Stocks Mostly Advance Amid Fed Hike and Tentative Tax Deal

Charles Schwab: On the Market

Posted: 12/13/2017 4:15 PM EST

Stocks Mostly Advance Amid Fed Hike and Tentative Tax Deal

 

U.S. stocks traded mostly higher mid-week as the Federal Reserve expectedly increased its federal funds rate target range and recent headlines suggest that legislators have reached a tentative agreement on a final tax bill with full House and Senate votes expected to be held next week. Treasury yields declined despite the Fed decision and the U.S. dollar lost ground on the heels of a cooler-than-forecasted core consumer price inflation reading. Crude oil prices were lower and gold ticked higher. Shares of Finisar surged after receiving an investment from Dow member Apple. 

The Dow Jones Industrial Average (DJIA) increased 81 points (0.3%) to 24,585, the S&P 500 Index ticked 1 point lower to 2,663, and the Nasdaq Composite advanced 13 points (0.2%) to 6,876. In moderate volume, 874 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.54 to $56.60 per barrel and wholesale gasoline lost $0.05 to $1.65 per gallon. Elsewhere, the Bloomberg gold spot price moved $10.93 higher to $1,255.43 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.7% lower at 93.46.

VeriFone Systems Inc. (PAY $18) reported Q4 earnings-per-share (EPS) of $0.03, or $0.44 ex-items, versus the $0.43 FactSet estimate, as revenues rose 2.6% year-over-year (y/y) to $477 million, compared to the projected $472 million. The payment transaction device company issued Q1 and 2018 EPS guidance that missed expectations. PAY also announced the sales of its Taxi business and a new $100 million share repurchase program. Shares were solidly lower.

Finisar Corp. (FNSR $24) jumped after Dow member Apple Inc. (AAPL $173) announced it will invest $390 million into the manufacturer of optical communications components. AAPL said the investment is part of its Advanced Manufacturing Fund and will enable Finisar to increase its production of vertical-cavity surface-emitting lasers (VCSELs) that power some of Apple's new features, including Face ID, Animoji, and Portrait mode selfies. AAPL traded higher.

Honeywell International Inc. (HON $156) reported that it expects Q4 EPS to be at the high end of its previous guidance, while issuing a 2018 profit outlook that had a midpoint below expectations as it executes its previously-announced restructuring plans that include spinning off a couple business units. HON gained ground.

Eli Lilly and Company (
LLY $88) issued 2018 EPS guidance with a midpoint slightly above the Street's expectations, while noting that in 2018 it expects continued product pipeline progress, including U.S. regulatory action for some of its experimental treatments. Shares traded higher.

Fed raises target range as expected, consumer price inflation report mixed

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, voting seven to two to increase the target range for the federal funds rate by 25 basis points (bps) to 1.25-1.50%, a move that was widely expected. The Committee noted that it expects "with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong." The Fed also updated its economic projections, increasing its GDP annual growth estimate to 2.5% from September's forecast of 2.1% and Janet Yellen held her final press conference as the Fed Chair. For in depth analysis of the Fed’s decision look for commentary later today from Schwab's Senior Fixed Income Research Analyst, Collin Martin, CFA, on the Market Commentary page and see Schwab's article, Fed Rate Hike: What Does It Mean for Your Portfolio.

As noted in the latest Schwab Market Perspective: The Big Picture Heading into 2018, uncertainty is elevated as the Fed faces several changes in 2018 but recent comments from incoming Fed Chief Jerome Powell suggest continuity and transparency are priorities. However, if inflation should flare up, or growth start to lag, the Fed may be challenged early in the new regime.

The Fed's decision will be followed by tomorrow's fully-loaded economic calendar, expected to show jobless claims remain at low levels, import prices nudged higher, business activity continued to grow solidly per Markit, business inventories dipped, and retail sales accelerated as the holiday season rolls on. The retail sales data will likely carry the most weight, given heavy impact of the U.S. consumer on economic output as we head into 2018.

The Consumer Price Index (CPI) (chart) rose 0.4% month-over-month (m/m) in November, matching the Bloomberg estimate, while October's 0.1% rise was unrevised. The core rate, which strips out food and energy, was 0.1% higher m/m, compared to expectations to match October's unrevised 0.2% increase. Y/Y, prices were 2.2% higher for the headline rate, in line with forecasts and following October's unrevised 2.0% rise. The core rate was up 1.7% y/y, versus projections to match October's unadjusted 1.8% increase.

The MBA Mortgage Application Index decreased 2.3% last week, following the prior week's 4.7% gain. The decline came as a 2.5% drop in the Refinance Index accompanied a 1.1% decrease in the Purchase Index. The average 30-year mortgage rate ticked 1 basis point (bp) higher to 4.20%.

Treasuries finished higher, with the yields on the 2-year note and the 30-year bond dipping 5 bps to 1.77% and 2.73%, respectively, and the yield on the 10-year note decreasing 6 bps to 2.35%. The yield on the 10-year note retreated after reaching the high end of its recent range and the U.S. dollar dipped after a run as of late following the inflation report, while the stock markets continue to notch record highs.

In her video, What Could Fixed Income Investors Expect in 2018?, Schwab's Chief Fixed Income Strategist Kathy Jones offers three reasons we think investors might want to be a bit more cautious about where they look for yield in 2018. As noted in our 2018 Schwab Market Outlook: Executive Summary, we anticipate solid growth and don't see a recession on the horizon. However, with markets priced for ongoing moderate growth and low volatility, the risks we’re monitoring include the potential for higher inflation and more central bank tightening than expected.

As the tax reform reconciliation process continues, recent headlines suggest that the House and Senate negotiators have reached a tentative deal on a final tax bill. Schwab's Director of Tax and Financial Planning, Hayden Adams, CPA, offers analysis of this process and what investors should be paying attention to, in his article, Tax Reform: What Investors Should Know, while also addressing questions regarding how the potential tax overhaul may affect you as an investor in his article, Tax Reform: Frequently Asked Questions. Moreover, as you conduct your year-end tax planning, check out our latest article, Tax Reform: 11 Questions to Ask Your Advisor.

Europe declines and Asia mixed ahead of Fed decision

European equity markets finished mostly lower, with the markets treading cautiously ahead of today's Fed monetary policy decision, which will be followed by tomorrow's decisions from the European Central Bank and Bank of England. Also, some key Chinese economic data loomed on the horizon, while tax reform and the Alabama Senate election results in the U.S. garnered attention. The euro and British pound traded higher versus the U.S. dollar and bond yields in the region were mixed. In economic news, German consumer price inflation rose in line with expectations, eurozone industrial production unexpectedly increased, and U.K. employment change declined more than expected.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his, 2018 Global Market Outlook: Three Actions to Take for the Year Ahead, in which he says stay invested: with 2018 global stock market gains potentially being in the double-digits and go global: as international stocks may outperform U.S. stocks in 2018. Jeff also urges investors to rebalance: with rebalancing back to target allocations important as 2018 gains in stocks may result in a higher risk asset allocation ahead of a potential recession and bear market.

Stocks in Asia finished mixed, with tax reform reconciliation and the Alabama Senate election results in the U.S. garnering attention, while the markets awaited today's Fed monetary policy decision. Japanese equities declined, with the yen gaining solid ground and despite a stronger-than-expected rebound in machine orders—a gauge of capital investment—for October. Stocks trading in mainland China and Hong Kong advanced, led by strength in the banking sector and ahead of some key economic data due out tonight. Australian securities ticked higher and South Korean shares increased, while Indian equities declined amid some weakness in the financial sector. Schwab's Jeffrey Kleintop, CFA, offers a look at the global markets, which have rallied this year due to the broadest economic growth in a decade, in his article, 5 Reasons Investors Should Give Thanks.

