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Friday, October 13, 2017

Markets Notch Gains Amid a Flurry of Data and Events

Charles Schwab: On the Market
Posted: 10/13/2017 4:15 PM EDT

Markets Notch Gains Amid a Flurry of Data and Events
U.S. equities finished out the week higher, getting a boost from a 13-year high in consumer sentiment and solid retail sales. Technology issues caught a draft from HP's favorable guidance, while healthcare issues came under pressure as the Trump administration cut cost-sharing subsidies. Treasury yields were lower on cooler-than-expected inflation data and the U.S. dollar finished nearly unchanged, while crude oil prices moved higher in the wake of President Trump’s decision not to certify the Iran nuclear deal. 

The Dow Jones Industrial Average (DJIA) increased 32 points (0.1%) to 22,872, the S&P 500 Index added 2 points (0.1%) to 2,553, and the Nasdaq Composite gained 14 points (0.2%) to 6,606. In moderate volume, 769 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.85 to $51.45 per barrel and wholesale gasoline was $0.04 higher at $1.62 per gallon. Elsewhere, the Bloomberg gold spot price added $9.74 to $1,303.46 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was flat at 93.08. Markets were higher for the week, as the DJIA gained 0.4%, the S&P 500 Index added 0.3% and the Nasdaq Composite increased 0.2%.

Bank of America Corp. (BAC $26) reported Q3 earnings-per-share (EPS) of $0.48, versus the FactSet estimate of $0.46, with revenues rising 1.0% year-over-year (y/y) to $21.8 billion, compared to the expected $22.0 billion. Net interest income topped forecasts and trading revenues were above expectations despite falling, while loans grew and the company cut expenses more than anticipated. BAC was higher.

Wells Fargo & Co. (WFC $54) posted Q3 EPS of $0.84, or $1.04 ex-items, compared to the projected $1.02, as revenues declined 2.0% y/y to $21.9 billion, versus the estimated $22.4 billion. The company's net interest margin came in well below expectations and loans missed estimates. Shares were solidly lower.

HP Inc. (HPQ $22) rallied after the company issued its fiscal 2018 earnings outlook at its analyst day that had a midpoint above expectations. HPQ said it is looking to aggressively focus on pockets of growth in its stabilized core businesses and expand its 3-D printing solutions to include metal for mass-production manufacturing.

The healthcare sector saw some choppiness, led by hospital and managed-care stocks, after President Trump and his administration announced that they will cut off Affordable Care Act cost-sharing subsidies.

With earnings season heating up, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers a look at all the major market sectors in his latest, Schwab Sector Views: Sustainable Energy?, on the Market Commentary page at Follow us on Twitter: @schwabresearch.

Retail sales rise, consumer inflation cooler than expected, consumer sentiment jumps

Advance retail sales (chart) for September rose 1.6% month-over-month (m/m), compared to the Bloomberg forecast of a 1.7% gain and compared to August's positively-revised 0.1% decline. Last month's sales ex-autos were up by 1.0% m/m, versus expectations of a 0.9% gain, and following the favorably revised 0.5% increase seen in the previous month. Sales ex-autos and gas rose 0.5% m/m, compared to estimates of a 0.4% rise, and versus August's upwardly revised 0.1% gain. The retail sales control group, a figure used to help calculate GDP, grew 0.4%, matching projections, and the prior month's positively revised flat reading. Auto and gas sales rose solidly, along with building materials, while sales of food and beverages, clothing, at restaurants and online all moved higher. Electronics and appliances, furniture, health and personal care, and sporting goods sales categories were down.

The Consumer Price Index (CPI) (chart) gained 0.5% m/m in September, versus estimates calling for a 0.6% gain, while August's 0.4% rise was unrevised. The core rate, which strips out food and energy, was up 0.1% m/m, versus expectations for it to match August's unrevised 0.2% rise. Y/Y, prices were 2.2% higher for the headline rate, below forecasts of a 2.3% rise, while the core rate was up 1.7%, south of projections of a 1.8% increase. August y/y figures showed unrevised 1.9% and 1.7% rises for the headline and core rates, respectively.

The preliminary University of Michigan Consumer Sentiment Index (chart) surged to a 13-year high of 101.1 in October from the prior month's 95.1 level, and compared to expectations for it to dip to 95.0. The current economic conditions and expectations components of the report both jumped. The 1-year inflation forecast fell to 2.3% from September's 2.7% rate, while the 5-10 year inflation outlook dipped to 2.4% from 2.5%.

Business inventories (chart) rose 0.7% m/m in August, in line with forecasts, and versus July's upwardly revised 0.3% increase.

With inflation garnering more attention, Schwab's Chief Investment Strategist Liz Ann Sonders discusses putting traditional measures of inflation back on the radar screen in her article, The Waiting: Wage Growth and Inflation Finally Getting in Gear?, and Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers analysis of inflation in a global monetary policy perspective in his commentary, Inflation May Be The Biggest Question For Investors In 2018.

