Stocks Manage Mild Gains as Fed Holds Steady

Charles Schwab: On the Market

Posted: 2/1/2017 4:15 PM ET

Stocks Manage Mild Gains as Fed Holds Steady

U.S. stocks managed to finish with mild gains amid some favorable earnings results from Dow component Apple and a host of upbeat manufacturing reports out of China, Europe and the U.S. Investors seemed cautious ahead of today's Fed monetary policy decision, which showed the Central Bank will hold its current target rate range. Crude oil prices and the U.S. dollar were higher, while Treasuries and gold were lower.

The Dow Jones Industrial Average (DJIA) increased 27 points (0.1%) to 19,891, the S&P 500 Index was nearly unchanged at 2,279, and the Nasdaq Composite advanced 28 points (0.5%) to 5,643. In moderately heavy volume, 903 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil ticked $1.07 higher to $53.88 per barrel and wholesale gasoline added $0.03 to $1.58 per gallon. Elsewhere, the Bloomberg gold spot price declined $6.47 to $1,212.17 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—increased 0.2% to 99.51.

Dow member Apple Inc. (AAPL $129) reported fiscal 1Q earnings-per-share (EPS) of $3.36, above the $3.22 FactSet estimate, as revenues rose 3.3% year-over-year (y/y) to $78.4 billion, topping the projected $77.3 billion. The company said its holiday quarter results generated all-time revenue records for its iPhone, Services, Mac and Apple Watch units, with services revenue growing "strongly" y/y, led by record customer activity on the App Store. AAPL's 2Q revenue guidance came in just shy of expectations. Shares finished nicely higher.

Advanced Micro Devices Inc. (AMD $12) posted a fiscal 4Q loss of $0.01 per share, matching forecasts, with revenues rising 15.9% y/y to $1.1 billion, roughly in line with estimates. The graphic chipmaker's 1Q revenue forecast topped expectations and shares rallied.

The big three U.S. automakers reported January sales today, with General Motors Co's (GM $36) sales declining 3.8% y/y, compared to the projected 1.0% decline. Fiat Chrysler Automobiles NV's (FCAU $11) sales fell 11.2%, compared to the expected 14.9% drop. Ford Motor Co (F $12) reported a 0.6% dip in sales, versus the expected 3.2% decline. GM, F and FCAU declined.

Manufacturing growth accelerates in January, Fed holds steady

The Institute for Supply Management (ISM) Manufacturing Index (chart) for January moved farther into expansion territory (above 50) than expected after rising to 56.0—the highest since November 2014—from December's 54.5 level, and compared to the Bloomberg forecast of a modest rise to 55.0. Production and new orders both improved to levels north of 60, and growth in employment accelerated. Prices rose to 69.0 from 65.5, and inventories increased but remained in contraction territory. Amid the backdrop of the strong U.S. dollar, new export orders decreased but remained above 50. The ISM said comments from the survey were generally positive regarding demand levels and business conditions.

The final Markit U.S. Manufacturing PMI Index was revised slightly lower to 55.0 for January from the 55.1 preliminary level, where it was expected to remain. However, the index is up from the 54.3 level posted in December. A reading above 50 denotes expansion. The release is independent and differs from ISM's manufacturing report, as it has less historic value and Markit weights its index components differently.

The ADP Employment Change Report showed private sector payrolls rose by 246,000 jobs in January, well above the Bloomberg forecast of a 168,000 gain, while December's increase of 153,000 jobs was revised slightly lower to a 151,000 rise. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday's broader January  nonfarm payroll report, expected to show an increase of 175,000 jobs, while private sector payrolls are projected to rise by 170,000 (economic calendar). The unemployment rate is forecasted to remain at 4.7%, and average hourly earnings are projected to rise 0.3% month-over-month (m/m).

