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Thursday, November 02, 2017

Stocks Mostly Flat as New Fed Chief Announced

Charles Schwab: On the Market
Posted: 11/2/2017 4:15 PM EDT

Stocks Mostly Flat as New Fed Chief Announced
U.S. stocks finished the regular trading session mostly unchanged amid some favorable reports on weekly jobless claims and preliminary Q3 productivity and as President Trump announced Jerome Powell is expected to succeed Janet Yellen as the next Federal Reserve Chair. The markets also grappled with the details of this morning's release of the House's tax reform proposal. Treasury yields and the U.S. dollar were lower, while gold and crude oil prices traded slightly higher. In earnings news, Facebook and Tesla were under pressure after announcing their quarterly results following yesterday's closing bell.

The Dow Jones Industrial Average (DJIA) rose 81 points (0.3%) to 23,516, the S&P 500 Index was nearly unchanged at 2,580, and the Nasdaq Composite decreased 2 points to 6,715. In moderately heavy volume, 910 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.24 to $54.54 per barrel and wholesale gasoline added $0.03 to $1.77 per gallon. Elsewhere, the Bloomberg gold spot price gained $1.52 to $1,276.18 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 94.69.

Facebook Inc. (FB $178) reported Q3 earnings-per-share (EPS) of $1.59, versus the $1.28 FactSet estimate, as revenues rose 47.0% year-over-year (y/y) to $10.3 billion, topping the projected $9.9 billion. Daily and monthly active users were roughly in line with expectations, but its higher-than-expected outlook for capital expenditures and security investments was well above forecasts, and the company said this will impact profitability. Shares traded lower.

Tesla Inc. (TSLA $298) posted a Q3 loss of $3.70, or $2.92 per share ex-items, versus the expected $2.31 per share shortfall, with revenues rising 29.9% y/y to $3.0 billion, compared to the forecasted $2.9 billion. The company lowered its production target for its Model 3 due to constraints at its battery manufacturing facility. Shares finished sharply lower.

Yum Brands Inc. (YUM $79) announced Q3 EPS of $1.18, or $0.68 ex-items, versus the forecasted $0.67, as revenues declined 5.0% y/y to $1.4 billion, roughly in line with expectations. Q3 same-store sales grew 3.0% y/y, compared to the estimated 1.9% increase. The parent of Taco Bell, KFC and Pizza Hut maintained its full-year guidance. Shares rallied.

Kraft Heinz Co. (KHC $77) reported Q3 EPS of $0.77, or $0.83 ex-items, compared to the expected $0.82, as revenues grew 0.7% y/y to $6.3 billion, mostly in line with expectations. The company's organic sales growth slightly missed forecasts as sales declined more than expected in North America, overshadowing solid growth in the rest of the world. Shares were lower.

Jobless claims decline unexpectedly, Q3 productivity jumps

Weekly initial jobless claims (chart) decreased by 5,000 to 229,000 last week, below the Bloomberg forecast of an increase to 235,000, with the prior week’s figure being revised higher by 1,000 to 234,000. The four-week moving average fell by 7,250 to 232,500, while continuing claims dropped 15,000 to 1,884,000, south of estimates of 1,894,000.

Preliminary Q3 nonfarm productivity (chart) rose 3.0% on an annualized basis, versus expectations of a 2.6% gain, following the unrevised 1.5% increase seen in Q2. Unit labor costs gained 0.5%, above the forecast calling for a 0.4% gain. Unit labor costs were revised higher to a rise of 0.3% in Q2.

Today's employment data precedes tomorrow's fully-loaded economic docket, headlined by the October nonfarm payroll report, which is expected to show job growth of 310,000, rebounding from September's hurricane-impacted 33,000 decline. Private sector employment is projected to rise by 301,000 after falling 40,000 the month prior. The unemployment rate is forecasted to remain at 4.2% and average hourly earnings are estimated to rise 0.2% month-over-month after, building on September's 0.5% gain, and be up 2.7% y/y. Also, the September trade deficit is expected to widen to $43.2 billion, and September factory orders are projected to match August's 1.2% m/m rise, while the ISM non-Manufacturing Index and Markit's Services PMI Index are estimated to show growth remained solid.

Economic growth remains steady and a relatively new bright spot may be emerging as discussed by Schwab's Chief Investment Strategist Liz Ann Sonders in her article, Takin Care of Business: Several Important Kickers for a Strong Capex Cycle. Liz Ann also points out that tax reform—if we get it—would be an additional kicker, and the House's bill released today is garnering heavy scrutiny. Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend and Vice President of Trading and Derivatives, Randy Frederick, discuss in the video, Where Does Tax Reform Stand?.

Friday's reports are not likely to sway already elevated expectations of a December Fed rate hike, which was reinforced by the Central Bank's monetary policy decision yesterday, but could impact the outlook for the frequency of rate hikes next year. We expected two-to-three rate hikes in 2018, meaning the market's expectations may have to rise to meet the Fed's as Liz Ann notes in her analysis of yesterday's decision titled, Fed Stands Pat in November; Gets Ready to Go in December.

Also, the markets are grappling with today's expected pick of Fed Governor Jay Powell as the next Chairman of the Central Bank by President Donald Trump, along with the release of the House tax reform bill and the Bank of England's decision to raise rates as expected.

For analysis of the Fed and President Donald Trump's pick for the next Chairman check out our article, Fed Chairman: Why Trump's Choice Matters. President Trump's expected pick of Fed Governor Jay Powell as the next Fed Chairman today is also fostering uncertainty and Schwab's Chief Fixed Income Strategist Kathy Jones and Randy Frederick discuss in the video, Should a Change in Fed Leadership Matter to Investors?.

Treasuries finished higher, with the yield on the 2-year note flat at 1.61%, while the yields on the 10-year note and the 30-year bond declined 3 basis points to 2.35% and 2.83%, respectively. Treasury yields and the U.S. dollar dipped amid the aforementioned fiscal and monetary policy uncertainties, as well as the Bank of England's decision to raise rates today.

Europe mixed, pound falls despite BoE rate hike, Asia mostly lower amid earnings

European equity markets finished mixed, with the markets grappling with the details of the U.S. tax reform bill that was released today, while digesting the expected rate hike by the Bank of England (BoE), which included a more dovish forecast for further increases. The British pound fell on the BoE's decision and outlook to help the U.K. markets move higher. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers analysis of the changed global monetary policy landscape in his article, How the Shift by Central Banks May Affect the Stock Market. The markets also awaited the Fed leadership announcement in the U.S., while losses for financials were limited by a rally in shares of Credit Suisse Group AG (CS $16) on the heels of the company's sharp increase in profits. Markit reported that eurozone manufacturing output continued to depict solid growth. The euro traded higher versus the U.S. dollar and bond yields were lower.

Stocks in Asia finished mostly lower on some mixed earnings data in the region, while the markets digested yesterday's unchanged Fed monetary policy decision. Also, caution appeared to set in ahead of the Bank of England's monetary policy decision, as well as the release of the House's tax reform bill and President Trump's pick for the next head of the Fed in the U.S. Japanese equities gained ground. Australian securities dipped with financials seeing some pressure, while shares trading in mainland China and Hong Kong also declined. Stocks trading in South Korea and India finished lower. For analysis of the global market rally, see Schwab's Liz Ann Sonders' and Randy Frederick's video, Tracking Sentiment: Are Investors Too Optimistic About Stocks?.

The international economic docket for tomorrow will yield reads on the services sector from China, India, Australia and the U.K., with Australia also expected to report retail sales.

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