Markets Notch Gains Amid a Flurry of Data and Events

Charles Schwab: On the Market

Posted: 10/13/2017 4:15 PM EDT

Markets Notch Gains Amid a Flurry of Data and Events

 

U.S. equities finished out the week higher, getting a boost from a 13-year high in consumer sentiment and solid retail sales. Technology issues caught a draft from HP's favorable guidance, while healthcare issues came under pressure as the Trump administration cut cost-sharing subsidies. Treasury yields were lower on cooler-than-expected inflation data and the U.S. dollar finished nearly unchanged, while crude oil prices moved higher in the wake of President Trump’s decision not to certify the Iran nuclear deal. 

The Dow Jones Industrial Average (DJIA) increased 32 points (0.1%) to 22,872, the S&P 500 Index added 2 points (0.1%) to 2,553, and the Nasdaq Composite gained 14 points (0.2%) to 6,606. In moderate volume, 769 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.85 to $51.45 per barrel and wholesale gasoline was $0.04 higher at $1.62 per gallon. Elsewhere, the Bloomberg gold spot price added $9.74 to $1,303.46 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was flat at 93.08. Markets were higher for the week, as the DJIA gained 0.4%, the S&P 500 Index added 0.3% and the Nasdaq Composite increased 0.2%.

Bank of America Corp. (BAC $26) reported Q3 earnings-per-share (EPS) of $0.48, versus the FactSet estimate of $0.46, with revenues rising 1.0% year-over-year (y/y) to $21.8 billion, compared to the expected $22.0 billion. Net interest income topped forecasts and trading revenues were above expectations despite falling, while loans grew and the company cut expenses more than anticipated. BAC was higher.

Wells Fargo & Co. (WFC $54) posted Q3 EPS of $0.84, or $1.04 ex-items, compared to the projected $1.02, as revenues declined 2.0% y/y to $21.9 billion, versus the estimated $22.4 billion. The company's net interest margin came in well below expectations and loans missed estimates. Shares were solidly lower.

HP Inc. (HPQ $22) rallied after the company issued its fiscal 2018 earnings outlook at its analyst day that had a midpoint above expectations. HPQ said it is looking to aggressively focus on pockets of growth in its stabilized core businesses and expand its 3-D printing solutions to include metal for mass-production manufacturing.

The healthcare sector saw some choppiness, led by hospital and managed-care stocks, after President Trump and his administration announced that they will cut off Affordable Care Act cost-sharing subsidies.

With earnings season heating up, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers a look at all the major market sectors in his latest, Schwab Sector Views: Sustainable Energy?, on the Market Commentary page at www.schwab.com. Follow us on Twitter: @schwabresearch.

Retail sales rise, consumer inflation cooler than expected, consumer sentiment jumps

Advance retail sales (chart) for September rose 1.6% month-over-month (m/m), compared to the Bloomberg forecast of a 1.7% gain and compared to August's positively-revised 0.1% decline. Last month's sales ex-autos were up by 1.0% m/m, versus expectations of a 0.9% gain, and following the favorably revised 0.5% increase seen in the previous month. Sales ex-autos and gas rose 0.5% m/m, compared to estimates of a 0.4% rise, and versus August's upwardly revised 0.1% gain. The retail sales control group, a figure used to help calculate GDP, grew 0.4%, matching projections, and the prior month's positively revised flat reading. Auto and gas sales rose solidly, along with building materials, while sales of food and beverages, clothing, at restaurants and online all moved higher. Electronics and appliances, furniture, health and personal care, and sporting goods sales categories were down.

The Consumer Price Index (CPI) (chart) gained 0.5% m/m in September, versus estimates calling for a 0.6% gain, while August's 0.4% rise was unrevised. The core rate, which strips out food and energy, was up 0.1% m/m, versus expectations for it to match August's unrevised 0.2% rise. Y/Y, prices were 2.2% higher for the headline rate, below forecasts of a 2.3% rise, while the core rate was up 1.7%, south of projections of a 1.8% increase. August y/y figures showed unrevised 1.9% and 1.7% rises for the headline and core rates, respectively.

The preliminary University of Michigan Consumer Sentiment Index (chart) surged to a 13-year high of 101.1 in October from the prior month's 95.1 level, and compared to expectations for it to dip to 95.0. The current economic conditions and expectations components of the report both jumped. The 1-year inflation forecast fell to 2.3% from September's 2.7% rate, while the 5-10 year inflation outlook dipped to 2.4% from 2.5%.

Business inventories (chart) rose 0.7% m/m in August, in line with forecasts, and versus July's upwardly revised 0.3% increase.

With inflation garnering more attention, Schwab's Chief Investment Strategist Liz Ann Sonders discusses putting traditional measures of inflation back on the radar screen in her article, The Waiting: Wage Growth and Inflation Finally Getting in Gear?, and Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers analysis of inflation in a global monetary policy perspective in his commentary, Inflation May Be The Biggest Question For Investors In 2018.

Global monetary policy focus remains, with Europe appearing to lean more hawkish and the Fed continuing down the normalization path amid leadership uncertainty, and Jeff discusses, How the Shift by Central Banks May Affect the Stock Market, and talks in the video with Vice President of Trading and Derivatives, Randy Frederick, Should a Change in Fed Leadership Matter to Investors?.

The political front remained in focus, as in midday action President Trump announced that he will not certify the nuclear deal with Iran, while Washington continues to grapple with tax reform, as discussed by Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend, in his article, Tax Reform Framework Released, But The Road Ahead Is Long.

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 higher on the inflation data, as the yield on the 2-year note declined 2 basis points (bps) to 1.50%, the yield on the 10-year note fell 4 bps to 2.28%, and the 30-year bond rate dropped 3 bps to 2.82%.

Europe mixed following U.S. data, Asia mostly higher as Japan extends rally

European equities finished mixed, though a sharp jump in Chinese exports bolstered the basic materials sector. The markets digested today's cooler-than-expected U.S. inflation data and countering retail sales and consumer sentiment reports. As such, the euro and British pound gained modest ground on the greenback to apply some pressure on the markets. A mixed response to key U.S. banking sector earnings reports and declining bond yields weighed on financials. Bond yields saw pressure amid reports suggesting the European Central Bank is considering extending its bond-buying program for at least nine months after it starts tapering stimulus measures, per Bloomberg.

U.K. Brexit uncertainty remained, with a stalemate continuing as a fifth round of negotiations wrap up. Political uncertainty also festered as Spain is pushing Catalonia for clarification on whether or not it declared independence, while recent Italian confidence votes were digested. 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.

Stocks in Asia finished mostly higher to close out the week, with recent upbeat global economic optimism continuing to buoy sentiment, while Japanese stocks extended a rally to levels not seen in over two decades. 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 in China and Hong Kong ticked higher on a mixed September trade report, which showed exports rose at a rate that was below forecasts but imports topped expectations. Markets in Australia and India advanced, with the latter gaining on the heels of late-yesterday's upbeat inflation and industrial production reports. After the closing bell, India reported that its exports for September rose solidly. Finally, South Korean equities finished lower.

Stocks tick higher on the week amid mixed data and uncertainties

U.S. stocks posted a fourth-straight weekly gain as Q4 continued to roll on, with data fostering continued global economic optimism to support sentiment and overshadow festering global political and monetary policy uncertainties. Treasury yields and the U.S. dollar slipped after recent rallies on a cooler-than-expected read on consumer price inflation, pared optimism as the markets grapple with the long road to tax reform, and volatility across the pond on a Brexit stalemate and lingering Spanish political uncertainty. As such, real estate and utilities led to the upside, while financials were hampered. Banks also saw pressure as earnings reports from Dow member JPMorgan Chase & Co. (JPM $96) and Citigroup Inc. (C $72) topped expectations but signs of rising credit costs and the continued drop in trading revenues appeared to foster concerns. Telecommunications issues fell solidly amid continued concerns toward the sector, exacerbated by AT&T Inc's (T $36) warning that its Q3 results were negatively-impacted by the hurricanes and heightened competition. Consumer staples were among the best performers, aided by Dow member Wal-Mart Stores Inc's (WMT $87) $20 billion share buyback plan and outlook for sales. The positive global economic mood helped materials issues gain ground. Crude oil prices moved higher to help lift the energy sector.

