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Wednesday, October 04, 2017

Modest Gains in a Lackluster Session

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

Modest Gains in a Lackluster Session
U.S. equities modestly added to record highs after a read on the key services sector activity hit a level not seen in 12 years and a report on private sector jobs met expectations. Treasuries were nearly unchanged and the U.S. dollar trimmed a run as of late, while crude oil prices were mixed and gold ticked higher. On the equity front, PepsiCo posted mixed results and Mylan rallied on an FDA approval.

The Dow Jones Industrial Average (DJIA) increased 20 points (0.1%) to 22,662, the S&P 500 Index was 3 points (0.1%) higher at 2,538, and the Nasdaq Composite added 3 points to 6,535. In moderate volume, 736 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.44 to $49.98 per barrel and wholesale gasoline was $0.01 higher at $1.58 per gallon. Elsewhere, the Bloomberg gold spot price rose $4.45 to $1,276.11 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 93.47.

PepsiCo Inc. (PEP $109) reported Q3 earnings-per-share (EPS) of $1.49, or $1.48 ex-items, versus the $1.43 FactSet estimate, as revenues rose 1.3% year-over-year (y/y) to $16.2 billion, compared to the projected $16.3 billion. The company said each of its operating sectors delivered results in line with or ahead of its expectations in what continues to be a challenging market, with the exception of its North America Beverages segment where revenues declined following two consecutive years of very strong Q3 growth. PEP raised its full-year earnings outlook but slightly lowered its revenue forecast. Shares overcame early losses to finish modestly higher.

Ford Motor Co. (F $12) was in focus after it reaffirmed its full-year guidance late yesterday and announced its strategic update with initiatives including cost cutting and expanding electric vehicle revenue opportunities. Shares of F were nearly unchanged.

Monsanto Co. (MON $120) reported fiscal Q4 EPS of $0.05 per share, or $0.20 ex-items, but it is unclear if this is comparable to the projected loss of $0.41 per share, with revenues growing 4.8% y/y to $2.7 billion, north of the forecasted $2.5 billion. Shares ticked higher.

Share of Mylan NV (MYL $38) rallied after the U.S. Food and Drug Administration approved its generic copy of Teva Pharmaceuticals Industries Ltd's (TEVA $16) best-selling drug for multiple-sclerosis. Shares of TEVA fell sharply.

Services sector activity hits 12-year high, ADP employment report matches expectations

The September Institute for Supply Management (ISM) non-Manufacturing Index (chart) jumped to the highest reading since August 2005's 61.3 level, rising to 59.8 from August's unrevised 55.3 level, and compared to the Bloomberg forecast of a gain to 55.5. A reading above 50 denotes expansion. New orders jumped 5.9 points month-over-month (m/m) to 63.0, business activity rose 3.8 points to 61.3, and employment ticked 0.6 points higher to 56.8. Prices spiked 8.4 points to 66.3. The ISM said respondents' comments indicate a good outlook for business conditions.

The report complements Monday's ISM Manufacturing Index, which hit a 13-year high, as well as a host of upbeat global economic data as of late, bolstering our view discussed in the latest, Schwab Market Perspective: Fourth Quarter Fun…or Folly?, that it is lifting earnings and supporting the bull market. However, the inflation components of both reports jumped and added to recent signs of an uptick in pricing pressures. We believe if inflation begins to kick in in earnest, it could push the Fed to be more aggressive than currently believed and foster bouts of volatility and/or pullbacks. Read more on the Market Commentary page at, where you can also find Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, article, Inflation May Be The Biggest Question For Investors In 2018. Follow Schwab and Jeff on Twitter: @schwabresearch and @jeffreykleintop.

The final Markit U.S. Services PMI Index was revised to 55.3 in September from the preliminary 55.1 level, where it was expected to remain, but just below August's level of 56.0. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently.

The ADP Employment Change Report showed private sector payrolls rose by 135,000 jobs in September, in line with the Bloomberg forecast, while August's increase of 237,000 jobs was revised to a gain of 228,000. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday's broader September nonfarm payroll report, expected to show jobs grew by 80,000 and private sector payrolls rose by 74,000 (economic calendar). The unemployment rate is forecasted to remain at 4.4% and average hourly earnings are projected to rise 0.3% month-over-month (m/m).