Global monetary policy focus remains, with Europe appearing to lean more hawkish and the Fed continuing down the normalization path amid leadership uncertainty, and Jeff discusses, How the Shift by Central Banks May Affect the Stock Market, and talks in the video with Vice President of Trading and Derivatives, Randy Frederick, Should a Change in Fed Leadership Matter to Investors?.

The political front remained in focus, as in midday action President Trump announced that he will not certify the nuclear deal with Iran, while Washington continues to grapple with tax reform, as discussed by Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend, in his article, Tax Reform Framework Released, But The Road Ahead Is Long.

Check out these articles and video on the Market Commentary page at Follow our Schwab experts on Twitter: @lizannsonders, @jeffreykleintop, @kathyjones and @randyafrederick.
Treasuries finished higher on the inflation data, as the yield on the 2-year note declined 2 basis points (bps) to 1.50%, the yield on the 10-year note fell 4 bps to 2.28%, and the 30-year bond rate dropped 3 bps to 2.82%.

Europe mixed following U.S. data, Asia mostly higher as Japan extends rally

European equities finished mixed, though a sharp jump in Chinese exports bolstered the basic materials sector. The markets digested today's cooler-than-expected U.S. inflation data and countering retail sales and consumer sentiment reports. As such, the euro and British pound gained modest ground on the greenback to apply some pressure on the markets. A mixed response to key U.S. banking sector earnings reports and declining bond yields weighed on financials. Bond yields saw pressure amid reports suggesting the European Central Bank is considering extending its bond-buying program for at least nine months after it starts tapering stimulus measures, per Bloomberg.

U.K. Brexit uncertainty remained, with a stalemate continuing as a fifth round of negotiations wrap up. Political uncertainty also festered as Spain is pushing Catalonia for clarification on whether or not it declared independence, while recent Italian confidence votes were digested. For analysis, see Schwab's Jeffrey Kleintop's, CFA, and Randy Frederick's video, Political Risk: How Should Investors Respond?, and our article, Brexit Begins: What's Next for the U.K?, on the Market Commentary page at

Stocks in Asia finished mostly higher to close out the week, with recent upbeat global economic optimism continuing to buoy sentiment, while Japanese stocks extended a rally to levels not seen in over two decades. Schwab's Jeffrey Kleintop, CFA, and Randy Frederick discuss in the video, Are Investors Underestimating the Stock Market Rally?, on the Market Commentary page at Stocks in China and Hong Kong ticked higher on a mixed September trade report, which showed exports rose at a rate that was below forecasts but imports topped expectations. Markets in Australia and India advanced, with the latter gaining on the heels of late-yesterday's upbeat inflation and industrial production reports. After the closing bell, India reported that its exports for September rose solidly. Finally, South Korean equities finished lower.

Stocks tick higher on the week amid mixed data and uncertainties

U.S. stocks posted a fourth-straight weekly gain as Q4 continued to roll on, with data fostering continued global economic optimism to support sentiment and overshadow festering global political and monetary policy uncertainties. Treasury yields and the U.S. dollar slipped after recent rallies on a cooler-than-expected read on consumer price inflation, pared optimism as the markets grapple with the long road to tax reform, and volatility across the pond on a Brexit stalemate and lingering Spanish political uncertainty. As such, real estate and utilities led to the upside, while financials were hampered. Banks also saw pressure as earnings reports from Dow member JPMorgan Chase & Co. (JPM $96) and Citigroup Inc. (C $72) topped expectations but signs of rising credit costs and the continued drop in trading revenues appeared to foster concerns. Telecommunications issues fell solidly amid continued concerns toward the sector, exacerbated by AT&T Inc's (T $36) warning that its Q3 results were negatively-impacted by the hurricanes and heightened competition. Consumer staples were among the best performers, aided by Dow member Wal-Mart Stores Inc's (WMT $87) $20 billion share buyback plan and outlook for sales. The positive global economic mood helped materials issues gain ground. Crude oil prices moved higher to help lift the energy sector.

Although ramped up earnings season will likely command a great deal of the market’s attention, next week's economic calendar will bring a flood of reports to be scrutinized, with housing playing a major role. The NAHB Housing Market Index will be followed by housing starts and building permits, and the week will culminate with existing home sales. The docket will be rounded out with the releases of industrial production and capacity utilization, the Fed's Beige Book, the Leading Index and the Import Price Index.

As noted in the latest Schwab Market Perspective: Preparing for the Latter Innings, U.S. stocks continue to grind higher, with little appearing able to knock them off course. The possibility of a pullback always exists but a melt up is also reemerging as a real possibility. Earnings tend to drive equity market direction, and the next few weeks should help set the tone for market action for the rest of the year. Expectations came down a bit as we entered reporting season and recent robust economic data gives support to the potential for companies to meet and/or beat estimates. Global economic growth continues to improve, which should help support both domestic and global stock markets. Read more on the Market Commentary page at

International reports due out next week that deserve a mention include: Australia—employment change. China—lending statistics, CPI and PPI, Q3 GDP, retail sales and industrial production. Japan—industrial production and trade balance. Eurozone—trade balance, new car registrations, CPI and construction output, along with German investor confidence. U.K.—inflation statistics, employment change and retail sales.

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