Stocks Take a Mid-Week Breather

Charles Schwab: On the Market

Posted: 9/13/2017 4:15 PM ET

Stocks Take a Mid-Week Breather

U.S. stocks paused a bit from the recent two-day run, but still registered mild gains as another subdued inflation report hit the Street and participants await tomorrow's Bank of England monetary policy decision. Treasury yields continued to rise from multi-month lows and the U.S. dollar furthered its fresh advance. Geopolitical concerns seemingly continued to ease and cost assessments related to the aftermath of Hurricane Irma have been relatively favorable. Crude oil prices were higher and gold experienced a minor decline.

The Dow Jones Industrial Average (DJIA) increased 39 points (0.2%) to 22,158, the S&P 500 Index added 2 points (0.1%) to 2,498, and the Nasdaq Composite ticked 6 points (0.1%) higher to 6,460. In moderate volume, 820 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.07 to $49.30 per barrel and wholesale gasoline moved $0.01 lower to $1.65 per gallon. Elsewhere, the Bloomberg gold spot price lost $9.90 to $1,321.92 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.6% higher at 92.45.

American Airlines Group Inc. (AAL $47) lowered its Q3 guidance for the key industry metric of total revenue per available seat mile (TRASM) and pre-tax profit margin. The airline cited the impact of Hurricane Irma, which caused more than 5,000 flight cancelations amid closures at 40 airports in Florida and the Caribbean, including its hub at Miami International Airport. Shares traded higher after airline stocks took a hit leading up to Hurricane Irma's landfall and as early estimates of the economic cost impact have been less than projected.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Trying to Reason with Hurricane Season: The Aftermath of "Harma", we expect to see a dip in economic activity in the short-term, followed by a boost associated with the recovery/rebuilding efforts, and the impact will unlikely dent the Fed's plans to continue monetary policy normalization. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

CNBC reported that Nordstrom Inc. (JWN $48) is in talks with private equity firm Leonard Green & Partners regarding a buyout which would take the retailer private, per people familiar with the matter. Neither entity has commented on the report. Shares were nicely higher.

Centene Corp. (CNC $98) announced an agreement to acquire substantially all of the assets of privately-held health insurer Fidelis Care for $3.75 billion, subject to certain adjustments, allowing the company to enter the New York Market. CNC rallied.

Shares of Western Digital Corp. (WDC $86) fell after Toshiba Corp's (TOSYY $18) announcement to enter into a memorandum of understanding (MoU) to speed up talks regarding the sale of its memory chip unit with a rival group led by Bain Capital Private Equity LP. WDC said it was disappointed with Toshiba's actions. WDC is leading a group bidding to acquire Toshiba's chip unit.

Wholesale price inflation misses forecasts, mortgage applications jump

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in August were up 0.2% month-over-month (m/m), versus the Bloomberg expectation to rise 0.3%, after July's unrevised 0.1% dip. The core rate, which excludes food and energy, rose 0.1%, compared to forecasts of a 0.2% advance and July's unrevised 0.1% decline. Y/Y, the headline rate was 2.4% higher, below projections of a 2.5% increase, and the core PPI rose 2.0% last month, south of estimates of a 2.1% gain. In July, producer prices were 1.9% higher and up 1.8% for the headline and core rates, respectively.

Tomorrow, the economic calendar will complete the picture of the August inflation landscape with the release of the Consumer Price Index, projected to rise 0.3% and 0.2% m/m for the headline and core rates respectively, accelerating from the 0.1% gains posted in July. Y/Y, prices are expected to be 1.8% and 1.6% higher respectively, after the 1.7% gains registered the month prior and below the Fed's target 2.0% rate. Stubbornly low inflation has caused expectations for another Fed rate hike this year to fade, but the Central Bank is still expected to announce the beginning of shrinking its gargantuan $4.5 trillion balance sheet following next week's monetary policy meeting.

As noted in the latest Schwab Market Perspective: A Preview of Coming Attractions?, how the Fed ultimately threads the needle and when it begins the process of unwinding its balance sheet will be closely watched and could result in times of increased market volatility. Read more on the Markets & Economy page at www.schwab.com and follow us on Twitter: @schwabresearch.