In addition to the aforementioned central bank decisions, tomorrow's stacked international economic docket will yield industrial production and capacity utilization from Japan, retail sales and industrial production from China, consumer inflation expectations and employment data from Australia and wholesale prices from India. Releases from across the pond will include Markit Manufacturing and Services PMIs from the U.K., Germany, France and the eurozone, while the U.K. will also report retail sales.

Stocks Little Changed Following Two-Day WobbleStocks Mostly Flat After Overcoming Morning Lows

Charles Schwab: On the Market

Posted: 12/6/2017 4:15 PM EST

Stocks Little Changed Following Two-Day WobbleStocks Mostly Flat After Overcoming Morning Lows

 

U.S. stocks overcame some early weakness to finish the regular trading session fairly flat. U.S. tax reform continued to garner attention as the reconciliation process has begun. Treasury yields were lower and crude oil prices fell, while the U.S. dollar extended recent gains and gold was higher. Dow member Home Depot traded to the downside after announcing an accelerated business investment plan and the kidney dialysis services company DaVita agreed to sell its medical group to a unit of Dow component UnitedHealth for approximately $4.9 billion. 

The Dow Jones Industrial Average (DJIA) declined 40 points (0.2%) to 24,141, the S&P 500 Index was nearly unchanged at 2,629, and the Nasdaq Composite traded 14 points (0.2%) higher to 6,776. In moderate volume, 801 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil declined $1.66 to $55.96 per barrel and wholesale gasoline fell $0.06 to $1.66 per gallon. Elsewhere, the Bloomberg gold spot price ticked $1.39 higher to $1,267.79 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.2% higher at 93.55.

DaVita Inc (DVA $69) announced an agreement to sell its DaVita Medical Group to Optum, a unit of Dow member UnitedHealth Corp. (UNH $220), for about $4.9 billion in cash. DVA rallied and UNH dipped.

Dow member Home Depot Inc. (HD $181) reaffirmed its full-year guidance and announced a new $15 billion share repurchase program, along with providing an update on its strategic priorities including its intent to accelerate business investment over the next three years. The boosted investment plans pressured shares of HD due to concerns about margin expansion as it issued its long-term goal for operating margins that missed expectations.

Dave & Buster's Entertainment Inc. (PLAY $53) reported Q3 earnings-per-share (EPS) of $0.29, or $0.27 ex-items, versus the $0.24 FactSet estimate, as revenues rose 9.3% year-over-year (y/y) to $250 million, compared to the forecasted $256 million. Q3 same-store sales declined 1.3% y/y, versus the expected 1.0% decrease. PLAY raised its full-year earnings guidance, but lowered its sales outlook, while its longer-term guidance appeared to please the Street. Shares traded solidly higher.

ADP private sector payroll report matches forecasts

The ADP Employment Change Report showed private sector payrolls rose by 190,000 jobs in November, matching the Bloomberg forecast, while October's increase of 235,000 jobs was unrevised. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday's broader November nonfarm payroll report, expected to show jobs grew by 195,000 and private sector payrolls rose by 200,000 (economic calendar). The unemployment rate is forecasted to remain at 4.1% and average hourly earnings are projected to rise 0.3% month-over-month (m/m).

Final Q3 nonfarm productivity (chart) was unrevised at the preliminary estimate of a 3.0% rate of growth on an annualized basis, versus expectations of a revised 3.3% rise. Q2 productivity was unrevised at a 1.5% gain. Unit labor costs were adjusted to 0.2% decrease, from the initial report of a 0.5% increase, and versus the forecast calling for an adjustment to a 0.2% rise. Q2 labor costs were revised lower to a 1.2% drop.

The MBA Mortgage Application Index rose 4.7% last week, following the prior week's 3.1% decline. The increase came as a 9.0% jump in the Refinance Index was met with a 2.4% increase in the Purchase Index. The average 30-year mortgage rate dipped 1 basis point (bp) to 4.19%.
Treasuries traded higher, with the yields on the 2-year and 10-year notes dipping 2 bps to 1.80% and 2.33%, respectively while the 30-year bond rate decreased 1 bp to 2.72%.

The U.S. dollar added to its recent gains with European currencies seeing pressure, while Treasury yields dipped from levels near the top end of the year's trading range. The markets continue to await the expected competitive tax reform reconciliation process between the House and Senate as they try to find compromises on some key differences of their bills.

Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend notes in his latest commentary, Tax Bill Passes Senate, Clearing Key Hurdle, reaching consensus between the two chambers won’t be easy; there are significant differences between the two bills that will need to be resolved. The conference process will begin this week and Republican leaders are optimistic that a deal can be struck within a matter of days. Complicating matters, the two chambers also must find time this week to avert a government shutdown and approve legislation that extends funding to keep the government open and operating.

The tech sector has seen some volatility as of late with the prospects of tax reform improving and fostering some noticeable sector rotation, which Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, I Melt with You: Anatomy of a Market Melt Up, is a healthy occurrence, for now.

The U.S. economic calendar for tomorrow will be light, starting with weekly initial jobless claims, forecasted to have ticked higher to a level of 240,000 from 238,000. Consumer Credit will be released in the final hour of trading to round out the day, expected to have increased by $17.0 billion in October, after expanding $20.8 billion in September.

Europe mixed on data, Asia falls amid global retreat

European equity markets finished mixed in the wake of the recent global market pullback recently after a strong year, while the euro lost some ground on the U.S. dollar and technology issues remained under pressure. Financials were also lower along with bond yields in the region. The economic calendar delivered a surprising rise in German factory orders. The British pound lost ground versus the greenback, amid ramped up uncertainty as Brexit negotiations remain deadlocked and British Prime Minister May faces political pressures regarding her stance during the talks on how to resolve the Irish border issue. May has only a few days left to reach a deal on the Irish border issue as the European Union is due to decide on whether Brexit talks can move to the next stage. The markets also grappled with the looming highly expected contested U.S. tax reform reconciliation process. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives Randy Frederick point out in the video, Political Risk: How Should Investors Respond?, that a long history of these developments shows us that holding a well-diversified portfolio may buffer the short-term market moves that are often the result. So, investors should avoid overreacting to the political and geopolitical drama and stick to their long-term financial plans.

Stocks in Asia finished decisively lower amid a global market retreat as of late, with technology issues leading the slide, while traders assess the strong global rally this year and U.S. tax reform heads for a likely contested reconciliation process. The global rally and recent volatility is discussed by Schwab's Jeffrey Kleintop, CFA, and Randy Frederick, in the video, It's All Relative: Why Stocks May Not Be Overvalued. The yen showed some strength as risk aversion nudged higher, weighing on Japanese equities. Stocks trading in mainland China and Hong Kong declined, with the markets giving back some of the year's strong gains and concerns about government regulations lingered. South Korean shares traded lower. Australian securities slipped after the nation reported softer-than-expected Q3 GDP growth. Indian stocks finished lower ahead of today's monetary policy decision by the Reserve Bank of India (RBI). After the closing bell, the RBI left its monetary policy and benchmark interest rates unchanged as expected.

The international economic docket for tomorrow will include the trade balance from Australia, the Leading Index from Japan, industrial production from Germany, and house prices from the U.K.