Although ramped up earnings season will likely command a great deal of the market’s attention, next week's economic calendar will bring a flood of reports to be scrutinized, with housing playing a major role. The NAHB Housing Market Index will be followed by housing starts and building permits, and the week will culminate with existing home sales. The docket will be rounded out with the releases of industrial production and capacity utilization, the Fed's Beige Book, the Leading Index and the Import Price Index.

As noted in the latest Schwab Market Perspective: Preparing for the Latter Innings, U.S. stocks continue to grind higher, with little appearing able to knock them off course. The possibility of a pullback always exists but a melt up is also reemerging as a real possibility. Earnings tend to drive equity market direction, and the next few weeks should help set the tone for market action for the rest of the year. Expectations came down a bit as we entered reporting season and recent robust economic data gives support to the potential for companies to meet and/or beat estimates. Global economic growth continues to improve, which should help support both domestic and global stock markets. Read more on the Market Commentary page at www.schwab.com.

International reports due out next week that deserve a mention include: Australia—employment change. China—lending statistics, CPI and PPI, Q3 GDP, retail sales and industrial production. Japan—industrial production and trade balance. Eurozone—trade balance, new car registrations, CPI and construction output, along with German investor confidence. U.K.—inflation statistics, employment change and retail sales.

Stocks Stretch Record Runs Despite Data

Charles Schwab: On the Market

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

Stocks Stretch Record Runs Despite Data

U.S. stocks added to strong weekly gains after shrugging off softer-than-expected retail sales and industrial production reports and showing some resiliency in the face of a terror attack in London and another North Korean missile test. Quadruple witching likely added to the day's volatility and volume. Treasury yields modestly extended their weekly advance and the U.S. dollar pared its weekly gain as the euro and British pound extended recent gains. Crude oil was little changed and gold was lower.

The Dow Jones Industrial Average (DJIA) increased 65 points (0.3%) to 22,268, the S&P 500 Index gained 5 points (0.2%) to 2,500, and the Nasdaq Composite increased 19 points (0.3%) to 6,448. In heavy volume, 2.1 billion shares were traded on the NYSE and 2.7 billion shares changed hands on the Nasdaq. WTI crude oil was flat at $49.89 per barrel and wholesale gasoline moved $0.03 higher to $1.66 per gallon. Elsewhere, the Bloomberg gold spot price declined $8.67 to $1,321.07 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 91.87. Markets were nicely higher for the week, as the DJIA rallied 2.2%, the S&P 500 Index jumped 1.6% and the Nasdaq Composite gained 1.4%.

Oracle Corp. (ORCL $49) reported fiscal Q1 earnings-per-share (EPS) of $0.52, or $0.62 ex-items, versus the $0.60 FactSet estimate, as revenues grew 7.0% year-over-year (y/y) to $9.2 billion, above the projected $9.0 billion. The company noted that the sustained "hyper-growth" of its cloud business continued to drive increased revenue and earnings. However, the company's Q2 guidance missed expectations. Shares fell solidly.

Retail sales miss to kick off heavy day of data

Advance retail sales (chart) for August declined 0.2% month-over-month (m/m), compared to the Bloomberg forecast of a 0.1% gain and compared to July's downwardly revised 0.3% gain. Last month's sales ex-autos grew by 0.2% m/m, versus expectations of a 0.5% gain, and following the negatively revised 0.4% increase seen in the previous month. Sales ex-autos and gas were down 0.1% m/m, compared to estimates of a 0.3% rise, and versus July's unrevised 0.5% rise. The retail sales control group, a figure used to help calculate GDP, decreased 0.2%, compared to the projected 0.2% rise, and the prior month's figure was unrevised at a 0.6% rise.

Auto activity fell solidly, along with clothing and online sales, while electronics and appliances, and building materials were also lower. Sales of furniture, and at restaurants, food and beverage stores and gas stations all moved higher. Commenting on the potential impact of Hurricanes Harvey and Irma on the data, the U.S. Census Bureau said overall response was within the range of the past 12 months even though collection in the impacted areas lagged behind recent months.

The preliminary University of Michigan Consumer Sentiment Index (chart) dipped to 95.3 in September from the prior month's 96.8 level, and compared to expectations for it to decline to 95.0. The current economic conditions component improved m/m, while the expectations measure dropped. The 1-year inflation forecast ticked higher to 2.7% from August's 2.6% rate, while the 5-10 year inflation outlook rose to 2.6% from 2.5%.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his article, Consumer Discretionary Sector Rating: Marketperform, the status of the all-important U.S. consumer looks to us to be solid and hasn't shown signs of diminishing to any great degree at this point, but the retail sector faces challenges that warrant our rating. We view the retail sector is "right sizing," which could ultimately help the group down the road. Read more on the Markets & Economy page and follow us on Twitter: @schwabresearch.

Industrial production (chart) fell 0.9% m/m in August—after six-straight monthly gains—versus estimates calling for a 0.1% gain, and compared to July's upwardly revised 0.4% increase. Manufacturing and mining production both declined, while utilities output fell sharply. Capacity utilization declined to 76.1% from July's upwardly revised 76.9% rate, and compared to forecasts of a 76.7% rate. Capacity utilization is 3.8 percentage points below its long-run average. The Federal Reserve noted that Hurricane Harvey is estimated to have reduced the rate of change in total output by roughly ¾ percentage point.

The Empire Manufacturing Index showed output from the New York region remained solidly at a level depicting expansion (a reading above zero) for September. The index dipped to 24.4 from August's unrevised 25.2 level, with forecasts calling for a reading of 18.0.

Business inventories (chart) rose 0.2% m/m in July, matching forecasts, and versus June's unrevised 0.5% increase.

The impact of the hurricanes on incoming data will likely cloud the economic picture in coming months, but as Schwab's Chief Investment Strategist Liz Ann Sonders notes in her article, Trying to Reason with Hurricane Season: The Aftermath of "Harma", we expect to see a dip in economic activity in the short-term, followed by a boost associated with the recovery/rebuilding efforts, and the impact will unlikely dent the Fed's plans to continue monetary policy normalization. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Treasuries finished lower, with the yields on the 2-year and 10-year notes rising 2 basis points (bps) to 1.38% and 2.20%, respectively, while the 30-year bond rate was flat at 2.77%.

Bond yields are modestly extending this week's sharp rebound from a recent drop back to November lows that came despite upbeat economic data. Yesterday's acceleration in consumer price inflation appeared to bring the Fed back into focus, with expectations of a December rate hike nudging higher, per data compiled by Bloomberg. Schwab's Chief Fixed Income Strategist, Kathy Jones, and Vice President of Trading and Derivatives, Randy Frederick, provide analysis of the bond markets in the video, The Economy is Picking Up, But Bond Yields Are Falling—What's That About?, with Kathy noting that the disconnect between the fixed income markets and the economy is about inflation. Read more on the Insights & Ideas page and follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick.

The U.S. dollar pared its weekly gain, amid flared-up North Korean tensions and another terrorist attack in London. Also, the British pound extended a jump that came from boosted U.K. rate hike expectations. Schwab's Chief Global Investment Strategist 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. Read more on the International Investing page at www.schwab.com.

Europe lower as pound and euro rally

European equity markets finished lower, with the euro trading higher versus the U.S. dollar, while the British pound extended its surge to levels not seen in over a year. The pound has jumped on increased rate hike expectations in the wake of yesterday's Bank of England (BoE) monetary policy decision and bolstered hawkish commentary today from a BoE member that had been labeled as dovish. Another missile test over Japan by North Korea and another reported terrorist attack in London likely hampered sentiment, but the reaction appeared limited. Bond yields moved higher, led by the U.K., amid the heightened BoE expectations. In economic news, the eurozone trade surplus narrowed more than expected in July and the region's wage growth posted the fastest pace in two years.

For a look at global investing, see Schwab's Jeffrey Kleintop's, CFA, article, U.S. vs international: what do earnings tell us about what may be ahead?, on the Markets & Economy page at www.schwab.com, and his video with Randy Frederick, Is An Optimistic Outlook for Global Equities Warranted?, on the Insights & Ideas page.

Stocks in Asia finished mixed after overcoming a brief bout of risk aversion as North Korea conducted another missile test over Japan. The yen reversed to the downside after an early boost on the North Korean missile launch news, helping Japanese equities gain ground, while South Korean stocks also advanced to display some resiliency. Shares trading in India and Hong Kong ticked higher. Mainland Chinese stocks declined on the heels of yesterday's disappointing retail sales and industrial production reports, which continued to weigh on materials issues, leading to a move to the downside for Australian securities. However, after the closing bell, China reported stronger-than-expected lending statistics for August. Amid the backdrop of the resiliency in the global markets, check out Schwab's Jeffrey Kleintop's, CFA, article, What are fund flows telling us about trends and risks in the global stock market?, as well as his commentary, An important benefit to global investors is back after 20 years, on the Markets & Economy page at www.schwab.com.

