Financial Review

Thank You

Sinclair Noe — November 10, 2017

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DOW – 39 = 23,422
SPX – 2 = 2582
NAS + 0.89 = 6750
RUT + 0.25 = 1475
10 Y + .07 = 2.40%
OIL – .31 = 56.86
GOLD – 8.90 = 1276.60

Cryptocurrency

• Number of Currencies: 899
• Total Market Cap: $196,936,621,147
• 24H Volume: $13,213,160,008

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	Vol.	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	6,374.8	$107.77B	$4.99B	37.79%	1	-2.54%	-10.80%
	Ethereum	ETH	298.15	$28.77B	$817.87M	6.19%	0.0470464	+0.67%	-0.12%
	Bitcoin Cash	BCH	1,135.50	$18.86B	$4.64B	35.11%	0.175766	+14.24%	+81.41%
	Ripple	XRP	0.20300	$7.97B	$133.81M	1.01%	0.00003237	0.00%	+0.97%
	Litecoin	LTC	59.590	$3.21B	$295.57M	2.24%	0.00934421	+0.49%	+7.74%
	Dash	DASH	326.23	$2.51B	$91.67M	0.69%	0.051139	+0.07%	+18.30%
	NEO	NEO	27.907	$1.81B	$49.28M	0.37%	0.00436266	-0.52%	+3.16%
	NEM	XEM	0.18682	$1.68B	$7.49M	0.06%	0.00002913	-3.21%	+6.99%
	Ethereum Classic	ETC	17.2500	$1.67B	$600.88M	4.55%	0.00268302	+20.87%	+44.31%
	Monero	XMR	105.00	$1.60B	$69.48M	0.53%	0.0163628	+0.44%	+20.69%

The S&P 500 and the Dow Jones Industrial Average ended the week lower for the first time in nine weeks. For the week, the Dow lost 0.5 percent and the S&P 500 slipped 0.2 percent. The Nasdaq gave up 0.2 percent for the week, snapping six weeks of weekly gains.

The yield on 10-year Treasuries punched through 2.40 percent, joining a spike in European sovereign rates. Junk bonds stabilized after 3 days of declines. Global equities hit historic highs during the week as investors were encouraged by solid earnings and synchronized global economic growth.

Wall Street remained focused on Washington and the promise of tax cuts. Republican tax writers in the House and Senate are scrambling to find ways to make the math work on their respective tax plans. The House Ways and Means Committee hammered together a bill and sent it toward the House floor for a vote promised next week, while the Senate Finance Committee revealed a proposal it intends to mark up on Monday.

After the Senate plan’s release Thursday, Sen. Jeff Flake voiced fears about the effect of broad cuts on the national debt. The budget resolution approved by Congress allows it to pass a plan that adds as much as $1.5 trillion to federal budget deficits over a decade. While the nonpartisan Congressional Budget Office has not scored the Senate plan, it estimated that an earlier version of the House bill would increase federal budget deficits by $1.7 trillion over 10 years.

The current plans appear to come nowhere close to canceling out tax cuts with new revenue. The House is on track now to hold a vote before Thanksgiving, and the Senate perhaps soon after. But it’s far from clear either measure can pass in the opposing chamber, let alone be combined into one bill that can clear both and land on Trump’s desk.

Republican plans to overhaul US taxes includes a provision to cut the corporate tax rate from 35% to 20%. The House Republicans’ proposal would make the cut immediately, while the Senate Republicans’ plan would delay the cut for two years, which freaked out Wall Street.

The corporate tax cut is the single most important part of Republicans’ proposals. The Tax Policy Center estimates that the House plan would cost the government $2 trillion in revenue over the next 10 years, and that is a problem because they can only blow a $1.5 trillion hole in the budget.

On its face, cutting corporate taxes is a good idea. Most economists believe that it is more efficient to tax people, not companies. Taxes on companies discourage them from making investments and encourage them to move profits abroad to tax havens.

There are strong arguments that lower corporate taxes would increase economic growth, especially if corporate tax cuts were targeted to provide relief for companies that invest in new equipment, or hire more employees or for more research and development.

The problem with Republican proposals to reduce corporate taxes is that the $2 trillion in cuts are not replaced by other revenues. Thus, the government would borrow money to cut corporate taxes, on the bet that the economy will grow faster and make up for the shortfall. It almost certainly won’t.

