Charles Schwab: On the MarketPosted: 10/6/2017 4:15 PM EDT
Stocks Mostly Flat, but Finish Week with Solid GainsU.S. equities closed the trading session nearly unchanged, holding onto solid weekly gains as the monthly labor report showed an unexpected drop in September job creation due to the recent hurricanes. Treasury yields modestly extended a fresh run amid bolstered December rate hike expectations, while the U.S. dollar reversed to the downside following rumors of a possible North Korean missile test this weekend. Crude oil was lower and gold advanced. In equity news, Costco and Yum China Holdings announced quarterly results.
The Dow Jones Industrial Average (DJIA) decreased 2 points to 22,774, the S&P 500 Index dipped 3 points (0.1%) to 2,549, and the Nasdaq Composite ticked 5 points (0.1%) higher to 6,590. In moderate volume, 728 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil decreased $1.50 to $49.29 per barrel and wholesale gasoline was $0.05 lower at $1.56 per gallon. Elsewhere, the Bloomberg gold spot price added $6.86 to $1,275.08 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 93.81. Markets were nicely higher for the week, as the DJIA gained 1.7%, the S&P 500 Index added 1.2% and the Nasdaq Composite increased 1.5%.
Costco Wholesale Corp. (COST $157) reported fiscal Q4 earnings-per-share (EPS) of $2.08, above the $2.02 FactSet estimate, as revenues grew 15.8% year-over-year (y/y) to $42.3 billion, exceeding the $41.8 billion expectation. Q4 same-store sales rose 6.1% y/y, topping the forecasted 5.8% gain. However, the company's gross margin and membership renewal rates declined to disappoint the Street. Shares finished solidly lower.
Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest Schwab Sector Views: Consumer Staples: More than Meets the Eye, investors have grown nervous that already thin margins could collapse further as more shopping would potentially move online, and portions of the sector have taken a beating recently, which we think is a bit overdone. The staples group can be an important part of a portfolio, but without deteriorating economic conditions, a market weighting is the most we can justify. Read more on the Market Commentary page at www.schwab.com and follow us on Twitter: @schwabresearch.
Yum China Holdings Inc. (YUMC $41) posted Q3 EPS of $0.53, or $0.52 ex-items, versus the estimated $0.56, as revenues rose 8.0% y/y to $2.0 billion, roughly in line with forecasts. Q3 same-store sales grew 6.0% y/y, exceeding the 3.3% increase that was expected, reflecting solid growth at KFC and flat sales at Pizza Hut. The company approved an initial regular quarterly cash dividend of $0.10 per share, and increased its existing share repurchase program. YUMC traded higher.
September labor report shows wage growth may be gaining steam
Nonfarm payrolls (chart) declined by 33,000 jobs month-over-month (m/m) in September—the first decrease since September 2010—compared to the Bloomberg forecast of an 80,000 increase. The rise of 156,000 seen in August was revised to a gain of 169,000 jobs. The total downward revision to the job gains in August and July was 38,000. Excluding government hiring and firing, private sector payrolls decreased by 40,000, versus the forecasted gain of 75,000, after increasing by 164,000 in August, revised from the 165,000 rise that was initially reported.
The Labor Department noted that employment fell in food services and drinking places and showed below-trend growth in some other industries, likely reflecting major disruptions from hurricanes Harvey and Irma. Schwab's Chief Investment Strategist Liz Ann Sonders points out in her article, Trying to Reason with Hurricane Season: The Aftermath of "Harma", that a boost associated with the recovery/rebuilding efforts is likely. Read more on the Market Commentary page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.
However, the unemployment rate fell to 4.2% from 4.4%, where it was forecasted to remain, with the Labor Department saying that there was no discernable effect of the hurricanes on the national unemployment rate. Average hourly earnings rose 0.5% m/m, above projections of a 0.3% increase and versus August's upwardly revised 0.2% increase. Y/Y, wage gains were 2.9%—the highest since 2009—versus estimates of a 2.6% increase, and versus August's upwardly 2.7% rise. Finally, average weekly hours remained at August's unrevised 34.4 rate, matching forecasts.
Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, points out in his article, Inflation May Be The Biggest Question For Investors In 2018, 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. We expect central banks may get the big question of 2018 right, or at least mostly right, leading to gradually tighter monetary policy that doesn't derail the bull market or disrupt economic and earnings growth. But, there is a lot riding on it for investors and we will be watching the relationship between unemployment and wages closely. Read more on the Market Commentary page at www.schwab.com and follow Jeff on Twitter: @jeffreykleintop.
Wholesale inventories (chart) were revised slightly lower to a 0.9% m/m gain for August, versus forecasts calling for an unrevised preliminary 1.0% increase and July's 0.6% gain. Sales jumped 1.7% m/m, compared to forecasts to match July's upwardly revised flat reading. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—dipped to a 1.28 months pace from July's 1.29 rate.
Consumer credit, released in the final hour of trading, showed consumer borrowing expanded by $13.1 billion during August, below the $15.5 billion forecast of economists polled by Bloomberg, while July's figure was adjusted lower to an increase of $17.7 billion from the originally reported $18.5 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, rose $7.3 billion y/y, while revolving debt, which includes credit cards, increased by $5.8 billion.
Treasuries dipped but finished off the worst levels of the day that initially followed the employment report, with the yields on the 2-year and 10-year notes, as well as the 30-year bond rate, rising 2 basis points (bps) to 1.51%, 2.37% & 2.91%, respectively.