Stocks back on the weekly winning track

U.S. stocks got back to their weekly winning ways, rallying to fresh record highs amid reversals in the currency and bond markets, which contributed to last week's snapped winning streak. Early estimates suggesting Hurricane Irma's economic cost impact could be less than feared underpinned sentiment. Texas refining activity recovered from Hurricane Harvey's blow to boost crude oil prices to the best weekly performance since late July, per Bloomberg. The energy sector led the equity market's weekly jump. Tech stocks posted a respectable gain, bolstered by a rally leading up to Dow member Apple Inc's(AAPL $160) new iPhone unveiling. Consumer price inflation showed signs of accelerating against the favorable economic backdrop—small business optimism unexpectedly improved and the JOLTS' job openings surprisingly posted a record high—to appear to bring the Fed back in focus. The U.S. dollar rebounded from levels not seen in well over two years—though it pared gains on the pound's surge—and Treasury yields jumped off of multi-month lows to boost the financial sector.

This sets the stage for next week's economic calendar that will bring the Federal Open Market Committee's (FOMC) monetary policy decision, which is not expected to deliver a rate hike but could bring the commencement of the slow winding down of the Fed's behemoth $4.5 trillion balance sheet. Housing data will also be in focus, with the releases of the NAHB Housing Market Index, housing starts and building permits and existing home sales. Markit's September preliminary business activity reports and the Leading Index will round out the docket.

As noted in the latest Schwab Market Perspective: A Cat and Mouse Fall, U.S. stocks remain near all-time highs, but we expect some continued churn as fall is shaping up to bring a series of political, geopolitical and monetary policy conflicts which could contribute to greater volatility. Ample global liquidity, healthy economic growth combined with a solid earnings outlook should ultimately allow the bull market to continue. Global economic growth is looking good and is helping to fuel investor optimism over further gains in international stock markets. Read more on the Markets & Economy page at www.schwab.com.

International reports due out next week that deserve a mention include: China—property prices. Japan—trade balance and the Bank of Japan monetary policy decision. Eurozone—Consumer Price Index and Markit's September business activity reports, as well as German investor confidence. U.K.—retail sales.

Stocks Extend Weekly Advance Despite Disappointing Data

Charles Schwab: On the Market

Posted: 7/14/2017 4:15 PM ET

Stocks Extend Weekly Advance Despite Disappointing Data

U.S. stocks added to a solid weekly advance, with technology issues leading the ascent amid some eased Fed rate hike expectations following softer-than-expected reads on retail sales and consumer sentiment and as inflation remains subdued following this week's dovish testimony by Fed Chair Yellen. An increase in Treasuries coupled with some negative reactions to mostly upbeat banking earnings reports weighed on financials. The U.S. dollar was lower, while gold and crude oil prices were higher.

The Dow Jones Industrial Average (DJIA) gained 85 points (0.4%) to 21,638, the S&P 500 Index advanced 11 points (0.5%) to 2,459, and the Nasdaq Composite increased 38 points (0.6%) to 6,312. In light to moderate volume, 674 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.46 to $46.54 per barrel and wholesale gasoline was $0.03 higher at $1.56 per gallon. Elsewhere, the Bloomberg gold spot price gained $11.02 to $1,228.60 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.6% lower at 95.14. Markets gained solid ground for the week, as the DJIA increased 1.0%, S&P 500 Index advanced 1.4% and the Nasdaq Composite surged 2.6%.

Dow member JPMorgan Chase & Co. (JPM $92) reported Q2 earnings-per-share (EPS) of $1.82, above the FactSet estimate of $1.59, as revenues rose 4.5% year-over-year (y/y) to $25.5 billion, compared to the expected $25.0 billion. JPM noted a stable-to-improving global economic backdrop and a U.S. consumer that remains healthy, while saying loans and deposits continue to grow strongly but market trading revenue was down amid lower volatility and client activity. The company's net interest margin came in a bit shy of forecasts due to higher funding costs, and the company lowered its guidance for net interest income. Shares finished lower.

Citigroup Inc. (C $67) posted Q2 EPS of $1.28, topping the projected $1.21, as revenues increased 2.0% y/y to $17.9 billion, above the forecasted $17.4 billion. The company said it saw continued momentum in its businesses, with loan and revenue growth across both sides of the house. Trading revenues topped forecasts and net interest income was roughly in line with forecasts. However, shares were lower amid analyst caution regarding the outlook for net interest income for the industry.

Wells Fargo & Co. (WFC $55) achieved Q2 profits of $1.07 per share, exceeding the projected $1.01, as revenues were roughly flat y/y to $22.2 billion, versus the estimated $22.5 billion. The company noted continued modest economic growth, increased net interest income and continued improvement in credit results. However, loans were down quarter-over-quarter and its core fees missed expectations. WFC traded lower.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers a look at the financial sector as they unofficially kick off Q2 earnings season in his latest Schwab Sector Views: Christmas in July! (Status of the Consumer), on the Markets & Economy page at www.schwab.com and be sure to follow us on Twitter: @schwabresearch.

Retail sales and consumer price inflation miss, along with consumer sentiment

Advance retail sales (chart) for June declined 0.2% month-over-month (m/m), compared to the Bloomberg forecast of a 0.1% gain and compared to May's favorably revised 0.1% decline. Last month's sales ex-autos declined by 0.2% m/m, versus expectations of a 0.2% gain, and following the unrevised 0.3% decrease seen in the previous month. Sales ex-autos and gas were down 0.1% m/m, compared to estimates of a 0.4% rise, and versus May's unrevised flat reading. The retail sales control group, a figure used to help calculate GDP, dipped 0.1%, compared to the projected 0.3% rise, and the prior month's figure was unrevised at a flat reading. Sales declined at restaurants, gasoline stations, as well as at grocery and department stores, while online and building materials sales were bright spots.

The Consumer Price Index (CPI) (chart) was flat m/m in June, versus estimates calling for a 0.1% gain, while May's 0.1% dip was unrevised. The core rate, which strips out food and energy, ticked 0.1% higher m/m, compared to expectations of a 0.2% increase and versus May's unrevised 0.1% rise. Y/Y, prices were 1.6% higher for the headline rate, below forecasts of a 1.7% rise, while the core rate was up 1.7%, matching projections. May y/y figures showed an unrevised 1.9% rise and an unadjusted 1.7% increase for the headline and core rates respectively.

Industrial production (chart) was up 0.4% m/m in June, above estimates calling for a 0.3% gain, and compared to May's upwardly revised 0.1% increase. This was the fifth-straight monthly advance as manufacturing production ticked higher and mining output rose solidly, while growth in utilities was flat. Capacity utilization increased to 76.6%, compared to May's downwardly revised 76.4%, and below forecasts of 76.8%. Capacity utilization is 3.3 percentage points below its long-run average.

The preliminary University of Michigan Consumer Sentiment Index (chart) fell to the lowest level since October 2016, dropping to 93.1 in July from the prior month's 95.1 level, and compared to expectations for it to dip to 95.0. The current economic conditions component improved modestly m/m, while the expectations measure fell. The 1-year inflation forecast rose to 2.7% from 2.6%, while the 5-10 year inflation outlook also ticked higher to 2.6% from 2.5%.

Business inventories (chart) increased 0.3% m/m in May, in line with forecasts, and versus April's unrevised 0.2% decrease.

Treasuries gained ground on the data, notably the softer-than-expected inflation and retail sales data, which added to this week's dovish monetary policy testimony from Fed Chairwoman Janet Yellen to temper expectations of the pace of rate hikes this year and beyond. As noted in the latest Schwab Market Perspective: Smooth Sailing for Stocks?, a mixed economic picture, combined with the recent retreat in some inflation measures, has raised the level of uncertainty regarding future Federal Reserve actions. The environment for U.S. and global stocks continues to be in decent shape, but some risks are elevated and the possibility of a pullback exists. A notable potential driver of bouts of volatility could be U.S. and global central bank policy as they sail toward monetary policy normalization. Read more on the Markets & Economy page at www.schwab.com.

