares finished nicely higher.

Monsanto Co. (MON $101) confirmed the receipt of an unsolicited takeover offer from Bayer AG (BAYRY $100), and it is reviewing the proposal. MON added that there is no assurance that any transaction will be entered into or consummated, or on what terms. Monsanto gained solid ground, while Bayer closed lower.

Salesforce.com Inc. (CRM $81) reported 1Q profits ex-items of $0.24, one penny above estimates, as revenues rose 26.8% y/y to $1.9 billion, roughly in line with expectations. CRM raised its full-year EPS and revenues outlooks. CRM was noticeably higher. 

Jobless claims pullback, while Leading Index improves

Weekly initial jobless claims (chart) fell by 16,000 to 278,000 last week, versus the Bloomberg estimate calling for claims to decrease to 275,000, as the prior week's jump was unrevised at 294,000. The four-week moving average rose by 7,500 to 275,750, while continuing claims dropped 13,000 to 2,152,000, slightly south of the estimated level of 2,158,000.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) rose 0.6% month-over-month (m/m) in April, versus the projected 0.4% increase, and compared to March's downwardly revised flat reading. Support was widespread, led by the yield curve, building permits and jobless claims, while consumer expectations was the lone component to weigh on the index.

The Philly Fed Manufacturing Index (chart) in May remained at a level depicting contraction (a reading below zero) dipping to -1.8 from -1.6 in April, and compared to estimates calling for an improvement to 3.0.

Treasuries ticked higher, with the yields on the 2-year and 10-year notes declining 1 basis point (bp) to 0.88% and 1.85%, respectively, while the yield on the 30-year bond dipped 2 bps to 2.64%. Bond yields gave back some of yesterday's jump that followed the release of the Federal Reserve's April meeting minutes, which showed the Central Bank hadn't ruled out the possibility of a June rate hike. For our latest analysis on the bond markets see the video by Schwab's Chief Fixed Income Strategist, Kathy Jones and Managing Director of Trading and Derivatives, Randy Frederick, titled Is the Market Underestimating the Fed?, at www.schwab.com/insights. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick. Also check out Kathy Jones' article, Mixed Signals From the Bond Market: Something's Got to Give, at www.schwab.com/marketinsight.

Tomorrow, the lone report on the U.S. economic calendar will be the key release of existing home sales, projected to rise 1.3% m/m in April to an annualized rate of 5.4 million units. Existing home sales are based on contract closings and make up the largest portion of the domestic housing sales market. The recovery in housing has been a bright spot for the economy and National Association of Realtors' Chief Economist Lawrence Yun noted in last month's existing home sales report that with rents steadily rising and average fixed rates well below 4 percent, qualified first-time buyers should be more active participants than what they are right now. This suggests the housing recovery still has room to grow, but as noted in our article, What Will It Take to Get Stocks to New Highs?, increased capital investments from businesses is what we think is needed to push the S&P 500 past its all-time high, a level that it has failed to breach three times in the last year. Read more at www.schwab.com/insights. Be sure to follow Schwab on Twitter: @schwabresearch.

Europe and Asia mostly lower on Fed rate hike expectations

European equities finished broadly lower, with commodity issues seeing pressure as the U.S. dollar continued its rally in the wake of yesterday's release of the U.S. Fed's April monetary policy meeting minutes. The report bolstered recently heightened expectations that the Central Bank may still raise rates for a second time as early as its June meeting. Travel-related issues saw some pressure amid uncertainty regarding the disappearance of an EgyptAir flight between Paris and Cairo.

In economic news, U.K. retail sales rose more than expected in April. The data comes as the British pound has jumped recently versus the U.S. dollar amid recent polls that have suggested growing support for the U.K. to stay in the European Union (EU). Concerns have grown about the possibility of a U.K. exit from the EU, known as a Brexit, and last week, the Bank of England cut its economic growth forecast and warned that a vote for a Brexit would hamper economic activity. The British pound was little changed versus the U.S. dollar. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses the possible implications in his article, Brexit: 5 Things Investors Need to Know. Also, for our latest analysis on Europe, see Jeff's, article, Eight Years Later: Europe's Economy is Back and its Stocks are Leading Global Markets. Also, check out Schwab's Fixed Income Director Collin Martin's, CFA, latest article, The ECB's Latest Plan: What Does It Mean for U.S. Corporate Bonds?. Read all articles at www.schwab.com/marketinsight, and follow Jeff and Schwab on Twitter: @jeffreykleintop and @schwabresearch. The euro dipped versus the U.S. dollar and bond yields in the region finished mixed.