The Tax Foundation, an ideologically conservative think tank, finds that even with increased economic growth, the Republican tax plan will lead to $1 trillion in lost government revenues, and more government debt. There is a very simple solution to pay for corporate cuts. Hike income taxes on the rich.

Currently, the top federal income tax rate, applied to incomes above $480,000, is 39.6%. Among wealthy countries, that rate is comparatively low. Researchers from the Brookings Institution estimate that raising the US’s top income tax rate by 10 percentage points—in line with the rates in Japan and Sweden—would generate about $100 billion in government revenue every year. That would pay for a large portion of the corporate tax cuts.

A review of the academic literature by the IMF found that an increase in the top income tax rate is unlikely to negatively impact the US economy. And an analysis by a researcher at Uppsala University concluded that the US could raise its top income tax rate above 70% on the very rich without a significant negative impact on the economy. That could pay for some hefty corporate tax cuts.

The current plan to cut corporate tax rates and individual rates for the wealthy just doesn’t add up. You can’t eat your cake and have it, too.

The more we dig into the tax plan, the more it seems the whole scheme was just slapped together with bailing wire and duct tape. Take the plan to eliminate the tax credit for adoptions. That idea didn’t sit well with Pro-Life, pro-family evangelicals.

Late yesterday, the House Ways and Means Committee realized their error and added the credit back to their bill. The question remains – what were they thinking? And the answer is – they weren’t.  They’re just looking to get a bill passed and they aren’t paying attention to details.

Crude oil was down slightly as expectations OPEC and other producers will extend their production cut agreement were offset by U.S. drillers adding the most oil rigs in a week since June, indicating output will continue to grow. U.S. energy companies added nine oil drilling rigs in the week to Nov. 10, the second increase in three weeks, bringing the total count to 738.

Meanwhile, the political situation in Saudi Arabia remains sufficiently volatile to spike crude prices at any given time. Over the past week, Saudi security officials rounded up dozens of members of Saudi Arabia’s political and business elite in a corruption purge. War in Yemen, a dispute with the Gulf emirate of Qatar and growing tension with Iran is a concern to investors too. We saw that this week as West Texas Intermediate briefly popped up to $57.92, its highest since July 2015.

The University of Michigan consumer sentiment index fell to 97.8 from 100.7 in October. Gauges of both current and future expectations declined — but the index still was at its second-highest level since January. There was a slight rise in expectations for inflation over the next year, and growing expectations of increasing interest rates.

A new report from the Institute for Policy Studies shows inequality is growing. According to the report, three men – Bill Gates, Jeff Bezos, and Warren Buffet –  have collectively more wealth than the 160 million poorest Americans, or half the population of the United States.

The study shows the bottom 19 percent of Americans are financially underwater, meaning they have zero or negative net worth. Even those low- and middle-income families who do have some wealth often don’t have any liquid assets — cash or savings — at their disposal. Over 60 percent of Americans report not having enough savings to cover a $500 emergency.

Today is Alibaba’s big day – Singles’ Day, an annual online discount sales event that has become the world’s biggest shopping spree. It started out as a sales gimmick – Alibaba offered a day of discounts with the idea that lonely hearts could buy a gift for themselves. It has now become the biggest day for shopping – outpacing Black Friday and Cyber Monday combined.

In the first 3 minutes today, sales topped $1.5 billion. Sales for the 24-hour period are expected to top $24 billion. The event gets shoppers around China scouting for bargains and loading up their online shopping carts, while delivery men – and robots – are braced for an estimated 1.5 billion parcels expected over the next six days.

Yesterday, after the closing bell, Nvidia and Disney posted third quarter earnings. Nvidia jumped 6 percent and hit a record high after the chipmaker’s revenue forecast for the current quarter topped estimates. Disney rose 2.7 percent as the promise of a new “Star Wars” trilogy overshadowed its weak quarterly results.

Equifax reported a third-quarter revenue miss late Thursday. New customers are putting off contracts with Equifax until, or unless, the company can prove its cybersecurity practices are up to par. Most of Equifax’s business is selling services to other businesses, and there is always a concern that customer deferrals will turn into cancellations. After stripping out nearly $90 million in breach-related costs, Equifax claimed a third-quarter profit beat. I’m guessing $90 million might not be enough to clean up their mess.

Department store chain J.C. Penney reported third-quarter same-store sales that were twice what it had estimated. The retailer said comparable sales rose a better than expected 1.7 percent. Penney’s still reported a net loss of $128 million for the quarter – nearly double the loss from a year earlier, but much of the loss was due to heavy discounting to clear slow-moving inventory. Share popped 14%.

