Market Mixed Amid Continued Low Volatility

Charles Schwab: On the Market

Posted: 5/9/2017 4:15 PM ET

Market Mixed Amid Continued Low Volatility

U.S. equities finished mixed in another session amid low volatility, with little in the way of seismic news to shape sentiment. Second-tier earnings news dominated a quiet equity front, while economic news showed small business optimism topped forecasts and wholesale inventories were revised higher. Meanwhile, Treasuries, gold, crude oil prices and the U.S. dollar were all modestly lower.

The Dow Jones Industrial Average (DJIA) fell 37 points (0.2%) to 20,976, the S&P 500 Index ticked 2 point (0.1%) lower to 2,397, while the Nasdaq Composite rose 18 points (0.3%) to 6,121. In moderate volume, 862 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.55 to $45.88 per barrel and wholesale gasoline lost $0.03 to $1.49 per gallon. Elsewhere, the Bloomberg gold spot price moved $5.89 lower to $1,220.34 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 99.58.

Marriott International Inc. (U.S. equities finished mixed in another session amid low volatility, with little in the way of seismic news to shape sentiment. Second-tier earnings news dominated a quiet equity front, while economic news showed small business optimism topped forecasts and wholesale inventories were revised higher. Meanwhile, Treasuries, gold, crude oil prices and the U.S. dollar were all modestly lower.

Valeant Pharmaceuticals International Inc. (VRX $12) rallied nearly 25% after raising its full-year operating earnings outlook after posting mixed Q1 earnings and revenue figures.

Hertz Global Holdings Inc. (HTZ $13) announced a Q1 loss of $2.69 per share, or a loss of $1.61 ex-items, versus the shortfall of $1.16 per that had been projected, as revenues declined 3.4% y/y to $1.9 billion, in line with forecasts. Shares were sharply lower.

Small business optimism declines by smaller amount than expected

The National Federation of Independent Business (NFIB) Small Business Optimism Index for April dipped to 104.5 from March's 104.7 level, above the Bloomberg estimate of a decline to 104.0.

The Labor Department's Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, rose to a level of 5.74 million jobs available to be filled in March, from February's downwardly revised 5.68 million level, and slightly above forecasts of 5.73 million. The hiring rate remained at February's 3.6% pace, while the separation rate ticked higher to 3.5% from 3.4%.

Wholesale inventories (chart) were revised higher to a 0.2% month-over-month (m/m) gain for March, versus expectations of an unrevised preliminary 0.1% dip, and following February's upwardly revised 0.3% rise. Sales were flat m/m, after February's upwardly revised 0.7% gain. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—remained at February's 1.28 months level.

Treasuries were lower, as the yields on the 2-year and 10-year notes, along with the 30-year bond, all rose by 1 basis point to 1.34%, 2.40%, and 3.03%, respectively.

For analysis of the interest rate environment, see our article, Mixed Signals: What Does Recent Economic Data Mean for Bonds?, on the Insights & Ideas page at www.schwab.com, where you can also find our commentary, Cash: What to Consider in the New Rate Environment. Follow Schwab on Twitter: @schwabresearch.

Schwab's Chief Investment Strategist Liz Ann Sonders offers a look at the recent subdued market action in her article, Strange Brew: Heightened Uncertainties, Yet Plunging Volatility…What Gives? on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders. Liz Ann notes that volatility has been plumbing historical depths, but it may not be reflecting investor complacency, while the Fed's plans for its balance sheet, more than rate hikes, could bring on spikes in volatility.

Finally, with the political front remaining in focus, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses What the Coming Tax Cuts Mean for the Stock Market on the Markets & Economy page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop. Moreover, see the video from Schwab's Vice President of Trading and Derivatives, Randy Frederick and Vice President of Legislative and Regulatory Affairs, Michael T. Townsend titled, Washington Overview: Budget Deals, Tax Reform, and Trump's 100-Day Mark, on the Insights & Ideas page at www.schwab.com. Follow Randy on Twitter: @randyafrederick.

Tomorrow's economic calendar will lighten up a bit, with the only reports on the schedule being the Import Price Index, which is forecasted to increase 0.1% higher last month, as well as MBA Mortgage Applications.