Stocks Mixed As Techs Take a Hit

Charles Schwab: On the Market

Posted: 11/29/2017 4:15 PM EST

Stocks Mixed As Techs Take a Hit

 

The U.S. equity markets diverged amid continued global economic optimism following an upward revision to Q3 GDP and optimistic signs of progress in the Senate's tax reform bill. Treasury yields rose on the heels of a favorable economic outlook from Fed Chair Yellen, to the benefit of financials, but technology stocks tumbled, severely pressuring the Nasdaq. Crude oil prices were lower, extending losses ahead of tomorrow's OPEC meeting and following mixed oil inventory data, while gold was lower and the U.S. dollar was little changed.

The Dow Jones Industrial Average (DJIA) rose 104 points (0.4%) to 23,940, the S&P 500 Index fell nearly a point to 2,626, and the Nasdaq Composite tumbled 88 points (1.3%) to 6,824 In heavy volume, 922 million shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.69 to $57.30 per barrel and wholesale gasoline lost $0.04 to $1.73 per gallon. Elsewhere, the Bloomberg gold spot price decreased $8.94 to $1,285.04 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly flat at 93.24.

Tiffany & Co. (TIF $93) reported Q3 earnings-per-share (EPS) of $0.80, compared to the $0.76 FactSet estimate, as revenues grew 3.0% year-over-year (y/y) to $976 million, exceeding the projected $958 million. Q3 same-store sales were flat y/y, versus the forecasted 0.2% dip. TIF reaffirmed its full-year guidance. Shares finished lower.

Marvell Technology Group Ltd. (MRVL $22) posted Q3 EPS of $0.30, or $0.34 ex-items, compared to the forecasted $0.33, as revenues decreased 1.2% y/y to $616 million, just above the estimated $615 million. The chip company issued Q4 guidance that topped expectations. Shares were lower despite the results with the markets appearing to rotate out of the tech sector on the heels of the group's strong run this year, with chip companies seeing noticeable pressure.

Chipotle Mexican Grill Inc. (CMG $302) announced that Chairman and Chief Executive Officer (CEO)—and the founder of the company in 1993—Steve Ells will step down as CEO but will become Executive Chairman following the completion of a search to identify a new CEO. Shares were higher.

Shares of Autodesk Inc. (ADSK $109) tumbled over 15% after the application software company's Q3 billings figure missed expectations, resulting in a lowered full-year subscriptions outlook, despite reporting slightly stronger-than-expected Q3 top-and-bottomline results. The company also announced restructuring measures including the reduction of 1,150 employees to its workforce.

Q3 GDP revised higher, Fed comes into focus

The second look (of three) at Q3 Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of growth of 3.3%, up from the first release's 3.0% gain. The Bloomberg forecast called for an adjusted 3.2% pace of expansion. Q2 GDP grew by an unrevised 3.1% rate. Personal consumption came in at a 2.3% gain for Q3, lower than the preliminary estimate of a 2.4% increase, and compared to the expectations of a 2.5% increase. Personal consumption grew by an unrevised 3.3% in Q2.

On inflation, the GDP Price Index was revised to a 2.1% increase, versus expectations of an unrevised 2.2% gain, while the core PCE Index, which excludes food and energy, was adjusted to a 1.4% increase, compared to forecasts of an unrevised 1.3% rise.

Pending home sales rose 3.5% month-over-month in October, versus projections of a 1.0% rise, and following the negatively-revised 0.4% decline registered in September. Compared to last year, sales were 1.2% higher, versus estimates of a 3.0% gain. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which rose more than expected in October.

The MBA Mortgage Application Index declined 3.1% last week, following the prior week's 0.1% gain. The decrease came as a 7.7% drop in the Refinance Index more than overshadowed a 1.8% increase in the Purchase Index. The average 30-year mortgage rate remained at 4.20%.

Today the Fed is garnering attention as Chairwoman Janet Yellen delivered her U.S. economic outlook to the Joint Economic Committee of Congress, noting the economic expansion is increasingly broad-based and she continues to expect gradual adjustments in the stance of monetary policy. However, she pointed out that although recent lower readings on inflation likely reflect transitory factors, it is possible that this year's low inflation could reflect something more persistent.
In afternoon action, the Central Bank released its Beige Book, an anecdotal look at business activity across the nation used as a monetary policy preparation tool for the two-day meeting set to end December 13th. The report showed that economic activity progressed at "a modest to moderate pace," through mid-November, while also noting that "price pressures have strengthened since the last report" and that the labor market remains tight. As noted in the latest Schwab Market Perspective: Incredible, Amazing…Unstop-a-bull?, President Trump's nomination of current Fed governor Jerome “Jay” Powell to replace Janet Yellen as Chairman of the Federal Reserve when her term ends early next year was largely expected and greeted relatively favorably by the market. He is, like Yellen, a relatively dovish consensus builder; and therefore will represent continuity as the Fed continues its monetary policy normalization process. Given strong economic data and the pickup in some measures of wage growth, we believe the Fed will hike rates for the third time this year next month.

Treasuries finished lower, as the yield on the 2-year note increased 2 basis points (bps) to 1.77%, the yield on the 10-year note gained 5 bps to 2.38%, and the 30-year bond rate rose 6 bps to 2.82%.
The yield curve has steepened somewhat after a recent bout of flattening that appeared to foster some market weariness, while the U.S. dollar dipped after a two-day rebound, extending a pullback as of late.

The markets shrugged off flared-up geopolitical concerns following yesterday's missile launch by North Korea, aided by the positive global backdrop and signs of progress regarding the Senate's tax reform bill, which is expected to be voted on later this week. The House passed its bill two weeks ago, with several key differences setting the stage for a complicated reconciliation process.
Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend notes in his latest commentary, Tax Reform Bills Progress, but Many Hurdles Remain, we believe the prospects for a tax reform bill being signed into law before the end of the year are improving, but we still think it is too early for investors to take any drastic action. The bill is virtually certain to be changed many times in the weeks ahead. If and when a tax bill passes, there will be time to review the details and amend your tax and financial plans accordingly.

Personal income and spending will highlight tomorrow's economic calendar, with both measures forecasted to have gained 0.3% m/m during October following their respective 0.4% and 1.0% m/m gains the month prior, while weekly initial jobless claims will also be released, expected to tick higher to a level of 240,000 from the prior week's 239,000. The Chicago Purchasing Manager Survey will be released later in the morning, with economists anticipating a decline in the index to 63.0 for November from October's 66.2 reading.

Europe and Asia mixed ahead of data, North Korean missile launch has little impact

European equity markets traded mixed, with financials getting a boost as bond yields in the region gained solid ground. Global economic optimism remained elevated, bolstered by signs of progress in tax reform and today's upbeat revision to Q3 GDP out of the U.S., along with cooled political concerns on this side of the pond. In his latest article, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, addresses the question Are Stocks too Expensive?, noting that although world stock market valuations are above average, similar valuations have produced double-digit gains over the following 12 months during the past 50 years. Jeff concludes that valuations support a globally diversified portfolio offering the best diversification benefits in 20 years. However, the apparent rotation out of the tech sector that intensified in the U.S. made its way over to Europe late in the session to cause the markets to give up some solid early gains. Crude oil prices extended a weekly loss ahead of tomorrow's OPEC meeting and following some mixed inventory data in the U.S. The pound rallied against the U.S. dollar to hamstring the U.K. markets after Britain and the European Union reportedly agreed to reach a Brexit divorce bill, which could pave the way for negotiations of the exit to move forward. German consumer price inflation was mostly hotter than expected, French Q3 GDP rose at a pace that matched forecasts and eurozone economic confidence improved. The euro moved higher versus the greenback.