Stocks in Asia finished mostly to the downside, though financials gained ground, as yesterday's April policy meeting minutes out of the U.S. bolstered already resurfacing rate hike concerns. Indian equities were lower, even as election results showed Prime Minister Modi's main national opponents lost control of two states, per Bloomberg. Schwab's Director of International Research, Michelle Gibley, CFA, offers a look at the global political landscape in her article, Performing Reformers: How Political Change Can Affect Stocks.

Stocks in mainland China finished flat, while those trading in Hong Kong, Australia and South Korea declined. Japanese securities were nearly unchanged, aided by some weakness in the yen as the U.S. dollar rallied in the wake of the increased Fed rate hike expectations, while a report showed the nation's March machine orders—a gauge of capital investment—unexpectedly rose. The data follows yesterday's stronger-than-expected 1Q GDP report and Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, notes in his latest article, Japan: Another Recession Coming?, Japan’s economy struggled in the first quarter and the second quarter is not shaping up to be much better. Yet economists expect a sharp rebound in economic growth this year. We see hefty headwinds offsetting the potential positives for Japan. Read both articles at www.schwab.com/oninternational.

The international economic docket for tomorrow will be light, offering department store sales from Japan, PPI from German and the current account for the Eurozone.

Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

Financial Review

Jobs Report Friday: meh

Sinclair Noe — October 2, 2015

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

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DOW + 200 = 16,472
SPX + 27 = 1951
NAS + 80 = 4707
10 YR YLD – .05 = 1.99%
OIL + .92 = 45.66
GOLD + 24.90 = 1139.40
SILV + .74 = 15.37

The economy added a seasonally adjusted 142,000 jobs in September, missing estimates by about 60,000. The unemployment rate was unchanged at 5.1%. More people dropped out of the labor force.

The Department of Labor revised the August employment numbers from 173,000, down to just 136,000.  The disappointing back-to-back employment reports were the worst pair in three years. Employment gains for July were also revised down from 245,000 to 223,000. The combined revisions for July and August lopped off 59,000 jobs from previous reports.

Normally, the August jobs number is revised higher, not lower. Because of education related jobs and other variables, the August report has been notorious for upward revisions; typically at least 35,000 positions are added to the initial count. Not today. Six of the past eight reports have been revised lower in subsequent months.

Taken together, the three months averaged 167,000, a total that, while representing expansion, also signifies a major slowdown from the 260,000 per month clip for all of 2014. Moreover, at the beginning of the year, the three-month average was 312,000. Overall in 2015, job creation is now below the 200,000 milestone, sitting at 198,000 and drifting lower.

The average hourly wage paid to American workers fell a penny in September, once again confounding expectations that pay will rise because of the rapid decline in the unemployment rate over the past few years. The typical worker earned $25.09 an hour last month. Average hourly earnings of private-sector production and nonsupervisory employees were unchanged at $21.08 in September. The amount of time people worked each week fell a tick to 34.5 hours in September.

Nominal wage growth was unchanged at 2.2% year-over-year.  In September, the Labor Department’s report on job openings noted a 14-year high – 5.8 million – leading some to worry that the labor pool does not currently have the skills that employers require. The flip side is that employers may need to pay more to attract qualified, skilled workers, but for now it doesn’t look like that is happening.

Among the few bright spots in the September employment report, an alternative measure of unemployment known as the U6 rate fell to 10%, the lowest level since June 2008. OK, I admit that’s not much of a bright spot. The U6 includes anyone who wants a full-time job but can’t find one, including part-time workers. The number of persons working part time for economic reasons decreased in September to 6.04 million from 6.48 million in August.

Over the past 12 months, the number of persons employed part time for economic reasons declined by 1.0 million. The number of persons unemployed for less than 5 weeks increased by 268,000 to 2.4 million in September, partially offsetting a decline in August. The number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 2.1 million in September and accounted for 26.6 percent of the unemployed.

The percentage of Americans in the labor force fell to the lowest level since October 1977. The labor force participation rate fell to 62.4% from 62.6%. If people had not dropped out of the labor force, the unemployment rate would have been higher. Much of the lower participation rate can be explained by demographics; younger people are continuing their education and many older people are retiring. To get a better understanding of this, the 25 to 54 year old labor participation rate, which is the prime working years, declined to 80.6% in September, and the 25 to 54 employment population ratio was unchanged at 77.2%.

It may be hard to find a silver lining in this month’s jobs report, but it doesn’t mean the labor market has collapsed, more like a dip than a stumble. Total employment is now 4.0 million above the previous peak.  Total employment is up 12.7 million from the employment recession low. Private employment is now 4.4 million above the previous peak. Private employment is up 13.2 million from the recession low. In September, the year-over-year change was 2.75 million jobs.