Europe mostly higher, Asia mixed

European equities moved mostly higher, with basic materials rebounding amid some signs of stabilization in key metals prices, while relatively upbeat German economic and earnings data likely helped sentiment. The nation's industrial production declined by a smaller amount than expected and exports rose at a faster pace than projected for March, posting a third-straight monthly gain. Financials came under pressure and were the lone major sector kept out of the green, with weakness in Spanish banks hamstringing sentiment. In the wake of last weekend's highly-expected outcome of the French Presidential election, political uncertainty appeared to cool, though U.K. Brexit negotiations continue ahead of a June election, while Germany and Italy face votes later this year. For analysis of the political front, see Schwab's Jeffrey Kleintop's, CFA, and Randy Frederick's video, Political Risk: How Should Investors Respond? on the Insights & Ideas page at www.schwab.com, where you can also find our article, Brexit Begins: What's Next for the U.K?. The euro lost ground and the British pound was flat versus the U.S. dollar, while bond yields in the region were mostly higher.

Stocks in Asia finished mixed following some data and amid some political uncertainties in the region, with South Korean markets closed as the nation votes for a new President after the recent impeachment of former President Park for bribery charges. South Korean markets had rallied leading up to the election. Japanese equities declined, paring yesterday's rally despite some continued weakness in the yen versus the U.S. dollar on heightened expectations of a Fed rate hike next month. Japan reported an unexpected decline in wages for March, which was the first decrease in 10 months. Australia's markets dropped, led by banks following some disappointing earnings, and on reports suggesting the release later today of the country's government budget may impose a tax on lenders. Securities trading in India finished flat.

However, mainland Chinese stocks snapped a string of losses that came amid some softer-than-expected economic data, exacerbated by yesterday's trade report, and festering uneasiness about government regulatory crackdowns, while those traded in Hong Kong rallied, as major power companies jumped on reports the country is planning to create three power giants through mergers of eight coal-fired nuclear generators, per Bloomberg. For analysis of China and the global markets, see Schwab's Jeffrey Kleintop's, CFA, articles, The Fed has China in a Tough Spot and Top Five Trade Issues Investors Should Be Watching on the International Investing page at www.schwab.com.

A number of economic reports out of China will dominate the international calendar tomorrow, with the Asian nation set to release CPI, PPI and lending figures, while South Korea will report its unemployment rate, and Japan will post trade data and its Leading Index. Reports from across the pond include industrial production from France and Italy.

Oil, Fed and Politics Pressure Markets

Charles Schwab: On the Market

Posted: 3/14/2017 4:15 PM ET

Oil, Fed and Politics Pressure Markets

U.S. equities finished lower ahead of tomorrow's highly-anticipated monetary policy decision from the Fed, with expectations high for a 25 basis point rate hike, while political uncertainty across the pond continued to fester. Energy issues came under pressure amid a drop in crude oil prices in the wake of a bearish OPEC report showing a jump in production from Saudi Arabia. Treasury yields declined despite a hotter-than-expected producer price inflation report, while the U.S. dollar was higher and gold lost ground.

The Dow Jones Industrial Average (DJIA) declined 44 points (0.2%) to 20,837, the S&P 500 Index lost 8 points (0.3%) to 2,365, and the Nasdaq Composite decreased 19 points (0.3%) to 5,857. In moderate volume, 748 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.48 to $47.72 per barrel and wholesale gasoline was unchanged at $1.58 per gallon. Elsewhere, the Bloomberg gold spot price declined $5.16 to $1,199.14 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 101.69.

HD Supply Holdings Inc. (HDS $41) reported 4Q earnings-per-share (EPS) of $0.26, or $0.44 ex-items, compared to the FactSet estimate of $0.43, as revenues rose 3.2% year-over-year (y/y) to $1.6 billion, roughly in line with forecasts. The industrial distributor issued 1Q EPS guidance that missed expectations and shares were solidly lower.

Shares of MoneyGram International Inc. (MGI $16) surged after the company received a takeover proposal from Euronet Worldwide Inc. (EEFT $83) for $15.20 per share in cash, valuing it at more than $1 billion. EEFT said the offer represents a 15% premium over MGI's previously agreed upon takeover by Ant Financial Services Group. MGI has not commented on EEFT's offer.

Producer price inflation hotter than expected, small business optimism dips slightly

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in February were up 0.3% month-over-month (m/m), above the Bloomberg expectation calling for a 0.1% gain and compared to January's unrevised 0.6% rise. The core rate, which excludes food and energy, rose 0.3%, versus forecasts of a 0.2% advance and January's unrevised 0.4% increase. Y/Y, the headline rate was 2.2% higher, north of projections of a 1.9% increase, and the core PPI rose 1.5% last month, matching estimates. In January, producer prices were 1.6% higher and up 1.2% for the headline and core rates, respectively.