Stocks in Asia finished mixed, following the solid gains in the U.S. yesterday on further signs the economy is running healthy and progress toward tax reform. However, the markets likely treaded with some caution ahead of key economic data out of Japan and China tomorrow, which will coincide with the highly-anticipated OPEC production meeting and potential U.S. tax reform vote, and follow today's U.S. GDP revision and testimony from Fed Chief Yellen. The markets mostly shrugged off yesterday's latest missile launch by North Korea. Schwab's Jeffrey Kleintop, CFA, notes in his article, Missiles and Markets: An investor guide to geopolitical risks investors should avoid overreacting to geopolitical developments and stick to their long-term financial plans, while offering analysis of the global stock market rally that has been bolstered by broad economic growth and is expected to continue in 2018 in his latest article, 5 Reasons Investors Should Give Thanks.

The yen gave back some recent gains to help lift Japanese equities and overshadow a softer-than-expected retail sales report, while markets in South Korea and India dipped. Mainland Chinese stocks ticked slightly higher, but those traded in Hong Kong fell and Australian listings saw modest gains.

A whole host of reports are slated for tomorrow's international economic calendar, including industrial production from South Korea and Japan, building approvals and consumer credit from Australia, manufacturing data out of China, retail sales and employment data from Germany, CPI and PPI from France and Italy, GDP from Spain, and CPI and employment figures from the Eurozone.

Stocks Mixed in Subdued Action Ahead of Thanksgiving

Charles Schwab: On the Market

Posted: 11/22/2017 4:15 PM EST

Stocks Mixed in Subdued Action Ahead of Thanksgiving 

 

U.S. stocks were mostly lower, though the Nasdaq was able to tick higher with volume subdued ahead of the Thanksgiving break. In equity action, a flood of mixed earnings reports were highlighted by Deere & Co, while in economic news, a drop in durable goods orders was met with upward revisions to the prior month's solid advance. Treasury yields and the U.S. dollar were lower. Gold and crude oil prices gained ground.

The Dow Jones Industrial Average (DJIA) declined 65 points (0.3%) to 23,526, the S&P 500 Index shed nearly 2 points (0.1%) to 2,597, and the Nasdaq Composite increased 5 points (0.1%) to 6,867. In light volume, 661 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.19 to $58.02 per barrel and wholesale gasoline was unchanged at $1.77 per gallon. Elsewhere, the Bloomberg gold spot price increased $11.02 to $1,291.63 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—declined 0.7% to 93.28.

Deere & Co. (DE $145) reported Q4 earnings-per-share (EPS) of $1.57, versus the $1.47 FactSet estimate, as equipment sales rose 25.6% year-over-year (y/y) to $7.1 billion, topping the expected $6.9 billion. The company noted improving markets for farm and construction equipment. DE issued earnings guidance for next year that exceeded the Street's forecasts. Shares traded nicely higher.

Hewlett Packard Enterprise Co. (HPE $13) posted Q4 profits of $0.23 per share, or $0.29 ex-items, compared to the projected $0.28, as revenues grew 5.0% y/y to $7.7 billion, north of the estimated $7.3 billion. HPE issued Q1 EPS guidance that missed forecasts. The company announced that Antonio Neri will succeed Meg Whitman, who will step down as Chief Executive Officer, effective February 1, 2018. Shares were solidly lower.

HP Inc. (HPQ $21) announced Q4 EPS of $0.39, or $0.44 ex-items, versus the expected $0.44, with revenues rising 11.0% y/y to $13.9 billion, above the estimated $13.4 billion. The company issued Q1 profit guidance that had a midpoint just shy of projections, while its full-year earnings outlook had a midpoint that was north of expectations. Shares lost ground.

Salesforce.com Inc. (CRM $107) reported fiscal Q3 profits of $0.07 per share, or $0.39 ex-items, compared to the expected $0.37, as revenues increased 25.0% y/y to $2.7 billion, roughly in line with forecasts. The company issued Q4 EPS and billings guidance that was below expectations, overshadowing its revenue outlook that was slightly above estimates and its raised full-year guidance. Shares finished lower.

Durable goods orders mixed, Fed releases its recent meeting minutes

October preliminary durable goods orders (chart) were down 1.2% month-over-month (m/m), compared to the Bloomberg estimate of a 0.3% gain, and September's 2.0% rise was revised to a 2.2% increase. Ex-transportation, orders were 0.4% higher m/m, versus forecasts of a 0.5% gain and compared to September's favorably-revised 1.1% rise. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, fell 0.5%, versus projections of a 0.5% increase, and following the upwardly-revised 2.1% rise posted in the month prior.

Weekly initial jobless claims (chart) dropped by 13,000 to 239,000 last week, versus forecasts of a decrease to 240,000, with the prior week’s figure being upwardly revised to 252,000. The four-week moving average rose by 1,250 to 239,750, while continuing claims increased 36,000 to 1,904,000, north of estimates of 1,880,000.

The final November University of Michigan Consumer Sentiment Index (chart) was revised higher to 98.5, above forecasts of 98.0, from the preliminary level of 97.8. The index is below October's level of 100.7. Compared to last month, the expectations and current conditions components of the survey both dipped. The 1-year inflation outlook ticked higher to 2.5% from October's 2.4% rate, and the 5-10 year forecast dipped to 2.4% from 2.5%.

The MBA Mortgage Application Index ticked 0.1% higher last week, following the prior week's 3.1% gain. The slight increase came as a 4.8% drop in the Refinance Index was met by a 5.3% jump in the Purchase Index. The average 30-year mortgage rate rose 2 basis points (bps) to 4.20%.

At 2:00 p.m. ET, the Federal Reserve released the minutes from its monetary policy meeting that ended on November 1st. The information contained in the report showed that labor market conditions generally continued to strengthen and that real GDP expanded at a solid pace in Q3 despite disruptions from Hurricanes Harvey and Irma. Also, several participants indicated that an increase in the target range for the federal funds rate in the near term "would depend importantly on whether the upcoming economic data boosted their confidence that inflation was headed toward the Committee's objective." And participants "agreed that they would continue to monitor closely and assess incoming data before making any further adjustment to the target range for the federal funds rate."

As noted in the latest Schwab Market Perspective: Incredible, Amazing…Unstop-a-bull?, the selection of the new head of the Fed is seen as representing continuity as the Central Bank continues its policy normalization and given the strong economic backdrop, along with signs of wage growth picking up, we believe the Fed will hike rates for the third time this year next month.

Treasuries were higher with the yield on the 2-year note falling 5 bps to 1.73% and the yield on the 10-year note dropping 4 bps to 2.32%, while the 30-year bond rate was 2 bps lower at 2.74%.
Treasury yields and the U.S. dollar found some pressure as the markets grappled with Fed Chief Yellen's comments, as well as U.S. tax reform uncertainty ahead of next week's expected Senate vote on its plan that differs significantly from the House's that passed last week. This is being countered by Q3 earnings season that is winding down and mostly above expectations against a positive global economic backdrop.

Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend notes in his latest commentary, Tax Reform Bills Progress, but Many Hurdles Remain, we believe the prospects for a tax reform bill being signed into law before the end of the year are improving, but a number of tricky steps must still be overcome. Schwab's Chief Investment Strategist Liz Ann Sonders points out in her newest article, Green Grass and High Tides: Earnings Stellar But Not Without Risk, both earnings and revenues were strong; and importantly, the "beat rates" were well above average. The outlook for 2018 is bright, but we are on watch for an expectations bar that gets set too high.

