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Thursday, May 11, 2017

Stocks Cut Prices on Disappointing Retail Earnings

Charles Schwab: On the Market
Posted: 5/11/2017 4:15 PM ET

Stocks Cut Prices on Disappointing Retail Earnings

U.S. stocks finished the regular trading session well-off the lows, but still in the red as early morning pressure mounted on the heels of some disappointing earnings figures, which weighed on the retail sector, ahead of some key consumer reports expected tomorrow. Treasuries gained ground and the U.S. dollar was flat despite a hotter-than-expected wholesale inflation report, while gold and crude oil prices were higher. In central bank action, the Bank of England kept its monetary stance unchanged as expected.

The Dow Jones Industrial Average (DJIA) declined 24 points (0.1%) to 20,920, the S&P 500 Index ticked 5 points (0.2%) lower to 2,394, and the Nasdaq Composite decreased 13 points (0.2%) to 6,116. In moderately-heavy volume, 863 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.50 to $47.83 per barrel and wholesale gasoline added $0.02 to $1.56 per gallon. Elsewhere, the Bloomberg gold spot price moved $6.64 higher to $1,225.59 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 99.64.

Macy's Inc. (M $24) reported Q1 earnings-per-share (EPS) of $0.23, or $0.24 ex-items, compared to the $0.36 FactSet estimate, as revenues dropped 7.5% year-over-year (y/y) to $5.3 billion, below the projected $5.5 billion. Q1 same-store sales fell 5.2% y/y, versus the expected 2.7% decline. M reaffirmed its full-year guidance. Shares closed sharply lower.

Kohl's Corp. (KSS $37) posted Q1 profits of $0.39 per share, versus the forecasted $0.29, as revenues were 3.2% lower y/y at $3.8 billion, below the projected $3.9 billion. Quarterly same-store sales decreased 2.7% y/y, compared to the estimated 1.2% decline. KSS was solidly lower.

Whole Foods Market Inc. (WFM $37) announced fiscal Q2 EPS of $0.31, or $0.37 ex-items, versus estimates of $0.37, with revenues rising 1.1% y/y to $3.7 billion, roughly in line with expectations. Q2 same-store sales declined 2.8% y/y, compared to the forecasted 3.0% decrease. WFM lowered its full-year EPS and revenue outlooks, while announcing a 29% increase of its quarterly dividend to $0.18 per share, and a new $1.25 billion share repurchase program. WFM also announced changes, including additions, to its Board, as well as the appointment of a new Chief Financial Officer. WFM traded higher.

Symantec Corp. (SYMC $31) reported a fiscal Q4 loss of $0.23 per share, or earnings of $0.28 ex-items, compared to the projected $0.28, as revenues rose 35.0% y/y to $1.2 billion, roughly in line with expectations. The company's Q1 and full-year revenue guidance came in below forecasts, while its EPS outlooks for the periods were mixed. SYMC finished lower.

Verizon Communications Inc. (VZ $46) announced that it signed an agreement to acquire Straight Path Communications Inc. (STRP $178) for $184.00 per share, or a total consideration of approximately $3.1 billion in an all-stock transaction. The agreement terminates STRP's previously announced deal to be acquired by AT&T Inc. (T $38). Shares of STRP were sharply lower, though they have nearly doubled AT&T's initial takeover proposal of $95.63 per share, while VZ and T were little changed.

Producer price inflation tops forecasts, jobless claims surprisingly decline

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in April rose 0.5% month-over-month (m/m), versus Bloomberg's expectation of a 0.2% gain and compared to March's unrevised 0.1% dip. The core rate, which excludes food and energy, was up 0.4%, versus forecasts of a 0.2% advance and March's unrevised flat reading. Y/Y, the headline rate was 2.5% higher, above projections of a 2.2% increase, and the core PPI increased 1.9% last month, above of estimates of a 1.6% gain. In March, producer prices were 2.3% higher and up 1.6% for the headline and core rates, respectively.

Weekly initial jobless claims (chart) declined by 2,000 to 236,000 last week, below forecasts of 245,000, with the prior week’s figure unrevised at 238,000. The four-week moving average rose by 500 to 243,500, while continuing claims fell by 61,000 to 1,918,000, south of estimates of 1,980,000.

Today's disappointing earnings reports and hotter-than-expected inflation reading set the stage for tomorrow's economic calendar, which will bring key reads on consumer spending, sentiment and purchasing power. April retail sales are projected to rise 0.6% m/m, after March's 0.2% decline, and excluding autos, sales are forecasted to grow 0.5% after the prior month's flat reading. Stripping out autos and gas, sales are expected to increase 0.4% on the heels of the 0.1% gain in March.

