Fed Report Unravels Job Data Gains

Charles Schwab; On the Market

Posted: 4/5/2017 4:15 PM ET

Fed Report Unravels Job Data Gains

Early gains for U.S. equities that came courtesy of another batch of stronger-than-expected ADP employment data dissolved, after the minutes from the Fed's March meeting showed support among members to begin shrinking the central bank's balance sheet later this year, as well as the potential of no fiscal stimulus until 2018. Adding to the uncertainty were late-day comments from Speaker of the House Ryan regarding tax reform. Treasury yields declined following the Fed report, while some disappointing reads on the services sector also tempered conviction. Meanwhile, crude oil prices ticked slightly higher, despite an unexpected rise in oil inventories, while gold and the U.S. dollar lost modest ground.

The Dow Jones Industrial Average (DJIA) fell 41 points (0.2%) to 20,648, the S&P 500 Index moved 7 points (0.3%) lower to 2,353, and the Nasdaq Composite declined 34 points (0.6%) to 5,864. In heavy volume, 942 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.12 to $51.15 per barrel and wholesale gasoline was unchanged at $1.72 per gallon. Elsewhere, the Bloomberg gold spot price decreased $3.50 to $1,252.78 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 100.46.

Shares of Panera Bread Co. (PNRA $313) rallied over 14% after announcing an agreement to be acquired by JAB for $315 per share in cash, in a transaction valued at about $7.5 billion, including the assumption of approximately $340 million in debt. JAB is an investor in several companies in the consumer goods category, including owning controlling stakes in Keurig Green Mountain, Krispy Kreme, Peet's Coffee & Tea, and Caribou Coffee Company.

Walgreens Boots Alliance Inc. (WBA $81) reported fiscal 2Q earnings-per-share (EPS) of $0.98, or $1.36 ex-items, versus the $1.37 FactSet estimate, as revenues declined 2.4% year-over-year (y/y) to $29.4 billion, compared to the projected $30.2 billion. WBA reaffirmed its full-year EPS outlook. Separately, the company announced a share repurchase program for up to $1.0 billion. Shares were lower.

Monsanto Co. (MON $115) posted fiscal 2Q EPS of $3.09, or $3.19 ex-items, compared to expectations of $2.79, as revenues rose 12.0% y/y to $5.1 billion, above the forecasted $4.7 billion. MON said it expects full-year earnings to be at the high end of its previous guidance and shares gained ground.

ADP report trounces forecasts, services data misses, Fed minutes rouse cation

The ADP Employment Change Report showed private sector payrolls rose by 263,000 jobs in March, well above the Bloomberg forecast of a 185,000 gain, while February's increase of 298,000 jobs was revised to a gain of 245,000. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday's broader March nonfarm payroll report, expected to show an increase of 180,000 jobs (economic calendar). The unemployment rate is forecasted to remain at 4.7%, and average hourly earnings are projected to rise 0.2% month-over-month (m/m).

The March Institute for Supply Management (ISM) non-Manufacturing Index (chart) declined to 55.2—the lowest since October 2016—from February's unrevised 57.6 level, which was the highest since October 2015, and compared to the Bloomberg forecast of a dip to 57.0. New orders and employment both decreased m/m but continued to show expansion, while prices also grew at a slower pace. The ISM said comments from respondents were mostly positive regarding the outlooks for business conditions and overall economy. However, ISM noted that there were several comments about the uncertainty of future government policies on health care, trade and immigration, and the potential impact on business.

The final Markit U.S. Services PMI Index was revised to 52.8 in March from the preliminary 52.9 level, versus estimates of a 53.1 reading, and compared to the 53.8 figure posted in February. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently.

The services sector is the largest contributor to U.S. economic output and the reports may have disappointed somewhat, but both indexes remained above 50, a level depicting continued expansion. Also, the data is being countered by the much stronger-than-expected ADP employment report, which showed positive "hard data" and added credence to Schwab’s Chief Investment Strategist Liz Ann Sonders' latest article, Hard Times: Time for the Hard Data to Catch Up to the Soft Data, that after a "typical" weak first quarter, economic growth should accelerate. Based on history, soft data—generally survey-based readings, such as consumer and business measures of confidence, as well as purchasing managers' surveys (PMIs)—is likely to retreat, while hard data—quantitative data or actual measures of economic activity—is likely to gain steam but curb your enthusiasm for a more meaningful acceleration due to longer-term pressures. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

The MBA Mortgage Application Index fell 1.6% last week, following the previous week's 0.8% decline. The decrease came as a 4.2% fall in the Refinance Index more than offset a 0.7% gain for the Purchase Index. The average 30-year mortgage rate ticked 1 basis point (bp) higher to 4.34%.