Please note: All U.S. markets will be closed tomorrow in observance of the Thanksgiving Day holiday, and will close early on Friday.

The U.S. economic calendar will round out the week on Friday with the release of the preliminary Markit Manufacturing and Services PMI Indexes for November, with economists forecasting readings of 55.0 and 55.3, respectively, with manufacturing ticking higher and services unchanged from the final October prints.

Europe gives up early advance as euro gains ground, Asia advances 

European equity markets relinquished early gains and finished mostly lower, with the euro moving higher versus the U.S. dollar, ahead of the release of the Fed minutes and following comments about inflation from Chairwoman Yellen. The British pound also rose compared to the greenback after overcoming a brief drop as the markets digested the nation's budget release, which included a lowered economic growth forecast. Bond yields in the region finished mixed. Energy issues managed to eke out gains as crude oil prices recovered somewhat from a recent bout of weakness as the markets awaited next week's OPEC meeting. Stocks in Germany led to the downside with focus still on the flared-up political uncertainty as nation may face a snap election following the recently failed coalition talks, which joined continued scrutiny of the possibility for U.S. tax reform. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives Randy Frederick point out in the video, Political Risk: How Should Investors Respond?, that a long history of these developments shows us that holding a well-diversified portfolio may buffer the short-term market moves that are often the result. So, investors should avoid overreacting to the political and geopolitical drama and stick to their long-term financial plans.

Stocks in Asia finished higher on the heels of the back-to-back gains registered in the U.S. yesterday, with global economic optimism appearing to overshadow flared-up political concerns in Germany and lingering tax reform uncertainty in the U.S. Japanese equities rose ahead of tomorrow's holiday, even as the yen regained some of yesterday's drop. Stocks trading in mainland China and Hong Kong finished higher. South Korean and Australian securities traded to the upside, while Indian equities also advanced. Schwab's Jeffrey Kleintop, CFA, offers a look at the global market rally seen this year that has been fostered by the broadest economic growth in a decade and is expected to continue in 2018 in his latest article, 5 Reasons Investors Should Give Thanks.

Tomorrow, the international economic docket will yield Markit Manufacturing and Services PMI reads for Germany, France and the Eurozone, while Germany will also release Q3 GDP and the U.K. will report Q3 GDP and total business investment. On Friday, reports will include leading indicators from Japan, the Ifo Business Climate Survey from Germany and industrial orders from Italy.

Equities take a Ride on the Global Stock Slide

Charles Schwab: On the Market

Posted: 11/15/2017 4:15 PM EST

Equities take a Ride on the Global Stock Slide

 

Domestic stocks traded lower, joining a global equity slump as global market participants remain uncertain about the prospect of a successful overhaul of U.S. tax policy. Treasury yields were lower and the U.S. dollar was mostly flat after recovering from some early pressure. In equity news, tech stocks led the decline and a cautious outlook from Target weighed on consumer discretionary listings. Crude oil prices added to a recent selloff and gold reversed to the downside. 

The Dow Jones Industrial Average (DJIA) fell 138 points (0.6%) to 23,271, the S&P 500 Index lost 14 points (0.6%) at 2,565, and the Nasdaq Composite declined 32 points (0.5%) to 6,706. In moderate volume, 844 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.37 to $55.33 per barrel and wholesale gasoline was $0.02 lower at $1.74 per gallon. Elsewhere, the Bloomberg gold spot price ticked $1.79 lower to $1,278.46 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 93.79.

Target Corp. (TGT $54) reported Q3 earnings-per-share (EPS) of $0.87, or $0.91 ex-items, versus the $0.86 FactSet estimate, as revenues increased 1.4% year-over-year (y/y) to $16.7 billion, above the projected $16.6 billion. Q3 same-store sales rose 0.9% y/y, topping the expected 0.4% gain. TGT said it was pleased with its Q3 performance, including traffic and sales growth that demonstrate it is building on the progress it saw in the first half of the year. The retailer issued Q4 EPS guidance with a midpoint below estimates, while its same-store sales outlook had a midpoint above expectations, as it added that it expects the Q4 environment to be highly competitive but it is confident in its holiday season plans. TGT raised its full-year guidance. Shares traded sharply lower.

Shares of Acorda Therapeutics Inc. (ACOR $17) tumbled after the company announced that some patients had developed a severe blood infection called sepsis and some died during a late-stage trial of its treatment for Parkinson's disease.

Retail sales and consumer price inflation roughly match expectations

Advance retail sales (chart) for October rose 0.2% month-over-month (m/m), compared to the Bloomberg forecast of a flat reading and compared to September's upwardly revised 1.9% increase. Last month's sales ex-autos were up by 0.1% m/m, versus expectations of a 0.2% gain, and following the favorably revised 1.2% increase seen in the previous month. Sales ex-autos and gas gained 0.3% m/m, in line with estimates, and versus September's upwardly revised 0.6% gain. The retail sales control group, a figure used to help calculate GDP, increased 0.3%, matching projections, and versus the prior month's favorably revised 0.5% gain.

Sales gains were widespread, led by activity at sporting goods, hobby, book and music stores, food services and drinking places, clothing stores, and auto dealers. However, sales declined at gasoline stations, building material and garden equipment stores, and at nonstore retailers, which includes on line shopping.

Today's report, highlighted by the positive upward revisions to September's figures, suggests the consumer remains relatively healthy heading into the key holiday shopping season. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest, Schwab Sector Views: 'Tis the Season…Almost, much of the U.S. economy arguably comes down to how the consumer is faring. Brad adds that it would be difficult to view the status of the consumer as anything less than mostly positive with unemployment historically low, wages trending higher and still low interest rates conspiring to boost consumer confidence. He concludes that this holiday season could shape up to be a solid one but offers some headwinds facing retailers that lead us to maintain our marketperform rating for the consumer discretionary sector.

The Consumer Price Index (CPI) (chart) ticked 0.1% higher m/m in October, matching estimates, while September's 0.5% rise was unrevised. The core rate, which strips out food and energy, was up 0.2% m/m, in line with expectations and compared to September's unrevised 0.1% rise. Y/Y, prices were 2.0% higher for the headline rate, matching forecasts, while the core rate was up 1.8%, above of projections of a 1.7% increase. September's y/y figures showed unrevised 2.2% and 1.7% rises for the headline and core rates, respectively.

The Empire Manufacturing Index showed output from the New York region slowed but remained solidly at a level depicting expansion (a reading above zero) for November. The index decreased to 19.4 from October's unrevised 30.2 level—which was the highest since 2014—with forecasts calling for a decline to 25.1.

The MBA Mortgage Application Index rose 3.1% last week, following the prior week's flat reading. The increase came as a 6.3% jump in the Refinance Index was accompanied by a 0.4% gain in the Purchase Index. The average 30-year mortgage rate remained at 4.18%.

Business inventories (chart) were flat m/m in September, matching forecasts, and versus August's downwardly revised 0.8% increase.

Treasuries finished mostly higher, with the yield on the 2-year note little changed at 1.68%, while the yield on the 10-year note declined 5 basis points (bps) to 2.32% and the 30-year bond rate decreased 6 bps to 2.77%.

Treasury yields and the U.S. dollar remain under pressure as risk aversion appears to be continuing, with the global stock markets pulling back from the recent rally. Fiscal and monetary policy uncertainties are countering a relatively positive economic landscape, though caution has ramped up following soft Chinese economic data as of late. As such, check out our article, Does Low Market Volatility Portend a Market Tumble?, as well as Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's latest commentary, Tax Reform: Key Differences Between the Senate and House Plans.