The yield on the 2-year note dipped 1 basis point (bp) to 1.35%, the yield on the 10-year note dropped 2 bps to 2.32% and the 30-year bond rate was nearly unchanged at 2.91%.

Schwab's Chief Fixed Income Strategist Kathy Jones notes in her Bond Market Mid-Year Outlook: Redefining the Borders of 'Lower for Longer' in the second half of 2017, we expect 10-year Treasury yields to remain in a 2% to 2.5% range, consistent with the eight-year "lower for longer" theme in the bond market. Read more on the Fixed Income page at www.schwab.com, where Kathy also discusses, Dollar Decline: Time to Shift to International Bonds? Maybe Not, on the Markets & Economy page. Follow Kathy on Twitter: @kathyjones.

The political front continues to garner attention, with the revised Senate healthcare bill being dissected to see if it has the potential to pass a vote and Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend discusses in his latest article, Washington Midyear Update: 4 Key Issues for Investors to Watch, dysfunction, drama and ethical issues in the White House have combined with Republican infighting on Capitol Hill to bog down the policy agenda. There's growing concern among congressional Republicans that the much-anticipated policy changes will need to be significantly scaled back—or that they may not happen at all. Read more on the Insights & Ideas page at www.schwab.com.

Europe turns mixed on data and global central bank volatility, Asia mostly higher

European equities finished mixed, with strength in oil & gas issues and basic materials being offset by gains in the euro and British pound versus the U.S. dollar, which found pressure following some disappointing U.S. retail sales and inflation data. The currencies gained ground on eased Fed rate hike expectations that followed the U.S. data and this week's dovish testimony from Fed Chair Yellen. Also, reports fostered speculation that the European Central Bank may be moving closer to scaling back its stimulus measures later this year. Financials saw some pressure as global bond yields moved lower and banking sector earnings reports in the U.S. were scrutinized. In economic news in the region, growth in EU new car registrations slowed, while the eurozone trade surplus came in below forecasts. For more on the markets, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, latest article, Where's the Next Bubble?, on the Markets & Economy page at www.schwab.com, as well as his 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks on the International Investing page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mostly higher, extending global market gains that have been fostered by the recent increase in crude oil prices and dovish monetary policy testimony from U.S. Fed Chair Janet Yellen, while appearing cautious ahead of key earnings reports out of the U.S. banking sector. Japanese equities ticked higher, with the yen giving back recent gains, while mainland Chinese shares also nudged to the upside. Stocks trading in Hong Kong and South Korea advanced, while Indian equities dipped and all three of these constituents have indexes that are at or near record highs and for a look at emerging markets, see Schwab's Jeffrey Kleintop's, CFA, article, The Long Period of Underperformance for Emerging Market Stocks May Finally Be Over on the Markets & Economy page at www.schwab.com. Australian securities rose.

Stocks climb as Fed Chief strikes dovish tone

U.S. stocks participated in a global rally that was fueled by eased concerns about the pace of Fed rate hikes as the Central Bank moves toward the start of reducing its bloated balance sheet. Economic data continued to paint a mixed picture with U.S. industrial production extending a winning streak, while retail sales and consumer sentiment missed. However, the bulk of the shift in Fed sentiment came as wholesale and consumer price inflation remained subdued and as Fed Chair Janet Yellen struck a dovish tone in her semi-annual Congressional monetary policy testimony. Yellen said the fed funds rate remains somewhat below its neutral level and "because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance." Technology stocks returned to rally mode after their brief hiccup. Energy and materials issues also helped lead the way as commodity prices added to a recent rebound on another dose of upbeat Chinese economic data and as the U.S. dollar drifted lower. Crude oil prices also rallied, bolstered by some bullish oil inventory data. However, financials were noticeably lower as Treasury yields, especially on the short-to-mid end of the curve, fell, and some key banking sector quarterly results to unofficially kick off earnings season garnered a mixed reaction.

Next week, as earnings take center stage, the U.S. economic calendar will bring updates on areas of the economy that have been bright spots. Housing will dominate the docket, courtesy of the releases of the NAHB Housing Market Index, as well as housing starts and building permits. Moreover, we will get the first look at manufacturing activity—which has suggested growth has accelerated recently—for July, in the form of regional reports the Empire Manufacturing Index and Philly Fed Manufacturing Index. The week will culminate with the Index of Leading Economic Indicators, which is projected to continue to indicate further economic expansion.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her commentary, 2017 Mid-year US Equity Outlook: Rattle and Hum, stocks have had a remarkable—and recently drama-free—run over the past eight-plus years. We are likely in a more mature phase, which could be marked by bouts of volatility and/or pullbacks—possible driven by Fed policy. But liquidity remains ample, financial conditions loose and earnings growth healthy; which have underpinned this bull for much of its history. Those are the key things on which to keep an eye as we head into the year's second half. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Next week's international economic front will likely garner heightened attention with key release including: Australia—employment change. China—retail sales, industrial production, property prices and Q2 GDP. India—trade balance. Japan—trade balance and the Bank of Japan's monetary policy decision. Eurozone—consumer price inflation and the European Central Bank monetary policy decision. U.K.—inflation statistics and retail sales.

Markets Mixed Following Expected Fed Rate Hike

Charles Schwab: On the Market

Posted: 6/14/2017 4:15 PM ET

Markets Mixed Following Expected Fed Rate Hike

U.S. equities finished mixed and near the unchanged mark, with the Nasdaq taking a hit on pressure from tech stocks, after the Federal Reserve's decision to increase the target for its fed funds rate, as the move was widely expected. Treasuries pared gains in the wake of the Fed decision, after rallying on the heels of early morning reads on retail sales and consumer price inflation that missed expectations. Gold reversed course to finish lower, while the U.S. dollar trimmed its losses to end nearly unchanged, and crude oil prices tumbled following a bearish government inventory report.

The Dow Jones Industrial Average (DJIA) increased 46 points (0.2%) to 21,375, the S&P 500 Index declined 2 points (0.1%) to 2,438, and the Nasdaq Composite lost 25 points (0.4) to 6,195. In moderate volume, 881 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil declined $1.73 to $44.73 per barrel and wholesale gasoline was $0.07 lower at $1.43 per gallon. Elsewhere, the Bloomberg gold spot price decreased $7.31 to $1,259.24 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was flat at 96.97.

H&R Block Inc. (HRB $29) rallied after the company announced Q4 financial results of $1.96 per share from continuing operations, topping the $1.91 FactSet consensus estimate, while revenues increased 1.3% year-over-year (y/y) to $2.3 billion, roughly matching expectations. The company also raised its quarterly dividend by 9% to $0.24 per share.

Technology issues recently experienced a sharp pull-back, prior to yesterday's advance, that some have attributed to a possible rotational trade. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA discusses in his latest Schwab Sector Views: Technology—Too Far or Room to Run?, that the technology sector has been on a remarkable run. It was the best-performing sector over the past three- and 12-month periods, as well as the best year-to-date performer—and it really isn’t all that close. After a run like that, it makes sense that investors are asking if tech may have gone too far. Could a retrenchment be in store? Some might even be wondering if we’re at risk of repeating the collapse that started in 2000, when tech saw its weighting fall from 33% of the S&P 500 to 14% a mere three years later. Read more on the Markets & Economy page at www.schwab.com and follow Schwab on twitter: @schwabresearch.

Fed hikes rates, retail sales and consumer price inflation miss estimates

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, agreeing to raise the target for its fed funds rate by 25 bps to a range of 1.00%-1.25%, a move that was widely expected. The FOMC also kept its rate outlook intact, indicating that most Committee members projected one additional rate increase for 2017, while continuing to forecast three hikes in 2018. In its statement, the FOMC said that near-term risks to the economy are “roughly balanced,” but that the Committee "is monitoring inflation developments closely." However, the Fed indicated that, “Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the committee’s 2 percent objective over the medium term.” In a separate statement, the Fed also provided details of its plan to wind down its bloated balance sheet, by gradually shedding a fixed amount of assets on a monthly basis, but without providing a starting point for the program. The Committee said it anticipates the initial cap to be $10 billion per month--$ 6 billion from Treasuries and $4 billion from mortgage-backed securities—to increase every three months in those amounts to reach $30 billion and $20 billion, respectively.