As noted in our recent article, Is the Retail Sector Really Dying?, the retailing sector will likely face more turmoil as a trimmed down and modernized industry reinvents itself. We don't think investors should totally shun the sector as the gloom hanging over the group may be obscuring some potential bright spots. Read more on the Insights & Ideas page at and follow Schwab on Twitter: @schwabresearch. For a look at the potential of the sector, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest look at our Consumer Discretionary Sector Rating: Marketperform, on the Markets & Economy page at

Also, this month's preliminary University of Michigan's Consumer Sentiment Index is anticipated to remain at April's 97.0 level and the Consumer Price Index (CPI) and core CPI are both estimated to be up 0.2% m/m in April, after falling 0.3% and 0.1% in March, respectively. The headline figure is expected to dip to a gain of 2.3% y/y from 2.4% and the core rate is projected to remain at a 2.0% increase. Business inventories for March will round out the day and are expected to have ticked 0.1% higher after rising 0.3% in February.

Treasuries finished higher, with the yields on the 2-year and 10-year notes declining 2 basis points (bps) to 1.34% and 2.39%, respectively, while the 30-year bond rate dipped 1 bp to 3.03%.

For analysis of the bond markets, see our article, Mixed Signals: What Does Recent Economic Data Mean for Bonds?, as well as Schwab's Vice President of Trading and Derivatives, Randy Frederick's and Chief Fixed Income Strategist, Kathy Jones' video, Fed Rate-Hike Cycle: How Can Bond Investors Prepare? on the Insights & Ideas page at Follow Randy and Kathy on Twitter:  @randyafrederick and @kathyjones.

Schwab's Chief Investment Strategist Liz Ann Sonders offers a look at the low volatility market action as of late in her article, Strange Brew: Heightened Uncertainties, Yet Plunging Volatility…What Gives? on the Markets & Economy page at Follow Liz Ann on Twitter: @lizannsonders.

Finally, with political uncertainty festering, exacerbated by this week's ousting of FBI Director James Comey, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses What the Coming Tax Cuts Mean for the Stock Market on the Markets & Economy page at Follow Jeff on Twitter: @jeffreykleintop. Moreover, see the video from Schwab's Randy Frederick and Vice President of Legislative and Regulatory Affairs, Michael T. Townsend titled, Washington Overview: Budget Deals, Tax Reform, and Trump's 100-Day Mark, on the Insights & Ideas page at

Europe lower on data, Asia mostly higher

European equities finished lower, with the markets digesting a plethora of mixed earnings reports on both sides of the pond, while global political uncertainty continues to fester and the Bank of England (BoE) expectedly kept its monetary policy stance unchanged. The British pound saw some pressure versus the U.S. dollar following the BoE's decision, with Bloomberg pointing out that the pound had gained ground leading up to the decision amid speculation that there could be more than one dissenting vote. In other U.K. economic news, industrial and manufacturing production both unexpectedly declined m/m in March and the nation's trade deficit widened more than expected. The euro was little changed against the greenback and bond yields in the region were mostly higher. For analysis of the political uncertainty amid Brexit negotiations, and ahead of elections in the U.K., Germany and Italy later this year, see Schwab's Jeffrey Kleintop's, CFA, and Randy Frederick's video, Political Risk: How Should Investors Respond? on the Insights & Ideas page at, where you can also find our article, Brexit Begins: What's Next for the U.K?

Stocks in Asia finished mostly to the upside, with the recent weakness in the yen helping lift Japanese equities, while Japan's trade surplus also narrowed by a smaller amount than had been expected in March. Stocks trading in mainland China and Hong Kong rebounded slightly from recent selling pressure that has come from lingering regulatory crackdown concerns and a patch of softer-than-expected economic data, bolstered by optimism amid reports that Chinese authorities stepped in to support the markets, per Bloomberg. South Korean securities advanced with the markets digesting this week's Presidential election, which delivered a victory for Democratic Party of Korea Moon. Indian listings finished flat and Australian equities ticked higher. For our latest analysis of the global markets, see Schwab's Director of International Research, Michelle Gibley's CFA, article, Different Drivers: Why Emerging Market Stocks Aren't All the Same on the Insights & Ideas page at, as well as Schwab's Jeffrey Kleintop's, CFA, article, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at

The international economic docket for tomorrow will include wholesale prices, CPI and industrial production from India, credit card balances from Australia, GDP and CPI from Germany, non-farm payrolls from France and industrial production from the Eurozone.

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