Tomorrow, the U.S. economic calendar will offer the Import Price Index for October, expected to have increased 0.4% m/m, after rising 0.7% in September and weekly initial jobless claims, forecasted to have dipped to 235,000 from the previous week's level of 239,000. Additionally, we'll receive the Fed's October industrial production and capacity utilization report, forecasted to show production advanced 0.5% m/m and utilization ticked higher to 76.3%. The housing market will also garner attention with tomorrow's release of the NAHB Housing Market Index, with economists anticipating November's reading to inch lower to 67 from the 68 posted in October, where the 50 mark represents the point of separation for good versus poor conditions.

Europe sees pressure and Asia falls as global markets turn cautious

Most European equity markets traded to the downside, with energy and commodity-related issues seeing pressure amid the continued risk aversion in the markets, exacerbated by festering U.S. tax reform skepticism, recent disappointing Chinese economic data and the pullback in crude oil prices. However, Spanish stocks bucked the trend, bolstered by solid gains in the country's banking sector, which helped the European financial sector overcome early losses. The euro and the British pound were little changed versus the U.S. dollar, while bond yields in the region finished mixed. In economic news, the September eurozone trade surplus widened more than expected, while U.K. employment unexpectedly declined. As noted in the latest Schwab Market Perspective: Incredible, Amazing…Unstop-a-bull?, momentum favors the bulls for the foreseeable future, but elevated valuations and growing investor complacency pose risks that could lead to a long-awaited pullback and/or a pickup in volatility from today’s extremely low base.

Stocks in Asia finished broadly lower as the global markets appear to be skittish following the recent rally as U.S. tax reform uncertainty lingers and Chinese economic data has been softer than expected as of late. Japanese equities fell, with the yen gaining ground, while the nation reported Q3 GDP growth of 1.4% on a quarter-over-quarter annualized basis, missing the 1.5% projection and compared to the upwardly revised 2.6% expansion posted in Q2. Shares trading in mainland China and Hong Kong dropped, while stocks in Australia and South Korea also traded lower. Indian securities moved to the downside, on the heels of late-yesterday's disappointing October trade report.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his latest article, 5 Reasons Investors Should Give Thanks, the record breaking streak of gains in the global stock market this year has been supported by the broadest global economic growth in a decade. Stocks appear to closely track earnings growth, even where risks are most intense. Broad economic and earnings growth is expected to continue in 2018.

The international economic docket for tomorrow will include housing loans and machine tool orders from Japan, inflation expectations and employment data from Australia, the unemployment rate from France and retail sales from the U.K.

Another Sluggish Day on the Street

Charles Schwab: On the Market

Posted: 11/8/2017 4:15 PM EST

Another Sluggish Day on the Street

 

With little in the way of news to sway the U.S. equity markets soundly in one direction or the other, stocks finished with modest gains, led again by the tech sector, after spending most of the day crowding the unchanged mark. Tax reform continued to garner attention as the Senate is expected to deliver its bill this week, while global trade was also in focus as President Trump continues his Asian tour and China posted mixed trade data. Crude oil prices came under pressure following a bearish government oil inventory report and gold was higher. Treasury yields ticked slightly higher and the U.S. dollar was little changed.

The Dow Jones Industrial Average (DJIA) gained 6 points to 23,548, the S&P 500 Index was 4 points (0.1%) higher at 2,594, and the Nasdaq Composite gained 21 points (0.3%) to 6,789. In moderate volume, 881 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.39 to $56.81 per barrel and wholesale gasoline was unchanged at $1.82 per gallon. Elsewhere, the Bloomberg gold spot price was $5.32 higher at $1,280.62 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 94.88.

Take-Two Interactive Software Inc. (TTWO $118) reported a fiscal Q2 loss of $0.03 per share, or earnings-per-share (EPS) of $1.61 ex-items, versus the FactSet estimate calling for EPS of $0.74, as net bookings grew 20.3% year-over-year (y/y) to $577 million, above the expected $516 million. The video game company raised its full-year outlook and issued net bookings guidance for the holiday season that easily topped expectations. Shares were sharply higher.

Humana Inc. (HUM $243) posted Q3 profits of $3.44 per share, or $3.39 ex-items, compared to the forecasted $3.26, on revenues of $13.3 billion, roughly in line with expectations, but premiums were a bit shy of expectations. HUM raised its full-year earnings outlook but offered little in terms of guidance for next year. Shares were sharply lower.

Snap Inc. (SNAP $13) announced a Q3 loss of $0.36 per share, compared to the $0.33 per share shortfall that the Street had anticipated, with revenues rising 62.0% y/y to $208 million, below the projected $236 million. The social media company's global daily active users and average revenue per user both missed expectations. Shares fell sharply. Separately, SNAP disclosed that China's Tencent Holdings Ltd. (TCEHY $50) has taken a 10% stake in the company.

Wendy's Co. (WEN $15) reported Q3 EPS of $0.06, or $0.09 ex-items, versus the projected $0.12, as revenues declined 15.4% y/y to $308 million, just shy of the expected $310 million, due to lower ownership of company-operated restaurants. The fast-food chain's North American same-store sales rose 2.0% y/y, south of the estimated 2.6% gain. WEN lowered its full-year profit outlook and shares were solidly lower.

Mortgage applications flat

The MBA Mortgage Application Index was flat last week, following the prior week's 2.6% decline. The unchanged reading came as a 0.5% decrease in the Refinance Index was offset by a 0.5% gain in the Purchase Index. The average 30-year mortgage rate fell 4 basis points (bps) to 4.18%.
Treasuries dipped, as the yields on the 2-year and 10-year notes, along with the 30-year bond, all inched 1 bp higher to 1.64%, 2.32% and 2.79%, respectively.

Treasury yields and the U.S. dollar remained subdued as a positive global economic backdrop continues to be met with looming Fed leadership changes, and market grappling with uncertainty regarding the long road to tax reform.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, One Thing Leads to Another: Productivity's Rebound, although there remains a long runway between the House bill put forth on tax reform and a bill that could pass through the Senate, a more competitive tax code would likely grow the capital stock, which should boost productivity.

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?, while Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest commentary, House Tax Reform Bill: What Investors Need to Know.

Tomorrow's economic calendar will remain light, beginning with weekly initial jobless claims, forecasted to rise modestly to 232,000 from the prior week's 229,000, followed by wholesale inventories, with economists expecting a 0.3% month-over-month increase for September, matching that seen in August.

Europe and Asia mixed on global trade focus and U.S. tax reform uncertainty
European equities finished mixed, with banking stocks being hamstrung by disappointing quarterly results from the sector in the region. The markets also grappled with global trade uncertainty as U.S. President Donald Trump remained on his tour of Asia and China posted a mixed trade report. U.S. tax reform scrutiny festered to keep conviction in check. The euro was little changed, while the British pound added to recent losses versus the U.S. dollar. Bond yields in the region traded mixed. In economic news, Spanish industrial output for September came in stronger than expected. With the global markets pausing from their rally, Schwab's Liz Ann Sonders and Randy Frederick note in the video, Tracking Sentiment: Are Investors Too Optimistic About Stocks?, that there seems to be no end in sight to the bull market in equities, but that doesn’t mean there’s nothing to worry about.