The National Federation of Independent Business (NFIB) Small Business Optimism Index for February dipped to 105.3 from January's 105.9 level, compared to forecasts calling for a decline to 105.6.

Treasuries finished higher, as the yield on the 2-year note was flat at 1.37%, while the yield on the 10-year note declined 3 basis points (bps) to 2.59%, and the 30-year bond rate decreased 4 bps to 3.17%.

The markets are awaiting tomorrow's conclusion of two-day monetary policy meeting from the Federal Open Market Committee (FOMC), expected to deliver a 25 bp hike to the target for the fed funds rate. The statement and accompanying updated economic projections are poised to also garner heavy attention, with the markets looking to see if the pace of rate hikes is expected to accelerate beyond current expectations. This will be followed by the customary press conference by Fed Chairwoman Janet Yellen, which typically garners scrutiny. Schwab's Chief Fixed Income Strategist, Kathy Jones offers a look at the Fed meeting and the impact on bond investing in her article, Will the Fed Hike Rates This Week? at www.schwab.com/insights. Follow Kathy on Twitter: @kathyjones.

The FOMC decision will be preceded by a plethora of economic reports such as MBA mortgage applications, the Empire Manufacturing Index, the Consumer Price Index (CPI), retail sales, the NAHB Housing Markets Index and business inventories. The read on consumer inflation will likely garner the heaviest attention. Core CPI is estimated to come in at 2.2% y/y for last month, a slight deceleration from the 2.3% gain in January, but the FOMC's favored core PCE Index remains slightly below its longer-run objective of 2.0%. Earlier this month, FOMC Chairwoman Janet Yellen bolstered rate hike expectations by noting that the economy is close to meeting the Fed's goals of maximum employment and price stability and that gradual increases in the fed funds rate will likely be appropriate in the months and years ahead to keep the economy from significantly overheating.

As noted in the latest Schwab Market Perspective: "Phenomenal" Expectations, the economic picture continues to look good, but inflation is heating up, and we are watching to see if this could force the Fed's hand. History compiled by Strategas Research Partners shows that the best stock market performance during a rate hiking cycle comes when the Fed moves slowly in the first year, but quicker in the second year. That pattern appears to be panning out in this cycle. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Finally, for a look at the break in the rally in the stock markets and possibility of increased volatility, see our article, End of an Era: Why Volatility May Return to the Stock Market and video from Schwab’s Chief Investment Strategist Liz Ann Sonders and Vice President of Trading and Derivatives, Randy Frederick titled, Stock Rally Continues, but Is It Time for Markets to Take a Breather?, at www.schwab.com/insights. Follow Liz Ann and Randy on Twitter: @lizannsonders and @randyafrederick. And for analysis of the political front, see Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's article, Presidential Reset: What Does Trump's Speech Mean for His Agenda?, at www.schwab.com/insights.

Europe dips as political uncertainty festers, Asia mixed 

European equities finished lower, with oil & gas and financial stocks leading to the downside amid some caution ahead of tomorrow's highly expected rate hike in the U.S., while crude oil prices fell on an OPEC report showing a jump in production from Saudi Arabia. Political uncertainty in the region also garnered heavy attention to likely hamstring sentiment, with U.K. Brexit uneasiness continuing to flare-up as Prime Minister May was granted the right to trigger Article 50, which will begin the formal process of negotiating the nation's exit from the European Union, following Scottish First Minister Sturgeon's news yesterday that she will start the legal process of preparing for a second independence referendum. Also, the markets are paying attention to tomorrow's Dutch election, which will set the stage for next month's key French Presidential election as discussed by Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Randy Frederick in the video, Why Should the French Presidential Election Be Important to Investors? at www.schwab.com/insights. Follow Jeff on Twitter: @jeffreykleintop. Also, be sure to check out Jeff's articles, Five Reasons to Stay Invested Despite Heightened Uncertainty and The future of Europe: EU 2.0 and its impact on the markets at www.schwab.com/oninternational, where you can also find Director of International Research, Michelle Gibley's CFA, article, Europe Votes: Could More Countries Reject the EU?.

In economic news, eurozone industrial production rose by a smaller amount than expected for January, while German investor confidence improved by a smaller amount than forecasted for this month. The euro dipped and British pound fell compared to the U.S. dollar, while bond yields in the region were mixed.