Due to positive and widespread global economic growth, with signs of an uptick in inflation, elevated expectations of a December Fed rate hike and the confirmation that the Central Bank will begin this month to shrink is massive balance sheet, Treasury yields and the U.S. dollar have rebounded noticeably in the past month. The yield on the 10-year Treasury note has recovered from levels not seen since late-2016 and the greenback has bounced off multi-year lows, also bolstered by the recently released tax reform framework, which appeared to foster some fiscal policy optimism despite facing a long road. The stock markets remain resilient, posting fresh record highs this week.
Amid this backdrop, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his article, Tax Reform Framework Released, But The Road Ahead Is Long, and Schwab's Liz Ann Sonders discusses the stock market's resiliency in her article, Comfortably Numb? An Update on Investor Sentiment. Read these articles on the Market Commentary page at www.schwab.com.
Europe mostly lower, Asia advances to close out the week
European equity markets finished mostly lower, as the markets digested the noisy U.S. labor report and a sharp jump in German factory orders for August. Also, continued weakness in the British pound in the wake of the recent rally in the U.S. dollar and amid festering political uncertainty in the region may have buoyed the U.K. markets. The euro reversed to the upside as the U.S. gave up early labor-report-fueled gains and dipped on rumors of a potential missile test by North Korea over the weekend and amid elevated expectations the European Central Bank could begin to dial back stimulus measures. Spanish political uneasiness remained as Catalonia continues to fight for independence after this week's vote that national authorities have called illegal. U.K. political uncertainty also lingered in the wake of this week's speech by U.K. Prime minister Theresa May that was marred by some mishaps, while the Brexit negotiations appear to be getting complicated.
Meanwhile, U.S. rate hike expectations jumped on the employment report, while recent hawkish signals from the ECB and Bank of England added to the global monetary policy anxiety. Bond yields in the region mostly gained ground.
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 www.schwab.com. Follow Randy on Twitter: @randyafrederick. Uncertainty regarding who will be the Fed Chief in the U.S. is festering in the wake of the ECB and Bank of England signaling last month moves to tighten monetary policy. As such, 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 www.schwab.com.
Stocks in Asia finished out the week in positive fashion, moving broadly higher on the heels of the continued record highs in the U.S., despite today's looming September labor report. However, volume remained lighter than usual, as mainland Chinese and South Korean markets remained closed for holidays. Japanese equities rose, with the yen extending recent weakness versus the U.S. dollar, while data showed wages rebounded slightly in August and Bloomberg pointed out that sentiment may have been supported by data showing foreigners turned to net buyers of Japanese equities last week for the first time since July. Shares trading in Hong Kong advanced, returning to action following yesterday's holiday break, while Indian stocks posted their first weekly gain in three. Australian securities gained ground, boosted by some dovish remarks by a Reserve Bank of Australia (RBA) member who said the RBA had not entirely ruled out further interest rate cuts in the wake of this week's disappointing retail sales figures and the central bank's unchanged monetary policy decision. Schwab's Jeffrey Kleintop, CFA, and Randy Frederick offer a look at global investing in the video, Is An Optimistic Outlook for Global Equities Warranted?, on the Insights & Ideas page at www.schwab.com.
Stocks begin Q4 in positive fashion
U.S. stocks began the final quarter of the year with a solid weekly gain and the U.S. dollar extended a recovery. Financials led the way as Treasury yields added to a recent rally that has taken the 10-year yield to highs not seen since July, with December rate hike expectations solidifying on a host of upbeat economic data. Leading up to Friday's labor report, a 13-year high in U.S. manufacturing activity followed upbeat reads out of China, Japan and eurozone, while growth in the key U.S. services sector was the strongest in 12 years. Both U.S. reports also showed inflation jumped.
Complementing the data, domestic business spending was stronger than initially-reported and September auto sales were mostly higher than projected. The House's passing of its budget resolution to start the long road to tax-reform bolstered fiscal policy optimism and most major sectors. However, crude oil prices fell decisively to give back a recent rally and pressure the energy sector.
Next week, the economic calendar will bring a plethora of releases that could drive volatility, headlined by the Producer Price Index (PPI) and Consumer Price Index (CPI), the minutes from the Fed's September meeting, retail sales and the preliminary October University of Michigan Consumer Sentiment Index. Other data next week to look out for include the NFIB Small Business Optimism Index and the JOLTS Job Openings report. However, the economic front will have to contend with the ramp up of Q3 earnings season, with the financial sector in focus as some banking heavyweights are slated to report.
As noted in the latest Schwab Market Perspective: Fourth Quarter Fun…or Folly?, the resiliency of stocks continues but risks of a pullback exist with signs of investor complacency and heightened political and geopolitical uncertainties. Earnings reporting season begins with elevated expectations and valuations, so the ability to hurdle the bar is getting tougher, but if surprises are biased to the upside, stocks should perform well. But that doesn't mean that there won’t be some Fed-induced volatility in the fourth quarter if inflation begins to kick in in earnest, it could push the Fed to be more aggressive than currently believed. Read more on the Market Commentary page at www.schwab.com.
International reports due out next week worth a mention include: Australia—consumer confidence. China—Caixin's PMI Services Index, trade balance and lending statistics. India—trade balance, CPI and industrial production. Japan—trade balance and core machine orders. Eurozone—investor confidence and industrial production, along with German trade balance and CPI. U.K.—industrial and manufacturing production and trade balance.
Please note: the U.S. bond markets will be closed on Monday in observance of the Columbus Day holiday.