As well, the Fed provided updated economic projections, showing only a slight upward change to gross domestic product for this year, while lowering its forecasts for inflation and the unemployment rate. In her press conference following the decision, Fed Chairwoman Janet Yellen said the upcoming rate of economic growth warrants further gradual rate hikes, while also noting that "one-off" price declines is what is behind recent softer-than-expected inflation readings. Regarding the program of trimming the balance sheet, she didn't indicate a firm timeframe, only saying she expects it to be initiated this year and that it could take a few years to complete. Read more insightful analysis of the Fed’s decision in an article from Schwab’s Chief Fixed Income Strategist, Kathy Jones, later today at www.schwab.com, while you can also read Kathy's article, Will the Fed Reduce Its Balance Sheet? What Bond Investors Should Know, where she discusses the Fed's potential changes to its inflated balance sheet and the impact on the bond markets, on the Fixed Income page. Follow Kathy on Twitter: @kathyjones.

Advance retail sales (chart) for May declined 0.3% month-over-month (m/m), below the Bloomberg forecast of a flat read and compared to April's unrevised 0.4% gain. Last month's sales ex-autos were also down by 0.3% m/m, missing of expectations of a 0.1% gain, and following the positive revision to a 0.4% rise from the 0.3% reading seen in the previous month. Sales ex-autos and gas were flat m/m, missing estimates of a 0.3% rise, and versus April's favorably revised 0.5% gain. The retail sales control group, a figure used to help calculate GDP, was unchanged, compared to the projected 0.3% rise, and the prior month's figure was revised higher to a 0.6% increase from the previously reported 0.2% increase.

The Consumer Price Index (CPI) (chart) was down 0.1% m/m in May, below estimates calling for no change, while April's 0.2% increase was unrevised. The core rate, which strips out food and energy, rose 0.1% m/m, below expectations of a 0.2% increase and compared to April's unrevised 0.1% rise. Y/Y, prices were 1.9% higher for the headline rate, just shy of forecasts of a 2.0% rise, while the core rate was up 1.7%, below projections of a 1.9% gain. April y/y figures showed an unrevised 2.2% rise and an unadjusted 1.9% increase for the headline and core rates respectively.

The MBA Mortgage Application Index increased 2.8% last week, following the previous week's 7.1% rise. The advance came as a 9.2% jump in the Refinance Index was met with a 2.8% decline for the Purchase Index. The average 30-year mortgage rate decreased 1 basis point (bp) to 4.13%.

Business inventories (chart) declined 0.2% m/m in April, matching forecasts, and versus March's unrevised 0.2% increase.

Treasuries were higher, as the yield on the 2-year note declined 2 bps at 1.35%, while the yields on the 10-year note and the 30-year bond fell 7 bps to 2.15% and 2.80%, respectively.

Tomorrow's economic calendar will again be busy, beginning with weekly initial jobless claims, forecasted to decline to 241,000 from the prior week's 245,000, followed by the Import Price Index, with economists anticipating a 0.1% m/m decline for May, and then the Empire Manufacturing Index and Philly Fed Manufacturing Index will be released. Later in the morning, the Fed's May industrial production and capacity utilization report will be released, forecasted to show production increased 0.2% m/m and utilization ticked higher to 76.8%, while the NAHB Housing Market Index will round out the day, with a reading of 70 expected for June, matching that seen in May.

Europe erases early gains, Asia markets diverge ahead of Fed decision

European equities erased early tech fueled gains and closed mostly lower following the disappointing economic reads from the U.S., while caution ahead of today's Fed decision also likely kept gains and conviction in check. German Bundesbank president and European Central Bank (ECB) Governing Council member, Jens Weidmann, made remarks aimed at highlighting the risks of continuing extraordinary stimulative monetary measures for too long just days after the ECB dropped its reference to the possibility of further declines in interest rates. In other economic news in the region, jobs data reported out of the U.K. showed that fewer payroll additions were made than expected and a miss on wage growth has intensified in the three months through April, imposing the biggest loss of household purchasing power in almost three years, per Bloomberg. The Bank of England (BoE) is expected to make its next policy decision tomorrow and BoE Governor Mark Carney has warned of possible challenging times for the rest of the year as the uncertainty surrounding Brexit is helping to keep pay subdued.

Political uncertainty remains in the U.K. following its recent elections which saw Prime Minister Theresa May's party losing its majority resulting in a hung parliament, while the U.K.'s Brexit department has seen two of its four ministers depart this week, just days before negotiations with the European Union are set to start. For commentary on the political front check out Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives, Randy Frederick's video, Political Risk: How Should Investors Respond? on the Insights & Ideas page at www.schwab.com, and follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick.

The euro and British pound erased early losses and gained ground against the U.S. dollar and bond yields in the region were lower. Schwab's Jeffrey Kleintop, CFA, discusses the recent action in the global bond markets and what it may be signaling in his latest article, Are bonds signaling a major stock market peak? on the Markets & Economy page at www.schwab.com.

Stocks in Asia finished mixed as market participants eyed some data from China and awaited this afternoon's Federal Reserve monetary policy decision. Mainland Chinese securities declined 0.7%, while those traded in Hong Kong ticked higher, as a couple of mostly in line reads on retail sales and industrial production showcased some economic resiliency for the world's second largest economy as regulators continue to pursue a reduction of shadow banking risks. Japanese reports on industrial production and capacity utilization showed growth that matched the previous month's increase, but weren't enough to influence a positive finish as stocks in the island nation dipped, while the Bank of Japan gets sent to begin its two-day monetary policy meeting tomorrow. South Korean equities declined, despite a larger-than-expected decline in the country's unemployment rate to 3.6%, but the jobless figure for young people is still more than twice the overall level. Meanwhile, markets in Australia rallied, aided by strength in financial listings and despite a report that showed a decline in consumer sentiment. For a more detailed picture of our current global economic landscape, see the latest video from Schwab's Jeffrey Kleintop, CFA, What's the Current State of the Global Economy? on the Insights & Ideas page at www.schwab.com.

In addition to the Bank of England meeting, tomorrow's international economic calendar will include employment data from Australia, India's trade balance, CPI from France and Italy, retail sales from the U.K., and the Eurozone's trade balance.

Financial Review

Fed Day

Sinclair Noe — March 15, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

Subscribe: iTunes | Android | RSS

DOW + 112 = 20,950
SPX + 19 = 2385
NAS + 43 = 5900
RUT + 20 = 1382
10 Y – .08 = 2.51%
OIL + 1.24 = 48.96
GOLD + 21.10 = 1220.70

Today is Fed Day.

Policymakers at the Federal Open Market Committee of the Federal Reserve raised interest rates, as expected. The decision to lift the target overnight interest rate by 25 basis points to a range of 0.75 percent to 1.00 percent marked one of the Fed’s most convincing steps yet in the effort to return monetary policy to a more normal footing.

This was the second interest rate hike in the past 3 months, and only the third rate hike in the past decade. The Fed indicated it is still looking at 2 more rate hikes in 2017, which matches the guidance they provided in December. The Federal Reserve under Janet Yellen has been very good at communicating any changes in policy; they do nothing that could shock the markets.

The Fed issued a statement confirming their view that the “labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate was little changed in recent months.

Household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat. Inflation has increased in recent quarters, moving close to the Committee’s 2 percent longer-run objective…”

The Fed added a fresh wrinkle by noting that inflation was little changed and still running below its long-term target if energy and food prices were excluded.

In a press conference following the statement, Yellen said the Fed isn’t trying to get inflation to run faster than 2% for a while to catch up from being below 2% for so long, but that doesn’t mean the Fed would stomp on the brakes as soon as the 2% target was breached. “Two percent is not a ceiling on inflation. It is a target.”

Yellen also said the Fed was not really considering any economic implications from President Trump’s proposals for tax cuts, deregulation, and infrastructure spending. Yellen said, “We haven’t tried to map out what our response would be to certain policies. We have plenty of time to see what happens.”

And Yellen added, “The simple message is, the economy is doing well.” It’s too early to react to Trump, Yellen said. Optimism is great, she said, but you have to show us actual changes in consumer or business spending, or actual changes in fiscal policies before we’re going to change our minds about the economy.

The Fed has a wait-and-see attitude about whether consumer or business optimism will translate into actual increased spending. Yellen said, “It’s uncertain just how much sentiment actually impacts spending decisions, and I wouldn’t say at this point that I have seen hard evidence of any change in spending decisions, based on expectations about the future.”

Yellen said the Fed does look at stock market valuations as part of its assessment of financial conditions, but there is no sign that the Fed is particularly worried about a dangerous bubble developing.

