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Thursday, November 02, 2017

Stocks Finish Mixed as Fed Holds Steady

Charles Schwab: On the Market
Posted: 11/1/2017 4:15 PM EDT

Stocks Finish Mixed as Fed Holds Steady
U.S. stocks finished the regular trading session mixed after a solid morning advance, which developed on the heels of strong global equity gains, tapered in afternoon action as the Fed concluded its monetary policy meeting. Treasury yields diverged as the Central Bank held its target range steady, as widely expected, while the U.S. dollar and gold were modestly higher and crude oil prices reversed to the downside despite a bullish inventory report. In equity news, corporate earnings reports continued to roll out, with Estee Lauder rallying after topping consensus forecasts.

The Dow Jones Industrial Average (DJIA) rose 58 points (0.3%) to 23,435, and the S&P 500 Index ticked 4 points (0.2%) higher to 2,579, while the Nasdaq Composite decreased 11 points (0.2%) to 6,717. In moderate volume, 873 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.08 to $54.30 per barrel and wholesale gasoline gained $0.01 to $1.74 per gallon. Elsewhere, the Bloomberg gold spot price gained $3.81 to $1,275.26 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 94.78.

Clorox Co. (CLX $128) reported fiscal Q1 earnings per share (EPS) of $1.46, compared to the $1.42 FactSet estimate, as revenues rose 7.0% year-over-year (y/y) to $1.5 billion, ahead of the projected $1.4 billion. The consumer products company said it saw record shipments of its newest products and solid growth in its Lifestyle segment. CLX trimmed both its full-year revenue and EPS guidance, citing its divestiture from the Aplicare business and a forecasted $0.10 per share impact from the hurricanes. Shares were higher.

Estee Lauder Companies Inc. (EL $122) posted a profit of $1.21 per share, or $1.14 ex-items, well ahead of the FactSet estimate calling for $0.97, as revenues increased 14% y/y to $3.3 billion , beating the Street’s forecasts for $2.9 billion. The makeup company said it saw solid growth out of its largest segments, skin care and makeup, which topped its own forecasts. Shares of EL finished solidly higher.

Pitney Bowes Inc. (PBI $11) posted Q3 EPS of $0.31, or an adjusted $0.33, versus the forecasted $0.42, on revenues of $842.8 million, above the FactSet consensus of $832.0 million. The company, best known for its postage and mailing technology equipment, also said it is initiating a review of its strategic alternatives. Shares traded solidly lower.

Fed holds target range steady, manufacturing remains solid and private sector jobs beat

The Federal Open Market Committee (FOMC) concluded its monetary policy meeting, unanimously agreeing to keep the target range for its fed funds rate steady at 1.00%-1.25%. The FOMC, based on information received since it met in September, stated that "the labor market has continued to strengthen and that the economy has been rising at a solid rate despite hurricane-related disruptions." Separately, the Fed noted that the balance sheet normalization program initiated in October is proceeding. At its previous meeting in September, the Fed provided details of its plan to begin winding down its $4.5 trillion balance sheet. In a unanimous decision, the Central Bank said it will taper its balance sheet by $10 billion per month—$6 billion from Treasuries and $4 billion from mortgage-backed securities—increasing by $10 billion per month every quarter for the first year. No updated economic projections or post-meeting press conference by Chairwoman Janet Yellen were provided after the decision. For more insightful analysis of the Fed’s decision, see Schwab's Chief Investment Strategist Liz Ann Sonders' article, Fed Stands Pat in November; Gets Ready to Go in December.

The meeting concluded amid the backdrop of global economic optimism, Fed leadership speculation, subdued inflation, and optimism regarding U.S. tax reform. For analysis of the Fed and President Donald Trump's pick for the next Chairman—expected this week—check out our article, Fed Chairman: Why Trump's Choice Matters, as well Schwab's Chief Fixed Income Strategist Kathy Jones' and Vice President of Trading and Derivatives, Randy Frederick's video, Should a Change in Fed Leadership Matter to Investors?.

Also, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend and Randy Frederick, discuss tax reform in the video, Where Does Tax Reform Stand?. For analysis of the global markets and potential risks to the bull market, which we believe will continue, read our latest Schwab Market Perspective: Stocks Aren't so Spooky.