Stocks in Asia finished mixed, with the markets digesting some diverging Chinese economic data and as the markets appear to be treading cautiously ahead of tomorrow's highly expected rate hike in the U.S. Moreover, European political uncertainty continues to ramp up, likely weighing on conviction. Japanese equities dipped, despite some weakness in the yen, while those traded in Australia finished flat. South Korean securities rose, extending a run that has ensued in the wake of last week's court ruling to uphold a parliamentary vote to impeach President Park, and markets in India jumped in a return to action following yesterday's holiday and following the weekend's state elections that showed Prime Minister Modi's party won by a larger amount than expected. Stocks in mainland China ticked higher and those traded in Hong Kong were little changed following reports that showed the nation's industrial production and fixed asset investment topped expectations, though retail sales missed forecasts for last month. Schwab's Michelle Gibley, CFA, provides timely analysis of global investing in her articles, Currency Hedging: 5 Things You Need to Know and Emerging Markets: Why They Deserve a Place in Your Portfolio at www.schwab.com/oninternational, and be sure to check out our release, Why Your Portfolio Needs International Stocks—Despite 2017 Risks at www.schwab.com/insights.

Tomorrow, the international economic calendar will offer employment data from South Korea, India's trade balance, industrial production and retail sales from Japan, CPI from France and Italy, and employment figures from the U.K.

Markets Endure Another Nose Dive

Charles Schwab: On the Market

Posted: 9/13/2016 4:15 PM ET

Markets Endure Another Nose Dive

U.S. equities whipsawed to solid losses following yesterday's rally, as Fed rate hike uncertainty has grabbed hold of the markets, leading to increased volatility that has moved the Dow more than a combined 900 points over just the last three trading sessions. A tumble in crude oil prices pressured energy stocks following a bearish supply forecast from the IEA. Meanwhile, Dow member Apple rallied on upbeat iPhone 7 pre-order reports, while more M&A activity made the headlines. Treasuries and gold were lower on light economic news, while the U.S. dollar was higher.

The Dow Jones Industrial Average (DJIA) plunged 258 points (1.4%) to 18,067, the S&P 500 Index tumbled 32 points (1.5%) to 2,127, and the Nasdaq Composite plummeted 57 points (1.1%) to 5,155. In heavy volume, 1.0 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.39 to $44.90 per barrel, wholesale gasoline lost $0.01 to $1.38 per gallon and the Bloomberg gold spot was $9.44 lower at $1,318.38 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was up 0.6% to 95.64.

Japan's Renesas Electronics Corp. (RNECY $3) announced an agreement to acquire California-based chip company Intersil Corp. (ISIL $22) for $22.50 per share in cash, representing an aggregate equity value of about $3.2 billion. RNECY was higher, while ISIL rallied nearly 10%.

Anadarko Petroleum Corp. (APC $58) announced an agreement to acquire the Deepwater Gulf of Mexico assets from the oil & gas subsidiary of Freeport-McMoRan Inc. (FCX $10) for $2.0 billion and up to $150 million in contingent payments. Both APC and FCS fell.

Dow member Apple Inc. (AAPL $108) was higher after upbeat pre-order announcements from T-Mobile US Inc. (TMUS $45) and Sprint Corp. (S $7) regarding the company's new iPhone 7 device. TMUS noted that the pre-order period was the biggest in the company's history and S said orders were almost four times higher than a year earlier. However, TMUS and S traded lower. 

Small business optimism slips

The National Federation of Independent Business (NFIB) Small Business Optimism Index for August dipped to 94.4 from July's 94.6 level, and compared to the Bloomberg forecast of a modest rise to 94.8.

Treasuries finished lower, as the yield on the 2-year note rose 2 basis points (bps) to 0.79%, while the yields on the 10-year note and the 30-year bond are gained 6 bps to 1.72% and 2.45%, respectively. Schwab's Chief Fixed Income Strategist, Kathy Jones offers her latest analysis of the interest rate environment in her article, Negative Interest Rate Policy: What Is It and Could It Happen Here?, at www.schwab.com/onbonds and follow Kathy on Twitter: @kathyjones.

Also, with global market volatility picking up as of late, Schwab's Chief Investment Strategist, Liz Ann Sonders offers her latest articles, Is That All?, and All Summer Long: Will the Extreme Lull in Volatility Persist? at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders. Liz Ann notes that since the beginning of 2015, we have been in this loop—moving frequently between easy and tight financial conditions, which have triggered the moves between a dovish and hawkish Fed. "As I've been saying for some time, I don't see how we extricate ourselves from this loop; while it's likely to remain a source of more frequent bouts of volatility." For more on this topic, see our latest article, Fed Uncertainty Brings Volatility to Markets at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Tomorrow's economic calendar will be light, with the Import Price Index scheduled for release, forecasted to have declined 0.1% month-over-month (m/m) during August following the 0.1% m/m increase seen in July, as well as MBA Mortgage Applications.