Today's manufacturing and employment data adds credence to our view in the latest Schwab Market Perspective: A New World, that we believe the market's post-election gains were not solely related to optimism about the pro-business leanings of the new administration, but also reflected improving economic data and better corporate earnings. Continued solid economic data and a decent earnings reporting season bolster our confidence in the continuation of the bull market in stocks. However, rising inflation, possibly forcing the Fed to be more aggressive, could lead to bouts of volatility and more pullbacks. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, opting to keep the target range for the Fed funds rate unchanged at 0.50%-0.75%, as many had expected, after agreeing unanimously to raise the target rate range at its December meeting. It was revealed in the Federal Reserve's FOMC statement that "in view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate." There was no press conference or updated economic projections following the decision. Be sure to check out analysis of the Fed's decision from Schwab's Chief Investment Strategist Liz Ann Sonders later today at www.schwab.com/marketinsight.

Construction spending (chart) declined 0.2% m/m in December, versus projections of a 0.2% advance, and following November's unrevised 0.9% gain. Residential spending was 0.4% higher, and non-residential spending declined 0.7%.

The MBA Mortgage Application Index declined 3.2% last week, following the previous week's 4.0% gain. The decrease came as the Refinance Index fell 1.4%, while the Purchase Index dropped 5.6%. The average 30-year mortgage rate rose 4 basis points (bps) to 4.39%.

Treasuries were lower, with the yield on the 2-year note gaining 1 basis point (bp) to 1.22%, the yield on the 10-year note rising 3 bps to 2.48% and the 30-year bond rate advancing 2 bps to 3.08%.Treasury yields and the U.S. dollar remain in focus with the global markets grappling with the latest policy moves from President Donald Trump, and Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, 5 Themes to Watch as the Trump Era Begins, at www.schwab.com/insights.

On the heels of the pullback in stocks from record highs, Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, Rise Up: Dow 20k Fails to Thrill Individual Investors, individual sentiment has become less bullish, while other measures show highly elevated optimism. She adds that extremely low volatility isn't likely to persist, but the bull market is. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Tomorrow's U.S. economic calendar will bring reports on weekly jobless claims, expected to have declined to 250,000 from the prior week's 259,000 level, and preliminary 4Q nonfarm productivity and unit labor costs, with productivity anticipated to have increased 1.0% on an annualized basis and costs forecasted to have risen 1.9%.

Europe snaps losing streak, Asia mostly higher following data

European equities gained ground, snapping a string of losses, with some upbeat Chinese business activity reports being met with some favorable eurozone and U.K. manufacturing data. The currency markets were in focus ahead of today's monetary policy decision in the U.S. and amid festering Brexit uncertainty, while U.S. President Donald Trump criticized currency valuations in Japan, China and Germany. The euro traded lower and the British pound moved higher versus the U.S. dollar, while bond yields in the region traded to the upside. Earnings results in the region were mostly upbeat to help sentiment, and the global tech sector got a boost from results from Dow member Apple.

For more on the global markets, see Schwab's Jeffrey Kleintop's, CFA, latest article, Five Reasons to Stay Invested Despite Heightened Uncertainty. Also, Jeff delivers his articles, The CURE for a calm Market: Four risks for 2017, and 5 Reasons International Stocks May Underperform In 2017. Read all these articles at www.schwab.com/oninternational.

Stocks in Asia finished mostly higher ahead of the U.S. monetary policy decision and some continued volatility in the currency markets following comments from U.S. President Donald Trump that criticized the low valuation of currencies in Japan, China and Germany. For more on Trump's policies, see Schwab's Jeffrey Kleintop's, CFA, article, President Trump and Global Trade: How Will Campaign Promises Play Out? at www.schwab.com/oninternational, where you can also find Schwab's Director of International Research, Michelle Gibley's, CFA, latest article, Currency Hedging: 5 Things You Need to Know. Some upbeat economic data in the region lent some support, with manufacturing and services sector reports out of China both showing growth accelerated in January, with the former topping estimates, while South Korea posted a larger-than-expected jump in exports for last month.

Stocks trading in Hong Kong declined, returning to action after the long Lunar New Year holiday break, while mainland Chinese markets remained closed. South Korean and Australian equities advanced, while Indian securities rallied as traders digested the nation's annual budget. For more on international investing, see Schwab's Michelle Gibley's, CFA, article, 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.

The international economic docket for tomorrow will include consumer confidence from Japan and PPI from the eurozone, while in central bank action, the Bank of England will announce its rate decision.