The MBA Mortgage Application Index jumped 9.9% last week, following the previous week's 3.3% gain. The increase came as an 8.9% rise in the Refinance Index was met with a 10.9% gain for the Purchase Index. The average 30-year mortgage rate declined 3 basis points (bps) to 4.03%.

Treasuries dipped, with the yields on the 2-year note and the 30-year bond ticking 2 bps higher to 1.35% and 2.79%, respectively, while the yield on the 10-year note advanced 3 bps to 2.19%. For analysis of the bond markets, see Schwab's Chief Fixed Income Strategist Kathy Jones' article, What's the Bigger Risk: Bond Market Bubble or Complacency?, on the Fixed Income page at www.schwab.com. Follow Kathy on Twitter: @kathyjones.

Bond yields and the U.S. dollar have rebounded this week from the former's November lows and the latter's levels not seen since early 2015, aided by eased geopolitical and domestic political concerns, as well as less-than-feared estimates of the economic cost impact of Hurricane Irma.

Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend points out in his article, Debt Ceiling Deal Pushes Showdown in Congress to December, with the debt ceiling debate being extended to December, we continue to believe that tax reform won't get resolved until the first part of 2018. Read more on the Insights & Ideas page at www.schwab.com and follow us on Twitter: @schwabresearch.

Finally, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, adds in his article, Missiles and Markets: An investor guide to geopolitical risks, investors should avoid overreacting to geopolitical developments and stick to their long-term financial plans. Read more on the International Investing page at www.schwab.com and follow Jeff on Twitter: @jeffreykleintop.

Tomorrow's domestic docket will also include weekly initial jobless claims, expected to have increased by 2,000 to a level of 300,000.

Europe and Asia mixed

European equity markets pulled back modestly in late-day action to finish mixed, with the Stoxx Europe 600 Index finishing flat after posting five sessions of gains. Energy stocks traded to the upside as crude oil prices moved higher. However, mining issues finished lower amid weakness in industrial metals prices, bogging down U.K. stocks, along with caution ahead of tomorrow's monetary policy decision by the Bank of England (BoE). Ahead of the decision, U.K. employment growth topped forecasts for July, but wage growth lagged estimates, on the heels of yesterday's hotter-than-expected inflation statistics. Technology stocks were choppy after rallying into yesterday's Apple iPhone unveiling, which appeared to foster some concerns about the timing of when customers can place orders for the device. The euro and the British pound fell versus the U.S. dollar and bond yields in the region finished mixed. In other economic news, eurozone industrial production rose modestly in July to match expectations.

For a look at global investing, see Schwab's Jeffrey Kleintop's, CFA, article, U.S. vs international: what do earnings tell us about what may be ahead?, on the Markets & Economy page at www.schwab.com, and his video with Vice President of Trading and Derivatives, Randy Frederick, Is An Optimistic Outlook for Global Equities Warranted?, on the Insights & Ideas page. Follow Randy on Twitter: @randyafrederick.

Stocks in Asia finished mixed after a couple days of gains that came courtesy of eased geopolitical concerns and estimates suggesting the economic cost impact in the U.S. of Hurricane Irma will be smaller than expected. Tech stocks finished mixed as the markets digest Apple's new iPhone launch, with some expressing concerns over the late timing of pre-order and on-sale dates. Also, the markets awaited tomorrow's BoE monetary policy decision and inflation data in the U.S. Japanese stocks extending a string of gains as the yen held onto recent weakness, while Indian shares ticked higher, despite late reports from yesterday showing consumer price inflation was slightly hotter than expected and industrial production growth missed forecasts. Australian securities finished flat and South Korean equities declined. Mainland Chinese stocks nudged higher, while shares in Hong Kong declined. For analysis of the global markets, see Schwab's Jeffrey Kleintop's, CFA, article, What are fund flows telling us about trends and risks in the global stock market?, as well as his commentary, An important benefit to global investors is back after 20 years, on the Markets & Economy page at www.schwab.com.

The international economic calendar for tomorrow will lead with consumer inflation and employment data from Australia, retail sales and industrial production from China, industrial production and capacity utilization from Japan and wholesale prices from India. Limited releases from across the pond will include CPI from Italy and France, as well as the aforementioned Bank of England monetary policy decision.