The Institute for Supply Management (ISM) Manufacturing Index (chart) for October unexpectedly declined to 58.7 from 60.8 in September, compared to the Bloomberg forecast calling for a dip to 59.7. A reading above 50 denotes expansion. ISM said comments from respondents continued to reflect strong incoming orders as a result of recovery efforts in the wake of the hurricanes. New orders remained solid at 63.4, while the employment and prices components shrunk slightly, but remained positive with readings of 59.8 and 68.5, respectively.

The final Markit U.S. Manufacturing PMI Index was revised to 54.6 for October from the preliminary reading of 54.5, where it was expected to remain, and above the 53.1 level posted in September. A reading above 50 denotes expansion. The release is independent and differs from ISM's manufacturing 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 235,000 jobs in October, above the Bloomberg forecast of 196,000, while September's increase of 135,000 jobs was revised to a gain of 110,000. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday's broader October nonfarm payroll report, expected to show jobs grew by 325,000 and private sector payrolls rose by 320,000 (economic calendar). The unemployment rate is forecasted to remain at 4.2% and average hourly earnings are projected to rise 0.2% month-over-month (m/m).

The MBA Mortgage Application Index fell 2.6% last week, following the prior week's 4.6% decline. The drop came as a 5.0% decrease in the Refinance Index was met with a 1.0% fall in the Purchase Index. The average 30-year mortgage rate rose 4 basis points (bps) to 4.22%.

Construction spending (chart) rose 0.3% m/m in September, versus projections of a 0.2% decline, and following July's downwardly revised 0.1% increase. Residential spending was flat, while non-residential spending rose 0.5%.

Treasuries finished mixed, with the yield on the 2-year note rising 1 bp to 1.61%, while the yield on the 10-year note dipped 1 bp to 2.37%, and the 30-year bond rate was 3 bps lower at 2.85%.
Tomorrow's economic calendar will be fairly light and include weekly initial jobless claims, forecasted to tick higher to a level of 235,000 from the prior week's 233,000, as well as preliminary Q3 productivity and labor costs, with productivity expected to increase 2.6% and labor costs forecasted to have moved 0.4% higher.

European gains cool, while Asia sees solid advance ahead of Fed decision

Stocks in Europe finished only modestly higher after paring early gains, with the STOXX Europe 600 Index hitting a 2-year high early on strength in commodity shares, as caution ahead of today's Fed rate decision ensued. However, markets in Germany were solidly higher, playing catch-up after being closed yesterday for a holiday. The gains came despite some mixed manufacturing activity reports across the region, as well as central bank uncertainty, as the Bank of England is highly expected to raise rates for the first time in a decade when it meets tomorrow. Amid this backdrop, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in the article, How the Shift by Central Banks May Affect the Stock Market, and talks with Randy Frederick in the video about Is An Optimistic Outlook for Global Equities Warranted?. The euro and the British pound were lower versus the U.S. dollar, while bond yields in the region were mixed.

Stocks in Asia finished higher amid upbeat economic data and positive earnings results in the region, while focus was on today’s FOMC policy meeting, as well as lingering uncertainty regarding who will be the next Fed Chief. Manufacturing activity reports dominated the economic landscape with mixed results across the region, with Japan reporting a slight increase in activity, while those out of Australia and South Korea ticked slightly lower. The Caixin Manufacturing report in China was flat at a reading of 51.0, limiting gains for mainland Chinese shares amid increased concerns that the economy may be losing steam as the data followed yesterday’s official survey that showed an unexpected decline in activity. However, stocks trading in Hong Kong rallied, shrugging the report, with positive results out of the tech sector and a 17-year high in consumer confidence providing the lift. Japanese equities surged to a 21-year high, getting a boost from exporters on weakness in the yen. Indian stocks notched another record high, powered by gains in financials, and Australian securities also rose. South Korean equities also got into the action, rallying to a 4-month high, as eased tension in the Korean Peninsula increased investors’ appetites for riskier assets.

In addition to the aforementioned Bank of England decision, the international economic docket for tomorrow will yield consumer confidence from Japan and the trade balance from Australia and South Korea, while releases from across the pond will include Markit Manufacturing PMI reads from Germany, France, Italy and the Eurozone.

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