The lack of hawkishness from the Fed apparently caught some traders out of the money. Dollar-buyers exited the trade. Stocks shot higher as Yellen spoke. Financials were the weakest sector in the S&P. A rate hike tends to be a positive for banks, because it increases how much they can charge borrowers, compared with their own short-term borrowing costs. So, the banks wanted to hear that the Fed was going to be more aggressive in raising rates.

In theory, rising interest rates are supposed to hurt the stock market because it makes interest-rate instruments relatively more attractive and reduces liquidity in the marketplace. But interest rates and the stock market usually trend in the same direction over the long term.

That is because the conditions that lead to higher rates, such as an acceleration in economic growth, also fuel bull markets for stocks, while the drivers of rate cuts, like an impending economic recession, are often behind bear markets.

Eventually, rates could get high enough to choke off economic expansion and hurt stocks, but based on current market dynamics, the market appears to be safe for quite a while, maybe even years. So, the Fed has a long way to go before damaging the market or economy.

Of course, higher rates will hit people who have debt; everything from mortgage rates to car loans to credit card debt. That increase will cost consumers an additional $1.6 billion in credit card fees alone during 2017.

For savers, a rise in Federal Reserve interest rates is good news. Savings account rates will likely increase slightly, which should help consumers, especially since interest rates on savings accounts are at historic lows. Although consumers shouldn’t expect those rates to rise much. Banks will likely have to collect extra income from borrowers before being able to pass those funds onto the savers.

The International Energy Agency says global oil inventories rose for the first time in January as the market grappled with increased production last year, but if OPEC maintains its output cuts, demand should overtake supply in the first half of this year.

OPEC also flagged rising inventory levels, but raised its estimates for production outside the group and did not see a re-balancing between supply and demand until the second half of this year.

The IEA said crude stocks in the world’s richest nations rose in January for the first time since July by 48 million barrels to 3 billion barrels, more than 300 million barrels above the five-year average.

Investors cashed out of US-based high-yield junk bond funds.  Lipper data shows high-yield bond funds posted $2.1 billion in net withdrawals during the week ended March 8, the most since November 2016. Crude oil prices fell this week to 3-1/2 month lows. Energy producers are heavily represented in junk bond indexes.

Higher interest rates could shrink bond prices and hike borrowing costs for indebted companies. Still US-based stock funds attracted their sixth straight week of net inflows, $8.5 billion, while taxable bond funds netted $2.8 billion despite the high-yield outflows

American consumers paid slightly more in February for goods and services such as groceries and rent, reflecting upward pressure on inflation that’s intensified since last summer.

The consumer price index, or cost of living, rose by a seasonally adjusted 0.1% last month. The increase in inflation over the past 12 months advanced to 2.7% in February from 2.5% in January, putting it at the highest level since early 2012.

Excluding the volatile food and energy categories, so-called core consumer prices rose 0.2% in February. Core prices have advanced 2.2% in the past year. Inflation-adjusted wages rose just 0.1% per hour in February and worker wages are unchanged in the past year.

Retail sales recorded their smallest increase in six months in February. The Commerce Department said retail sales ticked up a seasonally adjusted 0.1% in February, after a much bigger gain of 0.6% the previous month. January’s gain was revised higher.

The figures suggest that strong job gains this year, near record-high stock prices and decent pay gains haven’t yet lifted spending. But last month’s sluggish pace could prove temporary, because spending was likely held back by delays in tax refund payments.

Business inventories in the U.S. rose 0.3% in January, largely because of more new vehicles sitting in auto dealer lots. Inventories at auto dealers rose 2%, reflecting a downturn in sales at the start of the new year. Sales were pumped up in December by holiday-season discounts and a slowdown was expected in January.

The value of auto inventories is 9.3% higher compared a year ago. Millions of Americans who held onto to aging cars in the wake of the Great Recession have upgraded to newer vehicles, but much of that pent-up demand has been met.

Twitter shares were lower in early trading after many high-profile Twitter accounts were hijacked. The hacker posted tweets that supported Turkish President Erdogan in his diplomatic spat with the Netherlands and Germany.

Dutch Prime Minister Mark Rutte’s party has taken the lead in an election widely seen as an indicator of populist sentiment in Europe. Anti-immigrant, anti-European Union figure Geert Wilders had run on a “de-Islamification” platform, calling for Islamic schools to be closed and the Quran and burqa to be banned. The latest polls show that no party will come close to winning an overall majority, so the post-election period will likely come down to forming a coalition government.

MIT has created an award for rule-breakers. The university’s Media Lab announced this week it will award $250,000 to a group or individual for disobedience. Per Joi Ito, the director of MIT’s Media Lab, “You don’t change the world by doing what you’re told.”

The eligibility requirements are simple: “The recipient must have taken a personal risk to affect positive change for greater society.” The winner will be announced in July.

Stocks Advance for Fifth-Straight Session

Charles Schwab: On the Market

Posted: 2/15/2017 4:15 PM ET

Stocks Advance for Fifth-Straight Session

U.S. stocks extended their recent rally, with global markets remaining optimistic regarding President Donald Trump's reflationary policy promises. Treasury yields rose, bolstered by favorable retail sales and regional manufacturing reports and a hotter-than-expected read on inflation. Crude oil prices and the U.S. dollar ticked lower, while gold was higher. In equity news, PepsiCo offered mixed earnings results and AIG missed expectations.

The Dow Jones Industrial Average (DJIA) advanced 107 points (0.5%) to 20,612, the S&P 500 Index gained 12 points (0.5%) to 2,349, and the Nasdaq Composite added 37 points (0.6%) to 5,819. In moderately-heavy volume, 844 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.09 lower to $53.11 per barrel and wholesale gasoline was flat at $1.55 per gallon. Elsewhere, the Bloomberg gold spot price rose $4.66 to $1,232.80 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 101.04.

PepsiCo Inc. (PEP $107) reported 4Q earnings-per-share (EPS) ex-items of $1.20, above the $1.16 FactSet estimate, as revenues rose 5.0% year-over-year (y/y) to $19.5 billion, roughly in line with expectations. PEP issued 2017 EPS guidance that missed forecasts and shares traded modestly lower. Schwab’s Chief Investment Strategist Liz Ann Sonders offers a look at the earnings front in her latest article, Better Days: Earnings Growth Picks Up Sharply in 2017, at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

American International Group Inc. (AIG $61) fell after the insurer posted a larger-than-expected 4Q operating loss of $2.72 per share. FactSet had anticipated a $0.61 per share shortfall but the company had one-time items in its results that may be impacting comparability. AIG also announced a $3.5 billion addition to its share repurchase program.

Express Scripts Holding Co. (ESRX $69) posted 4Q EPS ex-items of $1.88, one penny above estimates, with revenues declining 5.0% y/y to $24.9 billion, compared to the projected $26.3 billion. ESRX issued 1Q earnings guidance that slightly missed expectations, while reaffirming its full-year profit projection. ESRX ticked lower in choppy trading. 

Dow member Merck & Co. Inc. (MRK $65) announced that it ended a study of its Alzheimer's drug. Shares finished lower.

Retail sales and consumer price inflation top forecasts, Yellen concludes Capitol Hill visit

Advance retail sales (chart) for January rose 0.4% month-over-month (m/m), above the Bloomberg forecast of a 0.1% increase, and compared to December's upwardly revised 1.0% rise. Also, last month's sales ex-autos were up by 0.8% m/m, north of expectations of a 0.4% gain, and following the positive revision to a 0.4% rise seen in the previous month. Sales ex-autos and gas were higher by 0.7% m/m, compared to estimates of a 0.3% increase, and versus December's upward revision to a 0.1% gain. The retail sales control group, a figure used to help calculate GDP, increased 0.4%, compared to the projected 0.3% rise, and versus to the prior month's positively revised 0.4% gain. 9 of the 13 categories showed growth, led by electronics and appliances, sporting goods, department stores, food services and drinking places, and gasoline, while autos pulled back.

The report, given the importance of consumer spending on U.S. economic output, along with the following jump in regional manufacturing activity, adds credence to Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, view in his latest article, Simple Indicators In A Complex World, that while markets may exhibit increasing volatility, we believe the bull market is being supported by tangible and effective indicators of global growth. The stock markets remain at record highs, tracking economic data that continues to exceed expectations as discussed by Jeff in his commentary, Five Reasons to Stay Invested Despite Heightened Uncertainty. Read these articles at www.schwab.com/oninternational, and follow Jeff on Twitter: @jeffreykleintop.