The MBA Mortgage Application Index declined 0.4% last week, following the prior week's 0.5% decrease. The dip came as a 1.8% drop in the Refinance Index more than offset a 1.0% gain for the Purchase Index. The average 30-year mortgage rate ticked 1 basis point (bp) higher to 4.12%.
Treasuries were nearly unchanged, as yield on the 2-year note ticked 1 bp lower to 1.46%, while the yields on the 10-year and the 30-year bond were flat at 2.33% and 2.87%, respectively.

Treasury yields have gained traction as of late, with the 10-year rate hitting multi-month highs, and the U.S. dollar has seen a noticeable increase to highs not seen since August. The moves came as the Fed announced it will begin to shrink its behemoth $4.5 trillion balance sheet, while December Fed rate hike expectations remain elevated. Also, broad-based global economic growth and relative optimism toward tax reform framework have contributed. Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend discusses the tax reform details his latest article, Tax Reform Framework Released, But The Road Ahead Is Long on the Market Commentary page.

Tomorrow's economic calendar will begin with weekly initial jobless claims, forecasted to tick slightly lower to a level of 265,000 from the prior week's 272,000, followed by the trade balance, with economists anticipating the deficit to have narrowed during August to $42.7 billion. The final read on August durable goods orders will also be released, expected to remain at the initial 1.7% m/m increase, and factory orders will round out the day, forecasted to have posted a 1.0% rise for August following the 3.3% decline the month prior.

Europe sees some pressure on mixed data and as political concerns fester, Asia mixed

European equity markets finished mostly lower as an unexpected decline in retail sales countered more signs of solid global business activity growth, and as Spanish political concerns continued to fester. Catalonia ramped up its fight to protect the weekend's independence vote that has been deemed illegal. Also, Brexit uncertainty continues to linger, while U.K. Prime Minister Theresa May spoke and introduced new caps on household energy prices but several mishaps that occurred during the speech garnered the most attention. For analysis of political and Brexit uncertainties, see Schwab's Jeffrey Kleintop's, CFA, and Vice President of Trading and Derivatives, Randy Frederick's video, Political Risk: How Should Investors Respond?, and our article, Brexit Begins: What's Next for the U.K?, on the Insights & Ideas page at Follow Randy on Twitter: @randyafrederick. The euro and British pound gained ground on the U.S. dollar amid flared-up uncertainty regarding who will be the Fed Chief in the U.S. and in the wake of the European Central Bank and Bank of England signaling last month moves to tighten monetary policy, and Schwab's Jeffrey Kleintop, CFA, offers analysis in his article, How the Shift by Central Banks May Affect the Stock Market, on the Market Commentary page at Bond yields in the region are mixed.

Stocks in Asia finished mixed on the heels of yesterday's record highs in the U.S. that came courtesy of improved global economic sentiment in the wake of recent upbeat data. Schwab's Jeffrey Kleintop, CFA, and Randy Frederick note in the video, Is An Optimistic Outlook for Global Equities Warranted?, all of the world's top 20 economies are growing this year—a rare occurrence over the last decade, underpinning our positive outlook for global earnings. Read more on the Insights & Ideas page at However, volume remained lighter than usual as markets in mainland China and South Korea remained closed for holidays.

Stocks in Japan ticked higher to add to its two-year high, and markets in Hong Kong tacked on to yesterday's rally amid continued optimism following the weekend's upbeat manufacturing data and the announcement from the People's Bank of China that it will reduce the amount of cash lenders must hold in reserve. Australian securities dropped, with the markets continuing to grapple with yesterday's unchanged monetary policy decision by the Reserve Bank of Australia, which offered a mixed outlook to foster policy uncertainty. Meanwhile, listings traded in India advanced ahead of the monetary policy decision by the Reserve Bank of India after the closing bell, where it expectedly left rates unchanged.

For tomorrow, the international economic calendar will offer retail sales and trade data from Australia, CPI from Switzerland, and retail figures from the Eurozone.

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