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Tuesday, September 19, 2017

Record Run Continues Despite Looming Fed Meeting

Charles Schwab: On the Market
Posted: 9/19/2017 4:15 PM ET

Record Run Continues Despite Looming Fed Meeting

U.S. equities added to record highs, continuing to show resiliency in the face of geopolitical and U.S political concerns, and ahead of tomorrow's Fed decision. U.S. housing construction activity in August topped expectations, adding to the upbeat mood, and Treasury yields modestly added to their recent rebound. Meanwhile, the U.S. dollar and crude oil prices declined, while gold was modestly higher.

The Dow Jones Industrial Average (DJIA) increased 40 points (0.2%) to 22,371, the S&P 500 Index gained 3 points (0.1%) to 2,507, and the Nasdaq Composite increased 7 points (0.1%) to 6,461. In moderate volume, 809 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.45 to $49.90 per barrel and wholesale gasoline lost $0.01 to $1.66 per gallon. Elsewhere, the Bloomberg gold spot price increased $3.87 to $1,311.31 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 91.78.

Shares of Kohl's Corp. (KSS $45) rose as the Street cheered its announcement that it will offer free returns for Inc's (AMZN $970) customers at select stores starting in October. The offer comes on the heels of its announcement earlier this month that it will launch a new Amazon smart home experience in 10 select Kohl's stores.

Shares of Best Buy Co. Inc. (BBY $53) fell as the Street expressed disappointment toward the company's new long-term financial targets that it released ahead of its investor day this afternoon.

AutoZone Inc. (AZO $535) reported fiscal Q4 earnings-per-share (EPS) of $15.27, or $15.18 ex-items, above the $15.11 FactSet estimate, as revenues grew 3.3% year-over-year (y/y) to $3.5 billion, roughly in line with expectations. Q4 same-store sales rose 1.0% y/y, versus the projected 0.8% gain, while its gross margin was flat y/y, slightly missing estimates, and its operating expenses rose due partly to higher wage pressure. Shares finished lower.

Shares of T-Mobile US Inc. (TMUS $65) and Sprint Corp. (S $8) moved higher following a report from CNBC's David Faber that the two companies are in active merger talks but that they are still weeks away from finalizing a deal. According to the report, Deutsche Telekom AG (DTEGY $19)—which owns about 64% of T-Mobile—would be the majority owner, while Softbank Group Corp. (SFTBY $41)—which owns nearly 84% of Sprint—will emerge as a large minority holder. None of the entities mentioned have commented on the report.

Housing construction activity tops forecasts in August

Housing starts (chart) for August dipped 0.8% month-over-month (m/m) to an annual pace of 1,180,000 units, but above the Bloomberg forecast of a 1,174,000 unit rate, while July starts were favorably revised to an annual pace of 1,190,000. Single-unit construction rebounded after the prior month's decline, while multi-family starts continued to drop. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, jumped 5.7% m/m in August to an annual rate of 1,300,000, after July's upwardly revised 1,230,000 rate, and north of the expected annual pace of 1,220,000 units. Permits for multi-unit rebounded from July's drop, while single-unit authorizations declined.

The housing market will likely be hampered by the storms in the short-term, joining the headwinds of higher building materials costs and shortages of lots and labor. Also, low supply and elevated prices have hampered existing home sales, which hit an eleven month low in July and will be in focus tomorrow as the August figures are released, projected to tick 0.2% higher m/m to an annual rate of 5.45 million units (economic calendar). However, as noted in yesterday's homebuilder confidence report and Schwab's Chief Investment Strategist Liz Ann Sonders' article, Trying to Reason with Hurricane Season: The Aftermath of "Harma", a boost associated with the recovery/rebuilding efforts is likely, while Liz Ann adds that real estate has been one of most consistent beneficiaries in the subsequent months following the 10 costliest U.S. hurricanes. Read more on the Markets & Economy page at and follow Liz Ann on Twitter: @lizannsonders. MBA Mortgage Applications will also be reported.

The Import Price Index (chart) increased 0.6% m/m for August, topping projections of a 0.4% rise, and compared to July's downwardly revised 0.1% dip. Compared to last year, prices were up by 2.1%, below forecasts of a 2.2% gain and compared to July's downwardly revised 1.2% increase.

Treasuries dipped, as the yield on the 2-year note was flat at 1.40%, while the yields on the 10-year note and the 30-year bond ticked 1 basis point higher to 2.24% and 2.81%, respectively. For analysis of the bond markets, see Schwab's Chief Fixed Income Strategist, Kathy Jones', and Vice President of Trading and Derivatives, Randy Frederick's, video, The Economy is Picking Up, But Bond Yields Are Falling—What's That About?, on the Insights & Ideas page at Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick.

Bond yields modestly extended a sharp recent rebound that has come as the markets shrugged off festering geopolitical tensions, while an acceleration in consumer price inflation added to the positive economic backdrop to bring the Fed back into focus, with the Federal Open Market Committee (FOMC) beginning its two-day monetary policy meeting today.

A rate hike is not expected after tomorrow's conclusion but the announcement that the Central Bank will begin to shrink its massive $4.5 trillion balance sheet is highly anticipated. For further analysis of the meeting, check out our latest article, Fed Watch: What to Expect from the September Meeting, on the Insights & Ideas page at and follow us on Twitter: @schwabresearch.

Europe battles back from early weakness, Asia lower 

European equity markets mostly ticked higher, overcoming early losses with the euro and British pound paring losses versus the U.S. dollar and despite caution ahead of tomorrow's monetary policy decision by the U.S. Federal Reserve. Global monetary policy remained in focus as the Fed decision will be followed by the Bank of Japan's policy statement, while the Bank of England signaled last week that a rate hike may be delivered in the coming months and the European Central Bank suggested at its last monetary policy decision that it will begin to discuss in detail dialing back its stimulus measures this autumn. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses the potential changes in global monetary policy in his latest article, How the Shift by Central Banks May Affect the Stock Market, noting that despite the coming shift by central banks towards trimming/tapering their balance sheets, we don't believe the bull market is at risk. Read more on the Markets & Economy page at including Jeff's point that earnings, not easing, remain the key support for stock markets around the world. In economic news, German investor confidence easily topped expectations for September. Bond yields in the region finished mixed to little changed.

Stocks in Asia finished mostly lower following the recent global market rally, with caution appearing to set in ahead of tomorrow's monetary policy decision out of the U.S., which will be followed by the Bank of Japan's decision later this week. Markets in mainland China, Hong Kong, Australia, India and South Korea were all lower. However, Japanese equities bucked the trend, finishing solidly higher in their return to action from yesterday's holiday, playing catch up with the markets and bolstered by the recent weakness in the yen. Schwab's Jeffrey Kleintop, CFA, offers analysis of the global investing landscape in his articles, What are fund flows telling us about trends and risks in the global stock market?, and, An important benefit to global investors is back after 20 years, on the Markets & Economy page at

Reports on tomorrow's international economic calendar will include trade data from Japan, PPI from Germany and retail sales from the U.K.

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