Europe turns lower as global uncertainty persists, Asia mixed on China data

European equities turned lower in choppy action, falling for four-straight sessions, with the global markets remaining skittish in the face of monetary policy uncertainty, while crude oil prices saw solid pressure to weigh on the energy sector. Crude oil prices dropped after the International Energy Agency (IEA) said it sees the global oversupply in oil persisting into 2017, longer than initially expected. Stocks gave up early gains that came courtesy of yesterday's dovish Fed commentary in the U.S. that cooled imminent rate hike expectations, as well as some upbeat Chinese economic data. Economic data in the region was lackluster as German investor confidence for this month missed expectations and U.K. consumer price inflation came in cooler than expected in August. U.K. economic data remained in focus as the markets try to assess the impact of the late-June vote to leave the European Union, known as a Brexit, and Schwab's Director of International Research, Michelle Gibley, CFA, offers her latest article, Keep Calm and Carry On: The Brexit Shock That Wasn't. The euro ticked higher and the British pound fell—following the inflation data—versus the U.S. dollar, while bond yields in the region finished higher.

Moreover, with volatility picking up amid global monetary policy and Brexit uncertainty, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversification and why Your portfolio may be less diversified than you think. Read all these articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed following the solid rebound in the U.S. yesterday as some dovish commentary from the Fed countered recent hawkish remarks from Central Bank officials to tamp down September rate hike expectations. Also, Bank of Japan (BoJ) uncertainty continued ahead of its policy decision next week, which will come hours before the Fed delivers its decision. Japanese equities rebounded from yesterday's drop with the yen paring some of its recent rally, and South Korean stocks moved higher on the reduced Fed rate hike concerns for this month. However, Australia's markets declined, as strength in technology and basic materials issues were more than offset by weakness in financials and oil & gas issues as crude oil prices saw some pressure.

Mainland Chinese stocks ticked slightly higher and those traded in Hong Kong declined, as August Chinese economic data showed stronger-than-expected reports on retail sales, industrial production and fixed asset investment, continuing to suggest stabilization in the world's second-largest economy but dampening expectations of further stimulus measures. For more on China, see Schwab's Michelle Gibley's, CFA, article, 5 Reasons China Won't Crash the Global Economy in 2016 at www.schwab.com/oninternational. Markets in India were closed for a holiday.

Tomorrow, the international economic calendar will provide investors insight into industrial production in Japan, CPI from France and Italy, wage data from the U.K., and industrial production out of the Eurozone.

Stocks Finish Nearly Flat in Choppy Session

Charles Schwab: On the Market

Posted: 8/9/2016 4:15 PM ET

Stocks Finish Nearly Flat in Choppy Session

U.S. equities finished near the unchanged mark in a session that saw a marked swing in and out of negative territory, as investors weighed some lackluster earnings reports, fairly upbeat domestic economic data, and uninspiring inflation reports out of China. Meanwhile, Treasuries and gold were higher, but crude oil prices and the U.S. dollar were lower.

The Dow Jones Industrial Average (DJIA) gained 4 points to 18,533, the S&P 500 Index inched nearly 1 point higher to 2,182 and the Nasdaq Composite rose 12 points (0.2%) to 5,225. In moderate volume, 775 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.25 to $42.77 per barrel, wholesale gasoline was $0.01 lower at $1.35 per gallon and the Bloomberg gold spot price rose $5.11 to $1,340.42 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 96.13.

Gap Inc. (GPS $27) reported a 4.0% year-over-year (y/y) drop in July same-store sales, versus the FactSet estimate of a 1.0% decline, as sales at its Gap and Banana Republic segments fell, while its Old Navy unit posted flat sales. GPS were solidly lower.

Valeant Pharmaceuticals International Inc. (VRX $28) achieved 2Q earnings-per-share (EPS) ex-items of $1.40, versus the expected $1.47, as revenues declined 11.0% y/y to $2.4 billion, compared to the projected $2.5 billion. However, shares were sharply higher as the company reaffirmed its full-year guidance and announced plans to divest assets.