The Consumer Price Index (CPI) (chart) was up 0.6% m/m in January, north of estimates and the prior month's 0.3% rise. The core rate, which strips out food and energy, gained 0.3% m/m, above expectations and December's 0.2% rise. Y/Y, prices were 2.5% higher for the headline rate, above forecasts of a 2.4% increase, while the core rate was up 2.3%, topping projections of a 2.1% gain. December y/y figures showed an unrevised 2.1% rise and an unadjusted 2.2% increase for the headline and core rates respectively.

The Empire Manufacturing Index showed output from the New York region jumped further into expansion territory (a reading above zero) for February. The index surged to 18.7—the highest since September 2014—from January's unrevised 6.5 level, with forecasts calling for a 7.0 reading.

Industrial production (chart) declined 0.3% m/m in January, compared to estimates of a flat reading, and following December's downwardly revised 0.6% gain. Manufacturing production ticked 0.2% higher m/m and mining production jumped, while utilities output tumbled. Capacity utilization dipped to 75.3% from December's upwardly revised 75.6%, and compared to projections for a 75.4% rate. Capacity utilization is 4.6 percentage points below its long-run average.

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month dipped for a second month to 65, compared to expectations for it to remain at January's unrevised 67 level, with a 50 mark separating good and poor conditions.

Business inventories (chart) rose 0.4% m/m in December, matching forecasts, and versus November's upwardly revised 0.8% gain.

The MBA Mortgage Application Index declined 3.7% last week, following the previous week's 2.3% gain. The drop came as a 2.9% decrease for the Refinance Index was met with a 4.5% fall for the Purchase Index. The average 30-year mortgage rate declined 3 basis points (bps) to 4.32%.

Federal Reserve Chairwoman Janet Yellen is concluding her two-day semi-annual Congressional economic and monetary policy testimony in front of the House Financial Services Committee. Her prepared testimony did not deviate from yesterday's statement in front of the Senate, where she kept the possibility of a March rate hike on the table by noting that waiting too long to remove accommodation would be unwise. Also, she added that, "At our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate." The Q&A session is garnering some attention on the Street.

As noted in the latest Schwab Market Perspective: Not So Fast!, if economic data continues to surprise on the upside, a March rate hike is likely to be on the table; while there is an additional risk that the Fed may be forced to speed up the tightening process should inflation accelerate from here. Read more at www.schwab.com/marketinsight and check out Schwab's Liz Ann Sonders' video with Schwab's Vice President of Trading and Derivatives, Randy Frederick titled, What Can Investors Make of Latest Fed Meeting and January Labor Report?, at www.schwab.com/insights. Treasury yields and the U.S. dollar continued to regain upward momentum and the stock markets added to record highs in the wake of Yellen's comments yesterday.

Treasuries were lower, with yields adding to a recent rally on the retail sales and inflation data. The yield on the 2-year note rose 2 bps to 1.25%, while the yields on the 10-year note and the 30-year bond increased 3 bps to 2.50% and 3.08%, respectively. For a look at the bond markets, see Schwab's Director of Income Planning, Rob Williams', CFP, and Senior Research Analyst, Cooper Howard's, CFA, latest article, Short-Term Bonds: Why They Could Outperform As Interest Rates Rise, at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

Tomorrow, the economic calendar will bring a look at January housing construction activity, in the form of housing starts and building permits, with starts forecasted to remain at December's annual rate of 1,226,000 units, and permits projected to rise 0.2% m/m to an annual rate of 1,230,000 units. Additional reports will include weekly initial jobless claims, expected to have increased by 11,000 to 245,000, and the Philly Fed Manufacturing Index for February, anticipated to decline to 18.0 from January's 23.6 level, though a reading above zero indicates expansion in activity.

Europe gets back on the upward trend, Asia finished mostly higher 

European equities moved back in positive territory after the Stoxx Europe 600 Index finished flat yesterday, halting a five-session winning streak. The markets continued to get a boost from optimism regarding U.S. reflationary policies that are expected to be announced in the coming weeks. Most markets shrugged off lingering European political uncertainty, with some key elections in the region looming on the horizon, though it bogged down Italian markets. For analysis of the U.S. and European political fronts, see Schwab's Jeffrey Kleintop's, CFA, article, President Trump and Global Trade: How Will Campaign Promises Play Out? and Director of International Research, Michelle Gibley's, CFA, article, Europe Votes: Could More Countries Reject the EU? at www.schwab.com/oninternational. Solid gains for French bank Credit Agricole SA (CRARY $6) and brewer Heineken NV (HEINY $40) on the heels of their earnings reports helped the markets in the region, along with upbeat reads on U.K. employment and the eurozone trade surplus. The euro ticked higher and British pound dipped versus the U.S. dollar, which cooled a bit after a recent run that was bolstered by U.S. Fed Chief Yellen's comments yesterday that kept the possibility of a March rate hike on the table. Bond yields in the region finished mixed. For global market investing analysis, see Schwab's Jeffrey Kleintop's, CFA, articles, The CURE for a calm Market: Four risks for 2017, and 5 Reasons International Stocks May Underperform In 2017. Read these articles at www.schwab.com/oninternational.

Stocks in Asia finished mostly higher amid the continued global market rally that has taken the U.S. markets to record highs. The markets have received a boost from a shift in focus to reflationary policies in the U.S. and away from global trade and immigration concerns. Stocks moved higher despite U.S. Fed Chief Yellen's comments yesterday that kept the possibility of a March rate hike on the table. Japanese equities rose, with the yen extending yesterday's drop as the U.S. dollar gained ground on Yellen's comments. Mainland Chinese stocks declined, but those traded in Hong Kong rallied in the wake of late-yesterday's mixed lending statistics for last month, highlighted by a record high in aggregate financing, the biggest measure of new credit. Australian securities gained ground, led by banks as global bond yields moved higher on Yellen's comments, and South Korean stocks rose. Indian equities declined amid weakness in banks as reports suggested the government cut the amount it planned to inject into state-run lenders, per Bloomberg. For our analysis of the global markets, see Schwab's Director of International Research, Michelle Gibley's, CFA, 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.

The international economic docket for tomorrow will include machine tool orders from Japan, employment data from Australia, unemployment reads from France and the trade balance from Italy.

Stocks Close Mixed Ahead of Holiday

Charles Schwab: On the Market

Posted: 1/13/2017 4:15 PM ET

Stocks Close Mixed Ahead of Holiday

U.S. stocks finished the trading session mixed ahead of the long holiday weekend which will keep markets closed on Monday in observance of the Martin Luther King, Jr Day holiday. Energy stocks lagged on lower crude oil prices, while financials led the advance following some upbeat earnings from Dow member JPMorgan Chase & Co and Bank of America. Treasuries and the U.S. dollar were lower and gold was slightly higher. In economic news, retail sales came in just shy of estimates and a read on consumer sentiment missed expectations.

The Dow Jones Industrial Average (DJIA) decreased 5 points to 19,886, the S&P 500 Index was 4 points (0.2%) higher at 2,275 and the Nasdaq Composite advanced 27 points (0.5%) to 5,574. In moderate volume, 745 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.64 to $52.37 per barrel and wholesale gasoline was unchanged at $1.61 per gallon. Elsewhere, the Bloomberg gold spot price rose $2.95 to $1,198.38 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 101.21. Markets were mixed for the week, as the DJIA decreased 0.4%, the S&P 500 Index shed 0.1% and the Nasdaq Composite advanced 1.0%.

Dow member JPMorgan Chase & Co. (JPM $87) reported 4Q earnings-per-share (EPS) of $1.71, including a tax benefit that may be impacting comparability to the FactSet estimate of $1.42. Revenues rose 2.0% year-over-year (y/y) to $24.3 billion, compared to the projected $23.9 billion. Net interest margin improved, fixed income trading activity topped estimates and the company reserves for bad loans shrunk. JPM's Chairman and Chief Executive Officer Jamie Dimon said the U.S. economy may be building momentum, while offering an upbeat outlook for potential impact of President-elect Donald Trump's incoming administration and noting that the company is "well positioned to play our part." Shares have pared early gains.