Saturday is Veterans Day. The holiday traces its origins back to the end of World War I. On Nov. 11, 1918, an armistice between the U.S.-led Allied nations and Germany went into effect on the 11^th hour of the 11^th day of the 11^thmonth – the date recognized as the end of the “war to end all wars.”

November 11^th was originally called Armistice Day. There are 6.7 million Vietnam Era veterans in 2016. There were 7.1 million who served during the Gulf War (representing service from August 1990 to present); 768,263 who served in World War II; 1.6 million who served in the Korean War; and 2.4 million who served in peacetime only.

There are 18.5 million military veterans in the U.S. according to the Census Bureau. 9.2 million of those are age 65 and older. Tomorrow, Veterans Day, is a good day to say thank you for their service and for our freedom. It’s always a good day to say thank you – no need to wait.

So, to all veterans Saturday – Thank you.

Financial Review

Pottery Barn Rules

Sinclair Noe — October 13, 2017

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

Subscribe: Android | RSS

DOW + 30 = 22,871
SPX + 2 = 2553
NAS + 14 = 6605 (Record)
RUT – 2 = 1502
10 Y – .04 = 2.28%
OIL + .80 = 51.40
GOLD + 10.20 = 1304.30

Cryptocurrency

• Number of Currencies: 878
• Total Market Cap: $174,223,159,809
• 24H Volume: $6,182,297,096

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	Vol.	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	5,691.3	$94.45B	$2.96B	47.93%	1	+0.97%	+30.33%
	Ethereum	ETH	339.63	$32.22B	$1.21B	19.62%	0.059464	+0.64%	+9.88%
	Ripple	XRP	0.26146	$10.11B	$349.29M	5.65%	0.00004604	+0.43%	+11.40%
	Bitcoin Cash	BCH	325.94	$5.45B	$264.35M	4.28%	0.057233	+1.68%	-10.28%
	Litecoin	LTC	59.220	$3.17B	$249.71M	4.04%	0.0104192	+0.54%	+14.35%
	Dash	DASH	311.77	$2.37B	$67.24M	1.09%	0.0546181	+1.06%	+1.04%
	NEM	XEM	0.20990	$1.88B	$5.16M	0.08%	0.00003664	-1.15%	-0.03%
	NEO	NEO	29.105	$1.46B	$67.41M	1.09%	0.00513938	-1.00%	-13.10%
	Monero	XMR	94.67	$1.43B	$59.07M	0.96%	0.0165036	-0.19%	+3.51%
	BitConnect	BCC	198.286	$1.42B	$17.34M	0.28%	0.0348017	-0.24%	+40.39%

The Dow Industrials hit an intraday high but then faded to close just below Wednesday record closing high. The Nasdaq closed at a record high.

For the week, the Dow was up 0.4 percent and the S&P 500 was up 0.2 percent, pushing the Dow and the S&P 500 to a fifth straight week of gains. The Nasdaq rose 0.2 percent for the week, registering a third week of gains.

The consumer price index rose 0.5% in September, the second big increase in a row and the largest in eight months. Three-fourths of the increase in the cost of living stemmed from higher prices at the gas pump as Hurricane Harvey knocked refineries off line. If food and energy are stripped out, core CPI rose a much smaller 0.1%.

The recent energy-driven rise in CPI pushed the yearly rate of inflation to 2.2% from 1.9% to match a six-month high. Yet the more closely followed core rate was unchanged at 1.7% for the fifth month in a row. Adjusted for inflation, hourly wages fell 0.1%. Over the past year “real” wages have risen just 0.7%.

The Social Security Administration announced today that more than 65 million recipients will get a 2% cost-of-living adjustment (COLA) in 2018, after receiving a measly 0.3% boost in 2017 and no increase for inflation in 2016. That means the average benefit for a retired worker will rise by $27 a month to $1,404 in 2018 while the average benefit per retired couple will grow $46 a month to $2,340.

But many recipients will find most or all of that increase eaten up by a jump in the Medicare Part B premiums deducted from their monthly Social Security checks. The COLA affects benefits for more than 70 million U.S. residents, including Social Security recipients, disabled veterans and federal retirees. That’s about one in five Americans.

Retail sales in the U.S. leapt 1.6% in September—the largest increase in 2½ years. The boost came from new autos and trucks. Excluding autos, sales rose 1%. And sales excluding autos and gasoline climbed a smaller but still robust 0.5%. Sales of cars and trucks surged last month after a disappointing August.