Coach Inc. (COH $41) posted fiscal 4Q EPS ex-items of $0.45, above the projected $0.41, as revenues rose 15.0% y/y to $1.2 billion, roughly in line with forecasts. North American retail same-store sales rose 2.0% y/y, slightly above estimates and the first increase in in over 12 quarters. COH traded lower as the company's 4Q revenue growth and full-year EPS guidance are garnering some scrutiny among analysts.

Hertz Global Holdings Inc. (HTZ $45) announced 2Q profits ex-items of $0.41 per share, including unanticipated net charges making it unclear if the figure was comparable to the projected $0.29. Revenues declined 2.0% y/y to $2.3 billion, in line with expectations. HTZ issued full-year EPS guidance that was below estimates and shares were solidly lower.

Wayfair Inc. (W $39) fell sharply after the home furnishing retailer posted a 2Q loss of $0.43 per share, compared to the forecasted loss of $0.40 per share, and issued 3Q revenue guidance that missed expectations.

Small business optimism ticks higher

The National Federation of Independent Business (NFIB) Small Business Optimism Index for July ticked higher to 94.6 from June's 94.5 level, where the Bloomberg forecast had called for it to remain.

Preliminary 2Q nonfarm productivity (chart) declined 0.5% on an annualized basis, versus expectations of a 0.4% gain, following the unrevised 0.6% fall seen in the 1Q. However, unit labor costs rose 2.0%, versus the forecast calling for a 1.8% increase. Unit labor costs were revised lower to a decrease of 0.2% in 1Q.

Wholesale inventories (chart) rose 0.3% month-over-month (m/m) in June, compared to forecasts calling for a flat reading and May's upwardly revised 0.2% gain. Sales were up 1.9% m/m, and the inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—fell to a 1.33 months level from the 1.35 posted in May.

Treasuries were higher, as the yield on the 2-year note was 2 basis points (bps) lower at 0.71%, while the yields on the 10-year note and the 30-year bond fell 5 bps to 1.54% and 2.26%, respectively. For more on the bond markets, see Schwab's Chief Fixed Income Strategist, Kathy Jones' article, With a Whimper Instead of a Bang: Is the Great Bond Bull Market Over?, at www.schwab.com/marketinsight. Follow Kathy on Twitter: @kathyjones.

Tomorrow's economic calendar will be fairly light, with the only scheduled reports being the Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, expected to show 5.5 million jobs were available to be filled in June, matching that in May, as well as MBA Mortgage Applications.

Europe higher following earnings, Asia mixed following Chinese inflation data

European equities finished higher, with a plethora of earnings reports that were mostly positive bolstering positive sentiment, while basic materials led a broad-based advance across the major sectors. Focus on the impact of the late-June vote in the U.K. to leave the European Union (EU) on economic data continued, with U.K. industrial production ticking higher in June, while manufacturing output declined slightly more than expected. The British pound came under some pressure versus the U.S. dollar, briefly falling below the $1.30 mark for the first time since early July amid the Brexit vote fallout. For more on the potential impact of the Brexit vote, read Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Brexit's Impact on Sectors, Part Two at www.schwab.com/marketinsight. And for commentary on how the recent Zika pandemic may or may not affect the markets, see the latest article from Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, Does Zika pose an Olympic-sized threat to stocks?, at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop. German exports rose by a smaller amount than anticipated in June, and the euro ticked higher versus the U.S. dollar, while bond yields in the region were mostly lower.

Stocks in Asia finished mixed, with yesterday's rebound in crude oil prices lending support, along with maintained losses in the yen, while traders digested some Chinese inflation data and monetary policy decision in India. Japanese securities advanced, with the yen holding onto yesterday's weakness, while those listed in Australia gained modest ground, led by strength in oil & gas issues, and South Korean stocks also moved higher. Mainland Chinese equities rose, while Hong Kong's market dipped slightly, following data that showed the nation's consumer price inflation rose by 1.8% y/y in July, matching forecasts, but a deceleration from the prior month's 1.9% rise, while producer price inflation declined 1.7%, after falling 2.6% in June, compared to the projected 2.0% drop. The data comes ahead of this week's plethora of reads on industrial production and retail sales, along with lending figures for last month. Schwab's Jeffrey Kleintop discusses China data in his article, Trust but Verify: Five Independent Indicators of China's Economy. Also, Schwab's Director of International Research, Michelle Gibley, CFA, offers 5 Reasons China Won't Crash the Global Economy in 2016. Read both articles at www.schwab.com/oninternational. Finally, stocks in India declined on the heels of the monetary policy decision from the Reserve Bank of India, where it kept its benchmark interest rates unchanged, as expected.

