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Thursday, October 12, 2017

Stocks Close Lower Amid Earnings and Economic Data

Charles Schwab: On the Market
Posted: 10/12/2017 4:15 PM EDT

Stocks Close Lower Amid Earnings and Economic Data
U.S. stocks finished lower with financial shares leading the decent despite mostly stronger-than-expected earnings results from Dow member JPMorgan Chase and Citigroup. The economic docket revealed a hotter-than-expected read on wholesale price inflation and a drop in weekly jobless claims that was larger than anticipated. Treasury yields and crude oil prices were lower, the U.S. dollar was flat and gold ticked higher. 

The Dow Jones Industrial Average (DJIA) decreased 32 points (0.1%) to 22,841, the S&P 500 Index shed 4 points (0.2%) to 2,551, and the Nasdaq Composite lost 12 points (0.2%) to 6,592. In moderate volume, 788 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.70 to $50.60 per barrel and wholesale gasoline was $0.03 lower at $1.61 per gallon. Elsewhere, the Bloomberg gold spot price was up $1.71 to $1,293.44 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 93.08.

Dow member JPMorgan Chase & Co. (JPM $96) reported Q3 earnings-per-share (EPS) of $1.76, versus the FactSet estimate of $1.65, with revenues rising 2.4% year-over-year (y/y) to $25.3 billion, above the projected $25.2 billion. Loan growth and net interest margin came in slightly above estimates, while trading revenues fell slightly more than it had projected last month as fixed income fell and equity trading was softer than expected. JPM's Chairman and Chief Executive Officer Jamie Dimon said the global economy continues to do well and the U.S. consumer remains healthy and it delivered solid results in a competitive environment. Shares of JPM traded lower.

Citigroup Inc. (C $72) posted Q3 EPS of $1.42, versus the forecasted $1.32, as revenues grew 2.0% y/y to $18.1 billion, compared to the estimated $17.9 billion. The company said it saw loan growth and increased revenue in many of its products, while tightly managing its expenses. Fixed income trading revenues fell but stock trading revenues rose. Net interest margin missed forecasts. C lost ground.

AT&T Inc. (T $36) reiterated its full-year earnings outlook, while noting that several devastating hurricanes, as well as earthquakes in Mexico, significantly impacted certain regions of its service during Q3. T also noted that total U.S. video subscribers in Q3 were down, driven by heightened competition in traditional pay TV markets and over-the-top services, hurricanes and its stricter credit standards. The company pointed out that it saw fewer y/y handset equipment upgrades in Q3, which will adversely impact wireless equipment revenue. Shares finished solidly lower.

Juniper Networks Inc. (JNPR $25) saw solid pressure after the company lowered its Q3 guidance, citing lower-than-expected cloud vertical revenue.

Producer price inflation rises, jobless claims fall

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in September were up 0.4% month-over-month (m/m), matching the Bloomberg expectation, after August's unrevised 0.2% gain. The core rate, which excludes food and energy, rose 0.4%, compared to forecasts of a 0.2% advance and August's unrevised 0.1% rise. Y/Y, the headline rate was 2.6% higher, in line with projections, and the core PPI rose 2.2% last month, above estimates of a 2.0% gain. In August, producer prices were 2.4% higher and up 2.0% for the headline and core rates, respectively.

Tomorrow, the economic calendar will complete the September inflation picture with the release of the Consumer Price Index, forecasted to rise 0.6% m/m, after August's 0.4% gain, and the core rate to match the prior month's 0.2% increase. Y/Y, the headline rate is expected to accelerate to a 2.3% gain after being up 1.9% in August and the core rate to tick higher to a 1.8% increase from a 1.7% rise. The report has the potential to overshadow tomorrow's other releases, September retail sales and the preliminary October University of Michigan Consumer Sentiment Index. Retail sales are expected to rebound m/m, with the control group figure—used to help calculate GDP—expected to rise 0.4% after dipping 0.2% in August. Consumer sentiment is projected to be little changed at 95.0. Business inventories will round out the day, forecasted to increase 0.7% m/m in August after rising 0.2% in July.