Part of the rebound reflected the purchase of replacement vehicles after many were damaged by hurricane-related flooding in Texas and Florida. Home-supply stores also got a bump in the cleanup that followed the storms. Higher gasoline prices lifted sales at gas stations dealers as well. We weren’t buying more gas, just paying more.

The University of Michigan said its consumer sentiment index climbed to a 13-year high of 101.1 in October from 95.1 in September. There were big gains in both the index for current economic conditions, which rose to 116.4 from 111.7, and expectations, which rose to 91.3 from 84.4.

Yesterday we told you that Trump had signed an executive order that makes it easier for individuals and small businesses to buy alternative types of health insurance with lower prices, fewer benefits and weaker government protections.

Yes, the policies would cost less, but they are basically don’t get sick plans. Still, these junk plans sold through associations could siphon young and healthy patients out of the ACA’s exchanges and create an individual-market death spiral. But the order is vague and subject to likely legal challenges.

The administration announced late last night that Trump will immediately halt cost-sharing reductions. These $7 billion in annual subsidies to health insurers allow around 7 million low-income Americans to afford coverage. The ACA requires that insurers subsidize the out-of-pocket health-care costs of some low-income patients, and the government reimburses them — until now. You might think that ending the subsidies to insurers would cut costs, but no.

The move could force the government to dole out almost $200 billion more on health insurance over the next decade. Here’s why: The insurer payouts Trump cut off aren’t the only government funds financing the program. Consumers also can get help with their insurance premiums.

When the insurer subsidies are discontinued, those premiums are pushed higher — and because the consumer subsidies are far bigger than those given to insurers, that’s a costly trade. More than eight in ten individuals who buy Obamacare plans get help paying their premiums directly from the federal government. Those subsidies effectively cap how much people must pay for insurance as a percentage of their income.

Even if premiums climb, people who receive those benefits won’t pay more out of their own pockets. The subsidies are available to people making as much as four times the federal poverty level, or just over $97,000 for a family of four. That means that those most likely to be hurt by the president’s action aren’t low-income people who will still get help with their costs.

Instead, consumers who make too much money to qualify for subsidies will now have to pay a much higher price for their health plans. It all adds up to a hefty bill for taxpayers for as long as the Affordable Care Act is the law of the land. The Congressional Budget Office estimated that ending the cost-sharing payments would increase the U.S. fiscal shortfall by $194 billion over the next decade as subsidy outlays jump.

The uncertainty about what Trump would do has already driven premium prices higher for 2018. Now it’s going to get worse. The fifth year’s open-enrollment season for consumers to buy coverage through ACA exchanges will start in less than three weeks, and insurers have said that stopping the cost-sharing payments would be the single greatest step the Trump administration could take to damage the marketplaces.

Ending the payments is grounds for any insurer to back out of its federal contract to sell health plans for 2018. After the failure to repeal and replace Obamacare, there was some talk about trying to find ways to make the ACA better, but instead, this is intentionally destroying the marketplace. Obamacare had its problems but it was working and he had a chance to fix those problems. Yes, this is a bargaining tactic to try to revive repeal and replace – the problem is the GOP has not been able to come up with a better replacement.

And as a bargaining position, it might not work. The Congressional Budget Office ran projections for just such a possibility. They figure about one million people could lose insurance coverage and the price hikes will be passed along to the federal government. But they also calculate that individual states will figure out schemes to overcome the loss of subsidies.

An unusually broad alliance of interests has urged Congress to appropriate the money, signaling just how disruptive their loss could be. Or Congress could decide to just pay the subsidies. Trump tried to shift blame, tweeting that the Democrats Obamacare is imploding. Not true. Remember the Pottery Barn rules: Yes, the plate you just shattered had some cracks in it. But if you throw it on the ground, the store is going to blame you. You break it, you own it.

Meanwhile, Trump’s campaign against the Iran nuclear deal came to a head today, when he refused to certify that Iran was in compliance with the agreement. Trump stopped short of withdrawing from the deal or of reimposing sanctions on Iran himself, instead sending the deal back to Congress, which will have 60 days to decide whether to re-implement sanctions or alter legislation that covers US participation in the accord.

Bank of America picked up where JPMorgan Chase and Citigroup left off on Thursday when it reported strong core banking numbers and lackluster trading revenue. Bank of America reported earnings per share of 48 cents on revenue of $22.07 billion.