At 2:00 p.m. ET, the minutes from the Fed's March monetary policy meeting were released, noting that most officials supported policy to begin shrinking the Fed's $4.5 trillion balance sheet later this year, while also reiterating its outlook for gradual increases in interest rates. The minutes also showed that most members felt that the economy was at or near full employment, but continued to be divided over inflation, with some Fed officials indicating a "limited risk of a marked pickup in inflation," while others thought there were significant upside risks as a result of a strong jobs market. In addition, members felt that any fiscal stimulus may not come to fruition until 2018.

Treasuries finished higher, as the yields on the 2-year and the 10-year notes, as well as the 30-year bond were 2 bps lower at 1.23%, 2.32%, and 2.98%, respectively.

The markets have been choppy amid some upbeat economic data, exacerbated political uncertainty here and abroad, and the Fed's March rate hike and outlook for future increases. Amid this backdrop, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Financials—Opportunity or End of the Run?, at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch. Also, check out our videos by Schwab's Vice President of Trading and Derivatives, Randy Frederick and Senior Fixed Income Research Analyst, Collin Martin, CFA, titled, Fed Hiked Interest Rates, So Why Are Bond Yields Still So Low?, and Randy's and Schwab's Chief Fixed Income Strategist, Kathy Jones' discussion, Three Fed Hikes Seen in 2017: How Should Bond Investors Respond, at www.schwab.com/insights. Follow Randy and Kathy on Twitter: @randyafrederick and @kathyjones.

Tomorrow's economic calendar will be light, but offer more jobs data ahead of Friday's labor report, as weekly initial jobless claims will be released, forecasted to decline to a level of 250,000 from the 258,000 posted the week prior.

Europe mixed on data and a rebound in financials, Asia higher

European equities finished mixed, with financials rebounding from recent weakness as bond yields paused from a losing streak as of late and on the heels of yesterday's comments from U.S. President Donald Trump regarding changes to regulations in the banking sector. Oil & gas and basic materials also provided support as crude oil prices continued to recover and amid optimism of economic developments in China. However, conviction may have been stymied by tomorrow's beginning of a two-day meeting between the U.S. and China and Friday's U.S. nonfarm payroll report. Political uncertainty also lingered as Brexit negotiations continue and the markets digested last night's debate in France ahead of its key Presidential election later this month. For analysis of the European political front, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Randy Frederick's videos, "Brexit" Underway: How Can Investors Prep Now That Article 50 Has Been Triggered? and Why Should the French Presidential Election Be Important to Investors? at www.schwab.com/insights. Follow Jeff on Twitter: @jeffreykleintop. Also, check out our article, Brexit Begins: What's Next for the U.K., at www.schwab.com/insights, and Director of International Research, Michelle Gibley CFA, offers her article, Europe Votes: Could More Countries Reject the EU? at www.schwab.com/oninternational. The euro dipped and the British pound was higher versus the U.S. dollar following reports showing eurozone services output missed forecasts but continued to show expansion, while U.K. activity in the sector easily beat expectations.

Stocks in Asia finished higher, aided by yesterday's modest gains in the U.S. that snapped a two-session losing streak, while gains may have been limited by the highly-anticipated two-day meeting between the U.S. and China beginning tomorrow and Friday's key U.S. labor report. The markets appeared to shrug off lingering political uncertainty in the U.S. and Europe, as well as reports that North Korea conducted another ballistic missile test. For commentary on global trade and China, check out Schwab's Jeffrey Kleintop's, CFA, articles, Top Five Trade Issues Investors Should Be Watching, and The Fed has China in a Tough Spot. Japanese equities rose modestly, with the yen paring a recent rally and reports showing the nation's manufacturing and services sector growth accelerated. Australian securities also advanced, with strength in basic materials and oil & gas issues leading the way amid the continued recovery in crude oil prices and news out of China.

Stocks in mainland China and Hong Kong gained ground in their return to action following a holiday break, as materials and industrial stocks led the way on optimism plans for a new economic zone near Beijing will bolster earnings, per Bloomberg. Meanwhile, South Korea's markets finished flat, while India's bourse rose slightly, hitting a record high in a return to action following yesterday's holiday. Emerging markets have enjoyed strong returns in 2017, led by Indian stocks, which have rebounded sharply after a brief post U.S. election slide. For more on emerging markets read Schwab's Michelle Gibley's, CFA, article, Emerging Markets: Why They Deserve a Place in Your Portfolio. Read all these commentaries at www.schwab.com/oninternational.