Private payroll employment increased 118,000 from August to September, meaning state and local governments added a combined 26,000 jobs in September, however the federal government lost about 2,000 jobs. The rebound in government jobs squares with other data, such as the recently released final US GDP numbers for the second quarter.

Those numbers showed government spending making the largest contribution to economic growth in years. Only 118 thousand public sector jobs have been added during the first thirty one months of Obama’s 2nd term (following a record loss of 702 thousand public sector jobs during Obama’s 1st term). This is one of the anomalies of this jobs recovery; it has not had support from government jobs.

The manufacturing sector remains soft, with factory payrolls falling by 9,000 when they were expected to show no change. With dollar appreciation and sluggish overseas growth providing headwinds, it was the biggest back-to-back decline since 2010. Mining/logging, a category that includes oil exploration and drilling, posted a loss of 12,000 jobs; wholesale trade also dropped over 4,000 jobs. Leisure and hospitality services gained 35,000 jobs. Health care added 34,000 jobs in September. Employment in professional and business services gained 31,000 jobs. Retail trade employment trended up in September (+24,000).

Earlier this morning, futures indicated a triple digit gain for the Dow Industrials, but following the release of the jobs report futures fell and Wall Street opened down, the Dow Industrials were down 258 points in the first hour of trading. The 10-year yield hit 1.92 percent, falling below 2 percent for the first time since Aug. 24. The 2-year yield also hit its lowest level since August 24, holding near 0.55 percent in morning trade. The Dow and S&P 500 closed up more than 1 percent for their biggest intraday upside reversal since Oct. 4, 2011.

The U.S. dollar fell nearly 1 percent against major world currencies, with the euro briefly topping $1.13 for its highest level against the dollar in more than a week. The yen strengthened to 119.03 against the dollar. The dollar bounced back as trading continued, but still closed lower against a basket of currencies. Crude oil started lower but surged back to a one-week high after a report showing the number of working U.S. oil rigs fell to a five-year low.

The initial reaction was the markets acknowledging that bad news is bad news, after that the bad news was interpreted as good news because it likely means no Federal Reserve rate hike in the immediate future.

With weaker-than-expected payroll expansion, the jobs report for September suggests the U.S. economy isn’t immune to the global economic slowdown. The disappointing performance reduces the probability the Federal Reserve will raise interest rates in October. Fed fund futures now indicate the Federal Reserve will delay a rate hike until March of 2016. October now stands just a 2 percent chance as being the month for the U.S. central bank to hike for the first time in more than nine years, according to the CME Group. December is at just 29 percent, January is at 39 percent and March is priced in as the most likely month, just barely, with a 51 percent probability.

Yet the continued stimulative monetary policy of close-to-zero rates is, by itself, unlikely to do much to resolve what ails the U.S. and the rest of the world. Eric Rosengren, the president of the Boston Fed, in a TV interview this morning said a rate hike is not off the table for 2015. Rosengren said he supported the Fed decision not to hike rates in September, but he is not a voting member of the FOMC.

Stanley Fischer, vice chair of the Fed, in a speech in Boston today did not address the economic or interest rate outlook in his remarks at a conference on “macroprudential monetary policy.” Fischer did say he doesn’t see immediate risks of financial bubbles in the U.S., while raising concerns that the central bank’s policy tool kit to deal with such occurrences is limited and untested.

Third-quarter economic growth is slowing rapidly. The Atlanta Fed’s GDPNow tracker is expecting gross domestic product to advance just 0.9 percent, a number that has been taken down nearly a full percentage point from its most recent target and does not include Friday’s dismal jobs reading.

The Fed’s decision to leave interest rates unchanged at their September FOMC meeting looks like a smart call in hindsight. Had the Fed gone ahead and tried to raise interest rates, despite collapsing global commodity prices and surging market volatility brought on by a sharp Chinese slowdown, soft job market data would have been far more alarming. Such a delay might not be a bad thing. After all, the global economy is in the midst of a big shift, from a China-centric, emerging-market-oriented commodities boom, toward …, whatever it is the future brings.

Having avoided a government shutdown this week after negotiating a stop-gap measure to extend federal funding until December, Congress has until around November 5 to raise the $18.1 trillion debt cap and avert a default. Treasury Secretary Jack Lew says that is when the country is due to run out of cash sooner than thought. President Obama held a press conference today and said that he would not sign another stopgap spending bill to prevent a government shutdown, warning that gridlock on a full-year spending plan threatens U.S. economic growth.

The recent data suggests government could be a more meaningful contributor to growth over the near-term. If that’s true, and it’s a big if because there are signs of another debt fight brewing, the Fed’s easy money policies will likely be more effective than they have been. In other words, the Fed will no longer be working at cross-purposes with the government.