Stocks in Asia finished mixed as the markets focus on global trade relations as U.S. President Trump continued his tour of the region and as China's October trade data painted a divergent picture as exports missed expectations and imports continued to rise solidly. For a look at the global trade picture, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his article, Top Five Trade Issues Investors Should Be Watching. Japanese equities dipped, with the yen gaining some ground, while Australian securities finished flat. Mainland Chinese stocks ticked higher and those traded in Hong Kong declined, while listings in India were also lower and South Korean markets saw a modest gain.

More data from China will take center stage on tomorrow's international economic calendar, including the Asian nation's CPI, PPI, and lending statistics, while Germany and the U.K. will report trade figures.

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.

Stocks Scale Back from Recent Highs

Charles Schwab: On the Market

Posted: 10/25/2017 4:15 PM EDT

Stocks Scale Back from Recent Highs

 

Despite a surprising jump in new home sales to near a decade high and a much stronger-than-expected rise in durable goods orders, U.S. equities lost ground amid a heavy dose of mixed earnings reports. Treasury yields ticked higher, as did gold, while the U.S. dollar was lower and crude oil prices were mixed. 

The Dow Jones Industrial Average (DJIA) fell 112 points (0.5%) to 23,329, the S&P 500 Index decreased 12 points (0.5%) to 2,557, and the Nasdaq Composite declined 35 points (0.5%) to 6,564. In heavy volume, 909 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.29 to $52.18 per barrel and wholesale gasoline increased $0.02 to $1.69 per gallon. Elsewhere, the Bloomberg gold spot price rose $1.34 to $1,277.92 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 93.70.

Dow member Boeing Co. (BA $258) reported Q3 earnings-per-share (EPS) of $3.06, or $2.72 ex-items, versus the $2.65 FactSet estimate, as revenues rose 2.0% year-over-year (y/y) to $24.3 billion, compared to the expected $24.0 billion. The company said its saw strong deliveries, but announced an additional cost of $256 million for its KC-46 Tanker program. BA raised its full-year earnings outlook, due to a lower-than-expected tax rate, but it had a midpoint that missed analysts' expectations. Shares were lower.

Dow component Visa Inc. (V $110) posted fiscal Q4 EPS of $0.90, above the projected $0.85, with revenues rising 13.9% y/y to $4.9 billion, topping the forecasted $4.6 billion. The company said it achieved double-digit payments volume growth. V said it expects earnings growth in the high mid-teens. Shares gained solid ground.

Dow member Coca-Cola Co. (KO $46) announced Q3 earnings of $0.33 per share, or $0.50 ex-items, versus the estimated $0.49, as revenues fell 15.0% y/y to $9.1 billion, exceeding the forecasted $8.7 billion. The company said its revenues declined due to a headwind from the ongoing refranchising of bottling territories, and its case volume was flat y/y, amid macroeconomic challenges with developed markets negatively impacted by weather and the cycling of strong results the prior year. KO reaffirmed its full-year guidance, and shares were modestly lower.

Shares of Dow component Nike Inc. (NKE $55) reversed solidly to the upside as the Street cheered the apparel and footwear maker's updated projections announced at its investor day.

AT&T Inc. (T $34) reported Q3 EPS of $0.49, or $0.74 ex-items, compared to the projected $0.74, as revenues decreased 2.9% y/y to $39.7 billion, below the forecasted $40.1 billion. The company said it is amid a transformation in its wireless and video businesses, while its DIRECTV NOW had another strong quarter. T maintained its full-year guidance, and shares came under pressure.

Chipotle Mexican Grill Inc. (CMG $277) posted Q3 profits of $0.69 per share, or $1.46 ex-items, versus the estimated $1.64, as revenues increased 8.8% y/y to $1.1 billion, roughly in line with forecasts. Q3 same-store sales rose 1.0% y/y, compared to the expected 1.2% gain. Shares fell sharply.

Texas Instruments Inc. (TXN $96) announced Q3 EPS of $1.26, or $1.24 ex-items, versus the expected $1.12, with revenues rising 12.0% y/y to $4.1 billion, above the estimated $3.9 billion. TXN issued Q4 guidance with midpoints above the Street's estimates. Shares were lower.

Durable goods orders easily beat estimates, new home sales surprisingly jump

September preliminary durable goods orders (chart) were up 2.2% month-over-month (m/m), compared to the Bloomberg estimate of a 1.0% gain, and August's 2.0% rise was unrevised. Ex-transportation, orders were 0.7% higher m/m, versus forecasts of a 0.5% gain and compared to August's upwardly revised 0.7% rise. Orders for non-defense capital goods excluding aircraft,
considered a proxy for business spending, grew 1.3%, well above projections of a 0.3% increase, and following the positively-revised 1.3% rise posted in the month prior.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Pumped Up Kicks: Several Important Kickers for a Strong Capex Cycle, that U.S. business capital spending has already picked up; but an even sharper recovery could be in the cards for 2018.

New home sales (chart) surprisingly surged 18.9% m/m in September to an annual rate of 667,000 units, well above the forecasts calling for a decline to 554,000 units and the upwardly revised 561,000 unit pace in August. The median home price was up 1.6% y/y to $319,700. New home inventory fell to 5.5 months of supply at the current sales pace from 6.3 in August. Sales jumped m/m in the Northeast, South, and Midwest, and were up solidly in the West. New home sales are based on contract signings instead of closings. This was the highest pace of sales since October 2007 and the biggest monthly gain since January 1992.

The MBA Mortgage Application Index fell 4.6% last week, following the prior week's 3.6% rise. The drop came as a 3.0% decrease in the Refinance Index was met with a 6.1% fall in the Purchase Index. The average 30-year mortgage rate rose 4 basis points (bps) to 4.18%.

Treasuries finished modestly lower, as the yield on the 2-year note was flat at 1.59%, while the yields on the 10-year note and the 30-year bond ticked 1 bp higher to 2.43% and 2.95%, respectively.

Tomorrow's economic calendar will be a busy one, beginning with weekly initial jobless claims, forecasted to rise to a level of 235,000 from the prior week's 222,000, as well as the advance goods trade balance, with economists anticipating the deficit to widen to $64.0 billion during September. Pending home sales is also on the docket, expected to have increased 0.3% m/m during September following the 2.6% m/m drop in August. Wholesale inventories and the Kansas City Fed Manufacturing Activity Index will round out the day.

Europe lower despite upbeat economic data, Asia mixed as Japan ends winning streak

European equities traded lower amid the down session in the U.S. as the markets digested mixed earnings reports on both sides of the pond, while caution likely set in ahead of tomorrow's monetary policy decision by the European Central Bank. The markets shrugged off positive economic data in the region that preceded the stronger-than-expected housing and manufacturing reports in the U.S. German business confidence unexpectedly improved for October, while U.K. Q3 GDP quarter-over-quarter growth of 0.4% topped forecasts calling for it to match Q2's 0.3% rate of expansion. The euro was higher versus the U.S. dollar, while the British pound rallied to stymie the U.K. markets.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives, Randy Frederick, note in the video, Is An Optimistic Outlook for Global Equities Warranted?, all of the world's top 20 economies are growing this year—a rare occurrence over the last decade, underpinning our positive outlook for global earnings. Bond yields in the region finished mixed, with the Spanish political turmoil and Brexit uncertainty lingering.

Stocks in Asia finished mixed, with most markets gaining ground on the heels of yesterday's advance in the U.S. on a host of positive earnings reports, which appeared to boost global earnings economic optimism. Mainland Chinese stocks and those traded in Hong Kong rose, equities listed in South Korea and Australia nudged higher, with the latter posting a cooler-than-expected consumer price inflation report, while markets in India rallied. However, stocks in Japan declined, snapping a 16-day winning streak that has taken the index to highs not seen since 1996, with traders assessing the recent run that has contributed to the global market rally, and Schwab's Liz Ann Sonders discusses with Randy Frederick in the video, Tracking Sentiment: Are Investors Too Optimistic About Stocks?, that there seems to be no end in sight to the bull market in equities, but that doesn’t mean there’s nothing to worry about.

