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Wednesday, September 27, 2017

Gains Garnish Stocks amid Data and Proposed Tax Overhaul

On the Market
Posted: 9/27/2017 4:15 PM EDT

Gains Garnish Stocks amid Data and Proposed Tax Overhaul
U.S. stocks gained solid ground with technology and financial shares leading an advance that followed an upbeat business spending report and an optimistic reception for the latest ambitious tax reform proposal. Treasury yields and the U.S. dollar rallied, gold was lower and crude oil prices were mixed. In earnings news, Micron topped the Streets expectations, while Dow member Nike announced quarterly results and a forecast that weighed on the blue chip index.

The Dow Jones Industrial Average (DJIA) increased 56 points (0.3%) to 22,341, the S&P 500 Index was 10 points (0.4%) higher at 2,507, and the Nasdaq Composite rallied 73 points (1.1%) to 6,453. In moderate volume, 834 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.26 to $52.14 per barrel and wholesale gasoline was $0.03 lower at $1.62 per gallon. Elsewhere, the Bloomberg gold spot price lost $10.11 to $1,283.87 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% higher at 93.42.

Dow member Nike Inc. (NKE $53) reported fiscal Q1 earnings-per-share (EPS) of $0.57, versus the $0.48 FactSet estimate, as revenues were flat year-over-year (y/y) at $9.1 billion, roughly in line with forecasts. The company said it saw growth in international geographies and Nike Direct globally, but North American wholesale revenues declined and its gross margin fell on unfavorable changes in foreign currency exchange rates and a higher mix of off-price sales. The athletic apparel and footwear company warned that it expects North American sales to decline again in Q2 and its outlook for gross margin disappointed the Street. Shares traded solidly lower.

Micron Technology Inc. (MU $37) posted fiscal Q4 EPS of $1.99, or $2.02 ex-items, compared to the forecasted $1.82, as revenues jumped 91.0% y/y and were up 10.0% quarter-over-quarter to $6.1 billion, topping the expected $5.9 billion. The chipmaker said volumes rose and average selling prices increased. MU said it expects robust demand for its memory and storage solutions to continue into 2018 as it issued Q1 guidance that exceeded estimates. Shares rallied.

Business spending jumps again, Treasury yields and dollar rally on Fed expectations

August preliminary durable goods orders (chart) were up 1.7% month-over-month (m/m), compared to the Bloomberg estimate of a 1.0% gain, and July's 6.8% drop was unrevised. Ex-transportation, orders were 0.2% higher m/m, in line with forecasts and versus July's upwardly revised 0.8% rise. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, rose 0.9%, well above projections of a 0.3% increase, and following the upwardly revised 1.1% rise posted in the month prior. The volatile component of nondefense aircraft and parts orders jumped to bolster the headline figure, along with a rebound in demand for motor vehicles and parts. Orders for communications equipment jumped and machinery ticked higher, while demand for computers dropped and electrical equipment and appliances was little changed

The highlight of the report is likely the back-to-back monthly jump in the business spending component, which adds credence to our view in the latest Schwab Market Perspective: A Cat and Mouse Fall, that both domestic and global economic and earnings growth continues to look healthy and we expect the bull market to continue. Read more on the Market Commentary page at and follow us on Twitter: @schwabresearch.

The MBA Mortgage Application Index declined 0.5% last week, following the prior week's 9.7% drop. The decrease came as a 3.5% drop in the Refinance Index more than offset a 2.8% gain for the Purchase Index. The average 30-year mortgage rate rose 7 basis points (bps) to 4.11%.

Pending home sales fell 2.6% m/m in August, versus projections of a 0.5% decline, and following the unrevised 0.8% decrease registered in July. Compared to last year, sales were 3.1% lower. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which unexpectedly fell in August due to inadequate levels of available inventory and the upward pressure it's putting on prices.

Treasuries were lower, with the yield on the 2-year note rising 2 bps to 1.48%, the yield on the 10-year note gaining 7 bps to 2.30%, and the 30-year bond rate advancing 8 bps to 2.85%.
Treasury yields rallied, with the 10-year rate hitting a two-month high, and the U.S. Dollar Index jumped to levels not seen in over a month. Fiscal policy focus appears to be heating up as the markets began to digest the release of tax-reform proposal details, while expectations of a Fed rate hike in December were bolstered by yesterday's speech by Federal Reserve Chairwoman Janet Yellen, which seemed to foster a hawkish reaction. The comments come on the heels of last week's Fed monetary policy decision, after which its statement was viewed as a bit more hawkish, as discussed by Schwab's Chief Investment Strategist Liz Ann Sonders in her commentary, The Fed's on the QT, on the Market Commentary page at, where you can also find Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, analysis of the global monetary policy front in his article, How the Shift by Central Banks May Affect the Stock Market. Follow Liz Ann and Jeff on Twitter: @lizannsonders and @jeffreykleintop.

Amid the backdrop of a plethora of things for the market to worry about, Schwab's Liz Ann Sonders discusses the market's resiliency in her article, Comfortably Numb? An Update on Investor Sentiment, on the Market Commentary page at

Tomorrow, the U.S. economic calendar will remain busy, beginning with four major releases an hour prior to the opening bell. Early reports include the third and final read for Q2 GDP, with economists anticipating no revision to the quarterly 3.0% annualized growth rate in the second release, weekly initial jobless claims, forecasted to tick higher to 270,000 from the prior week's 259,000, the advanced goods trade balance, estimated to show that the deficit widened in August to $65.1 billion, and preliminary wholesale inventories for August, expected to have increased by 0.4% after registering a 0.6% rise for July's final print. Rounding out the day will be the September Kansas City Fed Manufacturing Index, anticipated to have decreased to a level of 15 from 16 in August, with a reading above 0 indicating expansion in activity.

Europe higher and Asia mixed amid Fed expectations

Most European equity markets finished higher, with the euro and British pound losing ground versus the U.S. dollar, which rallied on some upbeat economic data and yesterday's speech by Fed Chief Janet Yellen that bolstered expectations of a December rate hike. Bond yields in the region moved noticeably to the upside to boost the financial sector. In economic news, Italian economic and consumer confidence both topped forecasts in September. For a look at the global markets, see Schwab's Jeffrey Kleintop's, CFA, article, U.S. vs. International: What Do Earnings Tell Us About What May Be Ahead?, on the Market Commentary page at

Stocks in Asia finished mixed as the markets grappled with heightened rate hike expectations in the U.S. following the Fed Chair's speech yesterday, while shares in China and Hong Kong gained ground following an upbeat read on the nation's industrial profits. Japanese equities declined, though losses may have been limited by continued weakness in the yen as the U.S. dollar has rallied as of late. Indian stocks extending their losing streak to seven sessions as recent economic data has fostered concerns and the markets continue to retreat from record highs. South Korean and Australia securities ticked lower. For analysis of global investing amid this backdrop, see Schwab's Jeffrey Kleintop's, CFA, and Vice President of Trading and Derivatives, Randy Frederick's video, Is An Optimistic Outlook for Global Equities Warranted?, on the Insights & Ideas page at

The international economic docket for tomorrow will yield reports on job vacancies in Australia, CPI from South Korea, CPI and GfK Consumer Confidence from Germany and consumer confidence from the Eurozone.

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