Both numbers topped consensus analyst estimates of 45 cents and $21.97 billion, respectively. BAC also reported a 22 percent decline in fixed-income trading revenue, which dropped to $2.152 billion. Bank trading revenues have suffered in 2017 thanks to historically low volatility in global financial markets.

Wells Fargo reported third quarter revenue that missed expectations Friday. The bank reported: Earnings per share of $1.04, ex-items, vs. the $1.03 a share expected by analysts. Revenue of $21.93 billion, vs. $22.4 billion expected. Revenue fell 2 percent from the same quarter last year. Shares fell more than 3 percent in trading Friday.

The adjusted earnings per share excludes 20 cents of charges related to litigation for a mortgage-related regulatory case from before the financial crisis – not related to the fake account schedule. The litigation cost of $1 billion contributed to an operating loss of $1.3 billion in the third quarter.

BASF has agreed to buy seed and herbicide businesses from Bayer for $7 billion in cash, as Bayer tries to convince competition authorities to approve its planned acquisition of Monsanto. BASF, the world’s third-largest maker of crop chemicals, has so far avoided seed assets and instead pursued research into plant characteristics such as drought tolerance, which it sells or licenses out to seed developers. But Bayer’s $66 billion deal to buy Monsanto, announced in September 2016, has created opportunities for rivals to snatch up assets that need to be sold to satisfy competition authorities.

And finally, for triskaidekaphobics, we finish with a story from Finland, where FinnAir – the airline of Finland – has been routinely flying for several years from Copenhagen Denmark to Helsinki Finland. The one-hour flight had somehow been assigned the Flight number 666. The airport code for Helsinki is HEL.

Well, that left a more than a few travelers nervous, and so FinnAir is changing the Flight number to AY954. Today, Friday the 13^th was the last time to catch flight 666 to HEL

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.

Financial Review

Complacency Abounds

Sinclair Noe — July 14, 2017

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

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DOW + 84 = 21,637 (record)
SPX + 11 = 2459 (record)
NAS + 38 = 6312
RUT + 3 = 1428 (record)
10 Y – .03 = 2.32%
OIL + .52 = 46.60
GOLD + 11.10 = 1229.40
BITCOIN – 3.39% = 2156.96 USD
ETHEREUM – 5.51% = 187.69

Washington is in gridlock and the White House faces scrutiny. Valuations are at the highest levels since the financial crisis. There’s been straight months of outflows from the biggest exchange-traded fund tracking the S&P 500.

So, what happened today? Record highs for the Dow, S&P 500, and Russell 2000. The Nasdaq is within 10 points of a record. The CBOE Volatility Index ended at 9.51, a 24-year low, falling 15 percent.

We start with economic data. The Commerce Department said retail sales fell 0.2 percent in June as Americans curtailed spending at restaurants, department stores and gasoline stations. That followed a 0.1 percent drop in May. Most retail segments posted weaker results in June.

Sales at gas stations posted the biggest drop, down 1.3%, reflecting lower prices at the pump. Sales also fell at grocers, restaurants, book stores, sporting-goods stores and department stores. Auto dealers reported a small increase in sales, but they are not moving new cars off the lots as quickly as they were a year ago.

Meanwhile, the Labor Department said consumer prices were flat in June, the latest evidence that inflation remains muted. All told, inflation has climbed just 1.6 percent from a year ago. In June, energy prices sank 1.6%. Americans paid less for gasoline, natural gas and electricity. The cost of food leveled off in June after five straight increases.

The core rate of inflation that excludes the volatile food and energy categories rose 0.1% in June. Grocery prices have declined in the past year, but the cost of takeout and eating out has risen sharply. Over the past 12 months the core CPI is up 1.7%, unchanged from the prior month.

The University of Michigan’s sentiment index slipped to 93.1 in July from 95.1 in June. The index has fallen from a 13-year high of 98.5 in January. Americans feel plenty confident in the economy right now, but seem convinced we’re all headed for hell in a handbasket.

An index that measures current conditions rose to 113.2 to set a 10-year high, but a gauge that looks out six months fell to 80.2 from 83.9. The outlook of consumers is now back to where it was before the November election.

Industrial production rose 0.4% in June, a touch ahead of expectations and the fifth straight month of increases, as mining output surged 1.6%; mining includes the oil and gas sector. The Federal Reserve reported utilities output as flat and manufacturing output edged up 0.2%.