For tomorrow, the international economic calendar will offer machine orders, the Tertiary Index and inflation data from Japan, South Korea's unemployment rate, and industrial production from France.

Financial Review

Falling Knives

Sinclair Noe — March 8, 2016

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW – 109 = 16,964
SPX – 22 = 1979
NAS -59 = 4648
10 Y – .07 = 1.83%
OIL – 1.67 = 36.23
GOLD – 6.50 = 1261.50

Small business confidence declined further in February as lingering concerns about sales growth and profits hurt capital spending and hiring plans. The National Federation of Independent Business (NFIB) said its small business optimism index dropped one point to a reading of 92.9 last month, with none of the index’s components showing an increase. The index decreased 1.3 percentage points in January.

Spending and hiring plans weakened a bit as expectations for growth in real sales volumes fell. Earnings trends worsened a bit as owners continued to report widespread gains in worker compensation while holding the line on price increases.

China’s February trade performance was far worse than economists had expected, days after top leaders at the National People’s Congress sought to reassure investors. Exports fell 25% from a year earlier, the biggest drop since May 2009, while imports slumped 13%, leaving a trade surplus of $32 billion. It’s easy to blame Chinese New Year distortions, but the numbers point to bigger economic problems.

Japan’s 10-year yield extended its push into negative territory, dropping to an all-time low of minus 0.12 percent, meaning almost three-quarters of Japanese government bonds currently offer yields at or below, zero percent. By far the biggest move in trading overnight was the Japanese 30-year, which saw its yield plunge 22 basis points to a record low 0.468 percent. Japan’s 40-year yield is now lower than the U.S. 12-month yield.

After a long wait for inflation to accelerate, Fed officials face a complex and possibly divisive debate over whether recent evidence of rising prices is strong enough to move ahead with planned rate hikes.

In separate statements on Monday, policymakers at the core of that debate staked out starkly different views, with Fed Vice Chairman Stanley Fischer saying economic data now points to the “first stirrings” of inflation, while Fed Governor Lael Brainard countered that the evidence was not yet clear, and it would be much safer to wait. The Fed is not expected to raise interest rates next week, but they might signal they are looking at a rate increase in April or June.

Mario Draghi, the President of the European Central Bank, who is widely expected to tinker with the Eurozone’s financial plumbing this week in the face of weaker-than-expected inflation and six weeks of volatility weighing on business sentiment. Once again, with the market already pricing aggressive action, there’s a risk of disappointment when the ECB meets Thursday. If the ECB takes action, it sets up a divergence in monetary policy between the Eurozone and the US.

Yesterday we told you that the big jump in iron ore prices was short covering and not based on fundamentals. We have also said that trading in the energy markets has been driven by speculation more than fundamentals. Goldman Sachs tells investors the current commodity rally will fade as higher prices prompt more supply to enter the market. Yesterday, iron ore prices jumped 19%; despite the move, Citigroup says it is still bearish as supply and demand fundamentals remain firmly in place; while Axiom Capital Management said the price jump was probably just a “blip.”

Now normally, when Goldman makes a recommendation, we need to consider the possibility that it is a contrarian indicator, but in this case, they might be right. The commodity markets, especially energy, is a supply driven market, and when prices go higher, supply floods back into the market. But the current oil market is still oversupplied and prices have to remain lower for supplies to meaningfully shrink and re-balancing to take place.

The oil market has been especially volatile. Oil’s 2016 roundtrip is nearly complete. WTI crude started the year at about $40 per barrel, and bottomed around $28.75 a barrel – a double bottom actually in late January and early February. That represents more than a 34% swing.  After a 5.5% gain on Monday, the price returned to just a few pennies shy of $38. Brent crude touched $40 per barrel yesterday for the first time in 2016, and moved up to a three month high today before sliding. Now that is nothing but speculative trading.

When prices move higher it is likely a short squeeze because the fundamentals have not changed; there is still an oil glut; OPEC can’t be trusted to freeze production; and it will take time to winnow the producers and eliminate the weak players.

 Meanwhile, China is looking at extra stimulus, Japan has gone to negative interest rates, and the ECB meets Thursday to consider adding even more monetary stimulus. The net effect should be that all these countries weaken their own currency, and the dollar should strengthen. And commodities are priced in dollars, which should lead to lower prices. Just a reminder, stocks have been trading close to commodities for at least the past few months.

