Stocks Mixed Ahead of Jobs Report

Charles Schwab: On the Market

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

Stocks Mixed Ahead of Jobs Report

U.S. stocks wavered on either side of the flatline before ultimately closing mixed on the heels of yesterday's Fed decision to hold current monetary policy steady and ahead of tomorrow's widely followed domestic employment report. On the equity front, Facebook topped its 4Q estimates but fostered concern in regard to its guidance to headline a mixed bag of corporate results. Treasuries were mixed, crude oil prices dipped and the U.S. dollar and gold were higher. Overseas, the Bank of England announced no changes to its current monetary policy at the conclusion of its meeting today.

The Dow Jones Industrial Average (DJIA) decreased 6 points to 19,885, the S&P 500 Index was 1 point (0.1%) higher at 2,281, and the Nasdaq Composite lost 6 points (0.1%) to 5,636. In moderately-heavy volume, 880 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.34 lower to $53.54 per barrel and wholesale gasoline lost $0.05 to $1.53 per gallon. Elsewhere, the Bloomberg gold spot price added $6.43 to $1,216.28 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—increased 0.2% to 99.80.

Facebook Inc. (FB $131) reported 4Q earnings-per-share (EPS) ex-items of $1.41, above the $1.31 FactSet estimate, as revenues jumped 53.0% year-over-year (y/y) to $8.8 billion, north of the forecasted $8.5 billion. Daily and monthly active users of the social media outlet both topped expectations, while ad revenue growth continued to jump. FB relinquished solid gains seen in the post-and-pre market sessions following its release late yesterday as its forecasts for higher-than-expected spending and reiteration that ad revenue growth will decelerate meaningfully in 2017 caused some concern among analysts. Shares saw pressure in choppy action.

Dow member Merck & Co. Inc. (MRK $64) posted 4Q profits ex-items of $0.89 per share, matching expectations, as revenues decreased 1.0% y/y to $10.1 billion, compared to the forecasted $10.2 billion. MRK's 2017 guidance bracketed the Street's estimates. MRK traded nicely higher.

MetLife Inc. (MET $51) announced 4Q EPS ex-items of $1.28, below the expected $1.34, with revenues increasing 1.0% y/y to $17.2 billion, versus the forecasted $17.3 billion. Shares traded decisively to the downside.

Ralph Lauren Corp. (RL $77) posted fiscal 3Q earnings ex-items of $1.86 per share, above the $1.64 estimate, as revenues fell 12.0% y/y to $1.7 billion, roughly in line with forecasts. RL maintained its full-year guidance. Separately, the company announced a cost savings plan and said it and Chief Executive Officer (CEO), Stefan Larsson, have mutually agreed to part ways. Shares fell sharply.

Mead Johnson Nutrition Co. (MJN $84) surged after confirming that it is in discussions with U.K. consumer products company and maker of Lysol cleaners, Reckitt Benckiser PLC. (RBGLY $18), about RBGLY's proposal to acquire MJN for $90.00 per share in cash. MJN noted that no agreement has been completed and there are no assurances that any transaction will result from these discussions. RBGLY gained ground.

Shares of Costco Wholesale Corp. (COST $168) rallied after the company reported that its net sales in January increased 9.1% to $9.08 billion from the $8.32 billion registered during the similar period last year.

Jobless claims decline

Weekly initial jobless claims (chart) declined 14,000 to 246,000 last week, below forecasts of 250,000, with the prior week’s figure revised to 260,000 from 259,000. The four-week moving average rose by 2,250 to 248,000, while continuing claims fell 39,000 to 2,064,000, just north of estimates of 2,063,000.

Preliminary 4Q nonfarm productivity (chart) rose 1.3% on an annualized basis, versus expectations of a 1.0% gain, following the upwardly revised 3.5% increase seen in 3Q. Also, unit labor costs increased 1.7%, versus the forecast calling for a 1.9% gain. Unit labor costs were revised downward to a rise of 0.2% in 3Q.

Treasuries were mixed, with the yield on the 2-year note dipping 1 basis point (bp) to 1.20%, the yield on the 10-year note was flat at 2.47%, and the 30-year bond rate ticking 1 bp higher to 3.09%.

Treasury yields, the U.S. dollar and stocks have been choppy as of late amid focus on the flurry of policy moves from President Donald Trump, recent record highs for equities, and yesterday's unchanged monetary policy decision from the Fed that appeared to foster a relatively dovish takeaway from the markets. 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. Follow Schwab on Twitter: @schwabresearch. Also, Schwab’s Chief Investment Strategist Liz Ann Sonders offers analysis of the Fed's monetary policy decision in her latest article, Fed Leaves Rates Unchanged, while noting in Rise Up: Dow 20k Fails to Thrill Individual Investors, that 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 provide a plethora of key reports to close out the week that could change the perceived dovish tone by the Fed in its policy statement yesterday. The ISM and Markit will provide their reads on services sector activity in January, with both expected to depict continued growth, while factory orders will put a bow on the final month of 2016, forecasted to show a rebound in manufacturing demand from November's drop. However, the headlining report will likely be the January nonfarm payroll report, projected to show total and private sector job growth remained steady, rising 175,000 and 173,000, respectively. The unemployment rate is estimated to remain close to a nine-year low of 4.7%. The wage component is poised to continue to garner the heaviest scrutiny for its implications on inflation and the health of the all-important U.S. consumer. Month-over-month (m/m) average hourly earnings are expected to rise 0.3% after December's 0.4% gain, while y/y wages are estimated to slow slightly to a 2.8% gain from the prior month's 2.9% increase, which was the highest gain since the great recession ended in June 2009.

As noted in the latest Schwab Market Perspective: A New World, 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.

Europe mixed, Asia mostly lower

European equities diverged, with technology leading to the upside and healthcare stocks pacing decliners, amid lingering U.S. political uneasiness and a plethora of mixed earnings reports. Traders also digested the unchanged monetary decision from the Bank of England (BoE), which followed the U.S. Fed's decision to hold its monetary policy stance steady yesterday. The British pound fell as the BoE boosted its economic growth forecast but lowered its outlook for inflation. The euro moved higher versus the U.S. dollar and bond yields in the region lost ground. 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 to the downside as festering U.S. political uneasiness in the wake of a plethora of policy moves from President Donald Trump, particularly regarding global trade and immigration, continued to foster some risk aversion. 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. The yen rallied amid the skittishness in the markets and in the wake of yesterday's unchanged Fed monetary policy decision, pressuring Japanese equities. Stocks trading in Hong Kong were lower in the second day back from an extended break due to the Lunar New Year holiday, while mainland Chinese markets remain closed until tomorrow. Securities in Australia and South Korea declined, however, Indian equities added to yesterday's rally that accompanied the nation's annual budget plan. For more on international investing, see 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 a plethora of PMI reads from Japan, China, India, the U.K., Germany, France, Italy and the eurozone. Additionally, Italy will report CPI and the eurozone will announce retail sales results.