Inflation has garnered more attention by the markets as signs of an uptick have joined the positive global economic growth backdrop. This has bolstered recent gains in bond yields and the U.S. dollar, along with elevated December Fed rate hike expectations and the Central Bank's planned start of trimming its behemoth $4.5 trillion balance sheet. Moreover, leadership uncertainty at the Fed has flared-up as Fed Chair Janet Yellen's term nears the end.

As such, Schwab's Chief Investment Strategist Liz Ann Sonders notes that with wage growth picking up and the labor market even tighter, it’s time to put even traditional measures of inflation back on the radar screen in her article, The Waiting: Wage Growth and Inflation Finally Getting in Gear?. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, points out in his commentary, Inflation May Be The Biggest Question For Investors In 2018, that central banks are behaving as if wages and inflation will revive in the year ahead. If they don’t, and central banks don’t alter their policy path, the global stock markets could be in for a rough 2018.

Jeff also discusses, 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, while Schwab's Chief Fixed Income Strategist, Kathy Jones, and Vice President of Trading and Derivatives, Randy Frederick, discuss in the video, Should a Change in Fed Leadership Matter to Investors?.

Read these articles and video on the Market Commentary page at Follow Schwab and our experts on Twitter: @schwabresearch, @lizannsonders, @jeffreykleintop, @kathyjones and @randyafrederick.

Weekly initial jobless claims (chart) fell by 15,000 to 243,000 last week, below forecasts of a decline to 250,000, with the prior week’s figure being revised lower by 2,000 to 258,000. The four-week moving average dropped by 9,500 to 257,500, while continuing claims fell 32,000 to 1,889,000, south of estimates of 1,930,000.

Treasuries traded higher, with the yield on the 2-year note dipping 1 basis point (bp) to 1.51%, the yield on the 10-year note declining 3 bps to 2.32% and the 30-year bond rate decreasing 4 bps to 2.85%.

Europe mixed, Asia mostly higher 

European equity markets finished mixed, with global economic optimism continuing and appearing to counter heightened expectations of another rate hike in December out of the U.S., which remained elevated after yesterday's minutes from the Fed's September meeting. The British pound fell during the session to help the U.K. markets, as Brexit negotiations were said by the European Union's (EU) chief negotiator Barnier to have hit an impasse over the bill the U.K. has to pay when it exits. The agreement on what it will have to pay is said to be needed before the EU will start trade talks, per Bloomberg. Political uncertainty remained as Spain seeks clarity from Catalonia on whether it declared independence or not, while some attention was on confidence votes in Italy ahead of next year's election. 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 The euro dipped despite a stronger-than-expected read on eurozone industrial production, while bond yields in the region traded mostly lower. Financials were in focus, dipping as the markets scrutinized earnings reports from heavyweights in the U.S. banking sector, while energy issues lost ground as crude oil prices slipped.
Stocks in Asia finished mostly higher as U.S. stocks continued to register record highs and Japanese markets added to yesterday's gains that took the markets 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

Global economic optimism has buoyed sentiment, likely helping ease concerns about the impact of the highly expected December rate hike in the U.S., which appeared to be preserved by yesterday's look at the Fed's September meeting. Japanese equities rose, with the yen holding onto some of yesterday's losses, while political uncertainty eased on reports that suggested Prime Minister Abe looks set for a victory in the election later this month. Mainland Chinese stocks dipped and shares in Hong Kong advanced, with developers in focus after falling yesterday as a speech by the government appeared to disappoint. South Korean and Australian securities gained ground. Indian equities rallied ahead of data on inflation and industrial production after the close, which showed the former come in cooler than expected and the latter top forecasts.

The international economic tomorrow will be limited to CPI reports from Germany and Italy.

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