Oil and natural gas producer Chevron will cut its budget by at least 17 percent for the next two years as it finishes construction on major expansion projects and works to save cash. The company said it plans to spend between $17 billion to $22 billion annually in 2017 and 2018. For 2016, the company has already announced it would spend $26 billion. Executives reiterated the company’s commitment to pay its $1.07 quarterly dividend.

Goodrich Petroleum, an oil & gas exploration company said it will not make interest payments due March 15 and April 1 on some of its bonds, and will instead opt to use the 30-day grace period it is allowed before being officially in default. Goodrich said it has already launched an offer to exchange all of its outstanding unsecured notes and preferred stock for its common stock. If the exchange offers are not taken up, the company said it would likely file for Chapter 11 bankruptcy protection.

It can be tempting to look for bargains in the oil patch but some folks think it is tempting to catch a falling knife. I wonder how long it will take before Houston turns into Detroit.

Rooftop solar panel installer Vivint Solar terminated an agreement under which it would have been taken over by solar energy company SunEdison after SunEdison failed to “consummate” the $2.2 billion deal. Vivint said it intended to “seek all legal remedies available” as a result of the “willful breach” of the merger agreement by SunEdison.

SolarCity’s shares popped today after announcing a deal to install solar panel systems in Whole Foods Market stores across the U.S. The plan aims to increase the production of solar power and offset the need for a traditional grid power while helping the organic food store save money. In total, the energy firm will retrofit up to 100 Whole Foods stores with rooftop solar panels.

The U.S. Air Force has selected Pratt & Whitney to build the engines for Northrop Grumman’s new $80 billion long-range strike bomber program. Analysts had expected Pratt to be chosen as the supplier since the company already builds engines for Lockheed Martin’s F-35 combat jet. Other key suppliers for “airframe or mission systems” include BAE Systems, GKN, Spirit AeroSystems, Orbital ATK, Rockwell Collins and Janicki Industries.

Cyprus has become the fourth Eurozone nation to exit an EU-IMF bailout, as finance ministers gave the green light to leave its program without a follow-up fund. Cyprus was forced into a €10-billion-euro bailout in March 2013, due to a toxic combination of broken banks, a soaring deficit and an inability to access market financing. By contrast with Cyprus, Greece (the only Eurozone country left in a rescue program) was caught yesterday in a new disagreement between the EU and IMF regarding the strength of its bailout reform commitments.

In the latest volley in its high-profile fight with Apple, the Justice Department has appealed a decision that protects the company from unlocking an iPhone in a New York drug case. Prosecutors, who say Apple has unlocked at least 70 iPhones in the past, are relying on the same “All Writs Act” in a California court, where a judge ordered the company to unlock a device belonging to one of the San Bernardino shooters. The clash has intensified a long-running debate over how much law enforcement and intelligence officials should be able to monitor digital communications.

The Arizona Regional Multiple Listing Service reports overall sales in February were down 2.6% year-over-year. Cash Sales (frequently investors) were down to 29.0% of total sales. Active inventory is now down 0.7% year-over-year, and inventory is down for the fifteenth consecutive month.

Sportswear giant Nike, Swiss watch brand Tag Heuer and German luxury car company Porsche will end their endorsement deals with tennis star Maria Sharapova after she tested positive for an illegal heart drug at the Australian Open. Sharapova brings in, or brought in, a reported $30 million per year in endorsements.

Sharapova said she’s taken the drug, meldonium for over a decade, long before a 2016 ban by the World Anti-Doping Agency, which outlawed the substance as a performance-enhancer. So you might be wondering why there is a problem with a heart drug. Meldonium delivers oxygen through the blood. This can save lives when poor circulation reduces blood supply and oxygen to tissues. For the same reason, reducing the need for oxygen can enhance athletic performance.

Over the course of a workout, as our bodies use oxygen, our blood becomes oxygen deficient—because we’re using up oxygen at a faster rate than our lungs can replace it. Not so if you’re Maria Sharapova on meldonium. Her blood stays oxygen-rich longer, allowing her to perform longer in practice and in matches. And because the drug changes the actual substance that is metabolized in the body, it changes the way Sharapova feels after a workout, too.

This winter was the warmest on record for the contiguous U.S., according to the National Oceanic and Atmospheric Administration. The average temperature across the lower 48 states was 36.8 degrees Fahrenheit, breaking the mark set in 1999-2000. It was 4 degrees higher than the 20th-century average.