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Wednesday, October 11, 2017

Technology Shares Lead Mild Advance

Charles Schwab: On the Market
Posted: 10/11/2017 4:15 PM EDT

Technology Shares Lead Mild Advance 
U.S. stocks finished the trading session higher with technology shares leading the advance, while financials lagged ahead of tomorrow's quarterly results from some key banking sector heavyweights. In economic news, a measure of unmet demand for labor and weekly mortgage applications declined ahead of the afternoon release of the Fed's September meeting minutes. Treasury yields and the U.S. dollar were lower, gold was higher and crude oil prices were mixed. Delta Air Lines and BlackRock topped quarterly earnings expectations and Kroger announced it is exploring strategic options.

The Dow Jones Industrial Average (DJIA) increased 42 points (0.2%) to 22,873, the S&P 500 Index gained 5 points (0.2%) to 2,555, and the Nasdaq Composite added 16 points (0.2%) to 6,604. In moderate volume, 742 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.38 to $51.30 per barrel and wholesale gasoline was $0.02 higher at $1.61 per gallon. Elsewhere, the Bloomberg gold spot price was up $5.21 to $1,293.24 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% lower at 92.90.

Delta Air Lines Inc. (DAL $53) reported Q3 earnings-per-share (EPS) of $1.64, or $1.57 ex-items, versus the $1.53 FactSet estimate, as revenues rose 5.5% year-over-year (y/y) to $11.1 billion, compared to the projected $11.0 billion. The company cited challenges from multiple hurricanes and an earthquake in Mexico, but said three of its four entities reported positive unit revenues and it sees continued opportunity in business yields. DAL issued a positive outlook for Q4 passenger revenue. Shares traded higher.

BlackRock Inc. (BLK $474) posted Q3 EPS of $5.78, or $5.92 ex-items, versus the projected $5.57, with revenues growing 14.0% y/y to $3.2 billion, above the expected $3.1 billion. The company noted strong organic asset and base fee growth amid continued growth of its global investment and technology platform. BLK closed higher.

Kroger Co. (KR $21) reaffirmed its 2017 guidance, while announcing plans to redefine its food and grocery customer experience and the exploration of strategic alternatives for its convenience-store business, including a potential sale. Shares finished higher.

Job openings slip from record highs, Fed release's meeting minutes

The Labor Department's Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, declined to a level of 6.08 million jobs available to be filled in August, from July's downwardly revised record high of 6.14 million jobs. The Bloomberg forecast called for a decrease to 6.13 million. The hiring rate dipped to 3.7% from July's 3.8% pace, and the separation rate declined to 3.6% from the prior month's 3.7% rate.

The MBA Mortgage Application Index declined 2.1% last week, following the prior week's 0.4% dip. The decrease came as a 4.2% drop in the Refinance Index The average 30-year mortgage rate rose 4 basis points (bps) to 4.16%.

At 2:00 p.m. ET, the Federal Reserve released the minutes from its September monetary policy meeting. The information contained in the report showed that labor market conditions continued to strengthen and that real GDP appeared to be moderately rising ahead of Hurricanes Harvey and Irma. The minutes also indicated that many participants thought that another increase in the target range for the federal funds rate before the end of the year "was likely to be warranted if the medium-term outlook remained broadly unchanged." And "all agreed that they would closely monitor and assess incoming data before making any further adjustment to the federal funds rate."

Treasuries were mostly higher, with the yield on the 2-year note flat at 1.51%, while the yields on the 10-year note and the 30-year bond declined 2 bps to 2.34% and 2.87%, respectively.

Bond yields and the U.S. dollar have pulled back somewhat from recent rallies to multi-month highs, with the markets grappling with uncertainty regarding the long road to 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.

Treasury yields and the greenback have been bolstered by an upbeat global economic backdrop, as well as signs that inflation may be starting to nudge higher, notably the strong wage growth figure of last week's September nonfarm payroll report. As such, the Fed, the Bank of England and European Central Bank have signaled shifts in monetary policy, with the former expected to continue to raise rates in December and begin to shrink its massive $4.5 trillion balance sheet this month.
Inflation has gained more global market attention and 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?.

Also, 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.

Read these articles and other timely commentary from our Schwab experts on the Market Commentary page at Follow Liz Ann, Jeff and Schwab on Twitter: @lizannsonders, @jeffreykleintop, and @schwabresearch.

Tomorrow, investors will get a look at some inflation data for the month of September from the Producer Price Index (PPI), with the measure of prices at the wholesale level expected to have increased 0.4% m/m, while excluding food and energy, the core rate is forecasted to have risen 0.2% m/m. Weekly initial jobless claims will also be reported, forecasted to have declined by 10,000 to a level of 250,000 from 260,000 the week prior.

Europe mixed on data and political focus, Asia mostly higher 

European equity markets finished mixed, with Japan's strong machine orders data joining yesterday's larger-than-expected rise in German exports to preserve optimism regarding global economic growth. Spanish stocks rallied amid eased political concerns after yesterday's speech from Catalan President Puigdemont in which he said he would hold off on an immediate declaration of independence for now as he seeks talks with the Spanish government. However, uncertainty remained as Spain's Prime Minister Rajoy held a special session of cabinet that concluded with a formal request to the Catalan government to clarify if independence had been declared. This move by Rajoy is a precursor to triggering Article 155, which could lead to suspension of Catalonia's government. U.K. political and Brexit uncertainties also festered as Prime Minister Theresa May faced questions in parliament today and as the fifth round of complicated Brexit negotiations continue. May stressed that there would not be a second vote on whether to exit the European Union and reiterated that Brexit will happen in March 2019. The euro gained ground on the U.S. dollar and the British pound was flat, while bond yields in the region finished mixed. For analysis, 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.

Stocks in Asia finished mostly higher following the advance in the U.S. yesterday back to near record high territory. Global economic optimism continues to support the markets, bolstered by today's much stronger-than-expected rise in Japan's core machine orders, which suggested business spending is ramping up. Following the report, Japanese equities rose to their highest level since December 1996, despite some strength in the yen. Australian securities advanced and South Korean shares rallied. Schwab's Jeffrey Kleintop, CFA, and Randy Frederick discuss in the video, Are Investors Underestimating the Stock Market Rally?, on the Insights & Ideas page at

Mainland Chinese stocks nudged higher, though those trading in Hong Kong declined amid weakness in property developers amid disappointment regarding a policy address by the government that failed to deliver details on farmland conversion into residential projects which was anticipated, per Bloomberg. Indian equities snapped a three-day winning streak on some caution ahead of earnings season.

The international economic docket for tomorrow will yield PPI from Japan, CPI and industrial production from India, consumer inflation and home loans data from Australia, CPI from France and industrial production for the Eurozone.

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