Markets Shrug Off Solid Jobs Report

Charles Schwab: On the Market

Posted: 3/8/2017 4:15 PM ET

Markets Shrug Off Solid Jobs Report

U.S. equities finished mixed, despite a much stronger-than-expected ADP employment report, as the data may have added to already-elevated Fed rate hike expectations. Meanwhile, political uncertainty here and abroad continued to be a drag on conviction. Treasury yields and the U.S. dollar moved higher and crude oil prices tumbled in the wake of a bearish government oil inventory report, while gold also finished lower.

The Dow Jones Industrial Average (DJIA) lost 69 points (0.3%) to 20,856, the S&P 500 Index declined 5 points (0.2%) to 2,363, while the Nasdaq Composite inched 4 points (0.3%) higher to 5,838. In moderate volume, 892 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil tumbled $2.86 to $50.28 per barrel and wholesale gasoline was $0.03 lower at $1.65 per gallon. Elsewhere, the Bloomberg gold spot price moved $7.64 lower to $1,208.22 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 102.09.

H&R Block Inc. (HRB $24) reported a fiscal 3Q loss of $0.50 per share, or $0.49 per share ex-items, compared to the $0.52 shortfall that was expected, as revenues declined 4.8% year-over-year (y/y) to $452 million, above the projected $428 million. The tax preparation company said it has seen market share gains in both assisted and do-it-yourself categories for the first half of tax season. Shares were sharply higher.

Shares of Dow member Caterpillar Inc. (CAT $93) saw pressure following a report from the New York Times (NYT) that said a report commissioned by the government accuses the company of tax and accounting fraud. The report follows last week's raid on the company's headquarters by Federal agents. No charges have been filed and the NYT said CAT told it that the company has not seen a copy of the report and declined further comment.

Urban Outfitters Inc. (URBN $25) reported 4Q earnings-per-share (EPS) of $0.55, below the estimated $0.56, as revenues rose 2.0% y/y to $1.0 billion, roughly in line with forecasts. 4Q same-store sales were flat y/y, versus the expected 0.1% increase. The retailer's gross margin was pressured, missing expectations, and the company said its 1Q gauge of profits is expected to see similar results as the quarter has started off weak. Shares dropped decisively.

Ciena Corp. (CIEN $24) posted fiscal 1Q EPS of $0.03, or $0.26 ex-items, compared to estimates of $0.29, with revenues rising 8.4% y/y to $622 million, below the forecasted $632 million. The network strategy and technology company reported gross margin that missed expectations. Shares were sharply lower.

ADP payroll report jumps, mortgage applications rise

The ADP Employment Change Report showed private sector payrolls jumped by 298,000 jobs in February, well above the Bloomberg forecast of a 187,000 gain, while January's increase of 246,000 jobs was revised to a 261,000 rise. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday's broader February nonfarm payroll report, expected to show an increase of 200,000 jobs, and private sector payrolls are estimated to rise by 195,000 jobs (economic calendar). The unemployment rate is forecasted to dip to 4.7% from 4.8%, and average hourly earnings are projected to rise 0.3% month-over-month (m/m).

Final 4Q nonfarm productivity (chart) was unrevised at a 1.3% gain from the preliminary estimate on an annualized basis, below expectations of an adjustment to a 1.5% rise. 3Q productivity was revised lower to a 3.3% increase. Also, unit labor costs were unadjusted at a 1.7% increase, from the initial report, versus expectations of a 1.6% gain. Unit labor costs rose by a downwardly revised 1.6% in 3Q.

Wholesale inventories (chart) was adjusted to a 0.2% m/m decline for January, versus expectations of an unrevised 0.1% dip, and following December's 1.0% gain. Sales decreased 0.1% m/m, compared to forecasts of a 0.5% gain. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—remained at December's 1.29 months level.

The MBA Mortgage Application Index rose 3.3% last week, following the previous week's 5.8% gain. The increase came as a 5.2% jump for the Refinance Index was met with a 1.7% rise for the Purchase Index. The average 30-year mortgage rate rose 6 basis points (bps) to 4.36%.

Treasuries finished lower, as the yield on the 2-year note rose 2 bps to 1.35%, the yield on the 10-year note gained 4 bps to 2.56%, and the 30-year bond rate increased 3 bps to 3.15%.

The markets continue to focus on the timing and details of President Donald Trump's policy plans, boosted expectations of a Fed rate hike next week in the wake of continued solid economic data, and the recent rally to all-time highs for the stock markets. As such, see our latest article, End of an Era: Why Volatility May Return to the Stock Market at www.schwab.com/insights.

As noted in the latest Schwab Market Perspective: "Phenomenal" Expectations, higher inflation and stronger economic data—and perhaps the stock market's rip higher—have led to more "hawkish" commentary from the Fed recently. March Fed hike expectations have risen considerably, now well over 80. History compiled by Strategas Research Partners shows that the best stock market performance during a rate hiking cycle comes when the Fed moves slowly in the first year, but quicker in the second year. That pattern appears to be panning out in this cycle. Read more at www.schwab.com/marketinsight.

For analysis of the Fed and President Trump's highly-anticipated reflationary policies, see Schwab's Chief Fixed Income Strategist, Kathy Jones' article, What would a shake-up at the Fed mean for bond investors? at www.schwab.com/onbonds, and Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Presidential Reset: What Does Trump's Speech Mean for His Agenda?, at www.schwab.com/insights. Follow Kathy on Twitter: @kathyjones.

Tomorrow's domestic docket will provide investors a look at weekly initial jobless claims, forecasted to rise to a level of 238,000 from the prior week's 223,000, as well as the Import Price Index, with economists anticipating a 0.1% m/m increase during February following the 0.4% rise registered in January.

Europe nudges higher on data, Asia mixed as conviction remains constrained

European equities ticked higher, with the markets digesting some relatively upbeat earnings and economic data, though a highly-anticipated U.S. rate hike loomed as a possibility and political uncertainty continued to linger. The upcoming key French Presidential election remained in focus 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. 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. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick. Shares of Adidas AG (ADDYY $92) rallied after the German athletic gear maker posted stronger-than-expected earnings results and offered a favorable outlook. In economic news, German and Spanish industrial production rebounded more than expected in January, ahead of tomorrow's monetary policy decision from the European Central Bank, with forecasts calling for the central bank to leave its stance unchanged. The U.K. raised its economic growth forecast for 2017, but lowered its outlook for the next three years as the nation delivered its spring budget. The euro and British pound were lower versus the U.S. dollar, while bond yields in the region gained ground.

Stocks in Asia finished mixed amid heightened expectations of a rate hike in the U.S. next week, mixed economic data, and festering U.S. and European political uncertainty. Also, recently resurfaced geopolitical concerns may have contributed to a lack of conviction in the markets. Japanese equities declined, as the yen strengthened intra-day, while a report showed the nation's 4Q GDP growth came in at a 1.2% annualized quarter-over-quarter pace, revised up from the preliminary estimate of 1.0% growth, but below the projected 1.5% expansion. Stocks in China dipped slightly, but those traded in Hong Kong advanced, following data that showed the nation's exports missed expectations for February, resulting in the first trade deficit in yuan terms for the country in three years. However, the Lunar New Year holiday may have impacted the data. Meanwhile, markets in Australia finished flat, India's market saw a modest decline, while South Korean securities ticked higher. For insight on global investing, see Schwab's Director of International Research, Michelle Gibley's, CFA, 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.

In addition to the aforementioned European Central Bank meeting, tomorrow's international economic calendar will hold CPI and PPI from China, machine tool orders from Japan, and employment data from France.