In addition to tomorrow's European Central Bank monetary policy meeting, items on the international economic calendar will include: preliminary Q3 GDP from South Korea, import/export prices from Australia, consumer confidence from Germany, employment figures from Spain, and confidence data from Italy.

Stocks Gain Ground, Dow Rallies

On the Market

Posted: 10/18/2017 4:15 PM EDT

Stocks Gain Ground, Dow Rallies

 

U.S. stocks finished higher with Dow member IBM's quarterly results aiding the blue chip index to close well above the 23,000 mark for the first time. Treasury yields rose despite continued uncertainty in regard to the future leadership of the Federal Reserve. Housing construction activity disappointed and the Fed's Beige Book noted a modest and moderate increase in domestic economic activity. The U.S. dollar and crude oil prices were little changed, while gold was lower. 

The Dow Jones Industrial Average (DJIA) rallied 160 points (0.7%) to 23,158, the S&P 500 Index added 2 points (0.1%) to 2,561, and the Nasdaq Composite was nearly 1 point higher at 6,624. In moderate volume, 677 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.15 higher to $52.26 per barrel and wholesale gasoline increased $0.01 to $1.64 per gallon. Elsewhere, the Bloomberg gold spot price lost $4.04 to $1,281.08 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 93.41.

Dow member International Business Machines Corp. (IBM $160) reported Q3 earnings-per-share (EPS) of $2.92, or $3.30 ex-items, versus the $3.28 FactSet estimate, as revenues dipped 0.4% year-over-year (y/y) to $19.2 billion, topping the expected $18.6 billion. The company's cloud revenue rose 20% y/y, helping it achieve double-digit growth in its strategic imperatives. IBM reaffirmed its full-year earnings outlook and projected Q4 revenues that topped forecasts and would end a 22-quarter streak of declines. Shares rallied.

Abbott Laboratories(ABT $56) reported Q3 EPS of $0.32, or $0.66 ex-items, versus the projected $0.65, with revenues rising 5.6% y/y to $6.8 billion, compared to the expected $6.7 billion. ABT issued Q4 profit guidance that matched forecasts, while it narrowed its full-year earnings outlook. Shares traded higher.

Housing construction activity misses, ahead of Fed's business activity report

Housing starts (chart) for September dropped 4.7% month-over-month (m/m) to an annual pace of 1,127,000 units, below the Bloomberg forecast of a 1,175,000 unit rate. August starts were upwardly revised to an annual pace of 1,183,000. Starts on both single and multi-unit structures were down m/m but are higher compared to the last year. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, fell 4.5% m/m in September to an annual rate of 1,215,000, after August's downwardly revised 1,272,000 rate, and south of the expected annual pace of 1,245,000 units. Permits for single unit structures were up m/m and y/y, while multi-family units were down sharply m/m and y/y.

The MBA Mortgage Application Index rose 3.6% last week, following the prior week's 2.1% decline. The increase came as a 3.0% gain in the Refinance Index was met with a 4.2% rise in the Purchase Index. The average 30-year mortgage rate decreased 2 basis points (bps) to 4.14%.
Mortgage demand appears healthy and home-buying incentives may be bolstered by continued relatively low interest rates and high rental rates in some areas of the country, as discussed as one of the reasons we have an outperform rating on the financial sector in Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest, Schwab Sector Views: Sustainable Energy?.

In afternoon action, the Federal Reserve released its Beige Book, a summary of business activity across the nation used as a tool to prepare for its next two-day monetary policy meeting ending on November 1st. The report indicated that domestic economic activity increased at a pace split between modest and moderate in September through early October. Major disruptions from hurricanes Harvey and Irma were reported in some areas and sectors in the Richmond, Atlanta and Dallas Districts. Meanwhile, job growth was modest on balance, and labor markets continued to be characterized as "tight."

The report also noted that price pressures remained modest and several Districts noted increased manufacturing input costs that in most cases weren't passed through to selling prices, while retail prices increased slightly. For our analysis of inflation, Schwab's Chief Investment Strategist Liz Ann Sonders notes in her article, The Waiting: Wage Growth and Inflation Finally Getting in Gear?, 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. Also, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes 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.

Global monetary policy remains in focus as many central banks appear to be shifting onto the path to normalization, while the upcoming end of Fed Chief Janet Yellen's term is fostering some uncertainty. Schwab's Jeffrey Kleintop discusses, How the Shift by Central Banks May Affect the Stock Market, and Schwab's Chief Fixed Income Strategist, Kathy Jones talks in the video with Vice President of Trading and Derivatives, Randy Frederick, Should a Change in Fed Leadership Matter to Investors?. Tax reform continues to garner attention, with the Senate expected to vote this week on its budget resolution that could help nudge it further down the long road to fruition, as discussed by Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend in the article, Tax Reform Framework Released, But The Road Ahead Is Long.

Check out these articles and video on the Market Commentary page at www.schwab.com. Follow our Schwab experts on Twitter: @lizannsonders, @jeffreykleintop, @kathyjones and @randyafrederick.
Treasuries finished lower, with the yield on the 2-year note ticking 2 bps higher to 1.56%, while the yields on the 10-year note and 30-year bond rose 4 bps to 2.34% and 2.85%, respectively. The U.S. dollar was little changed as global economic optimism was countered by the aforementioned uncertainties.

Tomorrow, the U.S. economic calendar will begin with weekly initial jobless claims, forecasted to have ticked lower to a level of 240,000 from the prior week's 243,000, as well as the Philly Fed Manufacturing Index, anticipated to have ticked lower to a reading of 22.0 in October from 23.8 in September. Rounding out the day, we'll receive the Leading Index for September, expected to increase 0.1% m/m after rising 0.4% in August.

Europe higher despite lingering political uneasiness, Asia mixed as Japan continues streak

European equity markets finished higher, despite festering political uncertainty as the independence standoff between Spain and Catalonia continues, with that latter given a deadline of Thursday morning to renounce independence claims. Also, Brexit talks remain in a deadlock ahead of this week's summit of European Union leaders. 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 www.schwab.com. IBM's earnings results across the pond appeared to foster some optimism regarding global earnings as the season kicks into gear. The euro ticked higher and British pound dipped versus the U.S. dollar, while bond yields in the region gained solid ground to boost financials. In economic news, U.K. employment change came in below forecasts, while eurozone construction output declined in August.

Stocks in Asia finished mixed as the markets await a flood of Chinese economic data tonight, headlined by the nation's Q3 GDP report, which is expected to show growth slowed slightly to a 6.8% y/y pace from 6.9% in Q2. Also, the commencement of China's Communist Party National Congress was in focus but comments from President Xi offered no huge changes to the country's outlook. Shares trading in Hong Kong and mainland China gained ground. Japanese equities nudged higher to continue a winning streak to 12 sessions, which has led the Nikkei 225 Index to its highest level since 1996. Japan's stock market has contributed to the global rally and 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 www.schwab.com. Stocks trading in South Korea and India dipped, while Australian securities finished mostly flat.

The international economic docket for tomorrow will include trade data, the All Industry Activity Index and machine tool orders from Japan, employment data and business confidence from Australia and retail sales from the U.K., while China will release retail sales in addition to its aforementioned GDP report.