Bank of America Corp. (BAC $23) posted 4Q EPS of $0.40, north of the projected $0.38, with revenues rising 2.0% y/y to $20.0 billion, versus the expected $20.8 billion. The company said net interest income improved, reflecting benefits from higher interest rates as well as growth in loans and deposits. However, fixed income trading activity missed estimates as "things tapered off at the end of the year," after doing "very well" in the first two months of the quarter. The company's Chief Financial Officer Paul Donofrio noted that while the recent rise in interest rates came too late to impact 4Q results, "we expect to see a significant increase in net interest income in 1Q of 2017." BAC increased its planned stock repurchase program for the first half of 2017 by $1.8 billion. BAC nudged higher.

Wells Fargo & Co. (WFC $55) announced 4Q earnings of $0.96 per share, below the expected $1.00, as revenues were roughly flat y/y at $21.6 billion, below the forecasted $22.5 billion. Net interest income increased, largely driven by growth in loans and investments, as well as higher interest rates. Shares finished higher despite the earnings miss.

Retail sales miss, consumer sentiment remains near highest level since early 2004

Advance retail sales (chart) for December rose 0.6% month-over-month (m/m), just below the Bloomberg forecast of a 0.7% increase, and compared to November's upwardly revised 0.2% rise. Also, last month's sales ex-autos were higher by 0.2% m/m, south of expectations of a 0.5% gain, and following the favorable revision to a 0.3% rise seen in the previous month. Sales ex-autos and gas were flat m/m, compared to estimates of a 0.4% increase, and versus November's upward revision to a 0.3% gain. The retail sales control group, a figure used to help calculate GDP, was up 0.2%, compared to the projected 0.4% rise, and compared to the prior month's negatively revised flat reading. A solid gain in auto sales led the way, while online shopping saw solid demand, furniture and building materials gained ground and gasoline stations posted a respectable increase. However, sales declined at department stores, food and beverage stores and among food services and drinking places.

The preliminary University of Michigan Consumer Sentiment Index (chart) dipped this month to 98.1, from the prior month's 98.2 level—which was the highest since January 2004—and compared to expectations of a slight increase to 98.5. The current economic conditions component nudged higher m/m, while the outlook portion dipped. The 1-year inflation estimate jumped from 2.2% to 2.6%, and 5-10 year inflation outlook increased to 2.5% from 2.3%.

The consumer sentiment report suggests the momentum in consumer spending, which does the heavy-lifting of the U.S. economy, will likely continue and Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers a look at the consumer discretionary sector in his latest Schwab Sector Views: Sectors and Politics. Brad notes that the outlook for American consumer spending appears to be improving, with consumer confidence rising and wages ticking higher. However, spending on traditional retail items has been cautious and competition among retailers may limit profitability. Read more at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in December were up 0.3% m/m, matching expectations, and compared to November's unrevised 0.4% gain. The core rate, which excludes food and energy, gained 0.2% m/m, versus forecasts of a 0.1% increase and compared to November's unadjusted 0.4% increase. Y/Y, the headline rate was 1.6% higher, in line with projections, and the core PPI increased 1.7% last month, versus estimates of a 1.8% increase. In November, producer prices were 1.6% higher and up 1.8% y/y for the headline and core rates, respectively.

Business inventories (chart) rose 0.7% m/m in November, compared to forecasts of a 0.6% increase, and versus October's upwardly revised 0.1% gain.

Treasuries were lower with the yields on the 2-year note and the 30-year bond rising 2 basis points (bps) to 1.19% and 2.99%, respectively, while the yield on the 10-year note gained 3 bps to 2.39%.

Bond yields and the U.S. dollar are regaining some of the lost momentum over past two sessions that came as the markets appeared to be disappointed with Wednesday's news conference by President-elect Donald Trump. Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the bond markets and the recent rally in the greenback in her articles, Changing Conditions: A Bond Market FAQ and Will the U.S. Dollar Bull Market Continue in 2017?, at www.schwab.com/marketinsight. Follow Kathy on Twitter: @kathyjones.

With the markets near record highs as we move into 2017, Schwab’s Chief Investment Strategist Liz Ann Sonders and Vice President of Trading and Derivatives, Randy Frederick offer their latest video, Record Territory: Could the Bull Market Continue in 2017? Watch the video at www.schwab.com/insights, where you can also find Senior Vice President of the Schwab Center for Financial Research, Mark Riepe's, CFA, latest podcast, 7 Principles for Investing Success.

Please Note: All U.S. markets will be closed on Monday in observance of the Martin Luther King, Jr. Day holiday.

Europe higher as healthcare issues rebound, Asia mixed

European equities moved higher, with healthcare issues recovering from yesterday's drop that came in the wake of U.S. President-elect Donald Trump vowing in his first news conference on Wednesday since winning the election to crack down on drug pricing. Financials led the charge as the markets digest the plethora of key earnings results from the banking sector in the U.S., while Italian banking concerns were held in check. The markets also sifted through some mixed trade figures out of China, which followed yesterday's upbeat lending statistics that added to a recent string of stronger-than-expected data to buoy global economic sentiment and fuel a rally in basic materials stocks. The euro ticked higher and the British pound gained ground on the U.S. dollar, while bond yields in the region moved mostly to the upside.

For timely analysis of the global landscape, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, latest article, 5 Reasons International Stocks May Underperform In 2017, at www.schwab.com/oninternational, as well as his video with Senior Derivatives Analyst Nathan Peterson titled, Brexit, Germany, China: How the Global Economy Could Fare in the New Year at www.schwab.com/insights. Follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed on the heels of the declines in the U.S. and Europe yesterday as Wednesday's press conference by U.S. President-elect Donald Trump appeared to cool post-election optimism as it lacked discussions of his proposed economic policies that have fueled the late-2016 rally. The markets also digested some December trade data out of China, which showed imports came in stronger than expected, though exports decelerated solidly. The data comes after late-yesterday's better-than-forecasted lending statistics for last month. Mainland Chinese equities declined and stocks in Hong Kong rose. Schwab's Jeffrey Kleintop, CFA, notes in his article, Happy Unrecession: The Alice in Wonderland economy, that while volatility may lie ahead for stocks, a prolonged bear market and recession seem unlikely for 2017.

However, Japanese equities advanced as the yen gave back some of yesterday's gains. Australian securities dropped as basic materials gave back a recent rally, while Indian listings finished flat. South Korean equities decreased as the Bank of Korea left its monetary policy unchanged. Schwab's Director of International Research, Michelle Gibley, CFA, offers timely analysis of emerging markets in her latest article, Emerging Markets: Why They Deserve a Place in Your Portfolio. Read the above articles 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.

Stocks mixed week as Trump-policy trade hits midweek snag

Stocks finished the first full week of 2017 mixed, with some of the post-election moves taking a step back as Wednesday's first news conference as President-elect by Donald Trump lacked details of proposed economic policies that have bolstered the late-2016 rally. The U.S. dollar dipped from a multi-year high and Treasury yields were little changed in choppy trading, while crude oil prices pulled back. Healthcare issues, while finishing near the unchanged mark, took a wild ride as pharmaceutical stocks sold off in the wake of Trump's presser as he vowed to crack down on the industry. Technology stocks led to the upside after lagging the financials, industrials and telecom sectors since the November post-election push. However, real estate, energy and telecom stocks saw some pressure. Economic data continued to suggest continued momentum, but the NFIB Small Business Optimism Index stood out after jumping to the highest level since December 2004.

This sets the stage for a shortened next week, with a heating up 4Q earnings season continuing to vector some attention away from the economic calendar, which is poised to deliver the Consumer Price Index (CPI), industrial production and capacity utilization, the NAHB Housing Market Index, and housing starts and building permits. As noted in the Schwab Market Perspective: A Perfect Mix?, the conditions for a continuation of the long-running equity bull market appear to be intact. The recent digestion of gains since the election is a healthy process as it forestalls a potentially dangerous "melt-up" scenario, at least for now. Economic data and corporate earnings growth are conspiring with a boost in consumer and business confidence to ignite "animal spirits." Add in a Federal Reserve that is slowly normalizing monetary policy, but still remains accommodative, and we see a good mix for further equity gains. Manufacturing has rebounded around the globe, and could continue on a positive trajectory in the first half of 2017. Read more at www.schwab.com/marketinsight.

International reports due out next week that deserve a mention include: Australia—consumer confidence and employment change. China—property prices, 4Q GDP, industrial production, retail sales and fixed asset investment. India—wholesale price inflation. Japan—machine orders. Eurozone—European Central Bank monetary policy decision, trade balance, CPI and German investor confidence. U.K.—CPI, employment change and retail sales.