Economic forecasts are revising estimates for second quarter GDP lower, to the range of 1.9% to 2.5%. At the start of the second quarter estimates topped 3% growth. The economic data confirms a lack of inflation and a sluggish economy that fits with dovish statements from the Federal Reserve policymakers this week.

At this rate, we may have seen the last rate hike from the Fed for this year. The Fed still wants to trim its balance sheet, but 1.6% inflation and weak retail sales is hardly justification to hike rates.

The dollar dropped lower and treasuries rallied. Oil gained 1% today and 5% for the week.

Earnings season kicked off in earnest, with JPMorgan Chase, Citigroup and Wells Fargo all posting better-than-expected profits. Even though the bottom line was solid, they still faced challenges.

JPMorgan Chase reported a better-than-expected quarterly profit on Friday due to strong loan growth and higher interest rates, but said net interest income for the year would be lower than expected, sending its shares down about 2 percent.

JPMorgan earned $26.5 billion in profit over the past 12 months, the most ever by any major U.S. bank.

While trading results were worse than analysts’ estimated, second-quarter earnings set a record. The bank said that net interest income will probably climb $4 billion this year, less than the $4.5 billion it previously projected.

One area of weakness is mortgages, where the market may shrink and competition is stiff. JPMorgan said its markets revenue fell 14 percent in the second quarter. At Citigroup, trading revenue was down 7.2 percent.

On a conference call, JPMorgan CEO Jamie Dimon had a few choice words about Washington politics, choice as in four letter words we can’t repeat in print. Dimon also had trepidation about the Fed’s plans to unwind its balance sheet, saying: “We’ve never had QE like this before, and we’ve never had unwinding like this before.Obviously, that should say something to you about the risk that might mean, because we’ve never lived with it before.”

The Fed will likely announce the kick-off this year, possibly at its September meeting. The Fed’s plan calls for a phase-in period. It will unload $10  billion the first month and raise that to $50 billion over the next 12 months. Then it will continue at that pace to achieve its “balance sheet normalization.”

Just like the Fed “created” this money during QE to buy these assets, it will “destroy” this money at a rate of $50 billion a month, or $600 billion a year. It’s the reverse of QE, with reverse effects. QE had the intended effect: inflating asset prices. Unwinding QE, once it starts in earnest, is likely to pull asset prices in the opposite direction.

But given of how leveraged assets are, and to the enormous extent they have been used as collateral, Dimon – the banker who is concerned about collateral values – hit the nail on the head. It’ll be “a very different world.”

Citigroup posted earnings per share of $1.28 on revenue of $17.9 billion, topping analyst expectations on the top and bottom lines. That’s compared to earnings of $1.24 per share on $17.5 billion in revenue in the year-ago period.

Wells Fargo beat earnings expectations, as it benefited from higher interest rates, though revenue was lower than expected at $22.1 billion. At Wells Fargo, new car loans dropped by almost half in the second quarter, while its automotive portfolio fell to the lowest level in two years after the bank tightened underwriting standards.

Another cause for celebration earlier this week: court approval of a $142 million settlement of a class-action lawsuit between the bank and victims of its fake account scandal of 2016. The fiasco, you might remember, included claims that Wells Fargo employees opened up to 2 million bank and credit-card accounts without customers’ permission to boost sales numbers. Multiple class action suits followed, and the bank expects them to all fold into this settlement.

However, the bank’s first response was to veto the class action and send it to mandatory arbitration, which is an alternate form of resolving a dispute using an appointed independent party instead of the court system. It’s an option banks and financial institutions have written into contracts with consumers, and they use it to prevent consumers from joining together to pursue relief. Only after public pressure did the San Francisco bank agree to face the suit.

The big 3 banks all beat on the bottom line. There was a bit of disappointment on the guidance but overall, it’s been a good start to the earnings season.

Look for S&P 500 earnings in the range of 7%. Analysts have high hopes for earnings. Companies in the S&P 500 will earn $130 per share at year-end, compared with current trailing 12-month comparable earnings of about $120, according to data compiled by Bloomberg. That $10 spread is the widest between past and future earnings since 2001.

Expectations for tech profits have steadily climbed throughout the year, with analysts now calling for a 15 percent jump in the group’s bottom line.

Senate majority Leader Mitch McConnell has planned for a vote next week on revised healthcare legislation, unveiled yesterday, and he has his work cut out for him in the coming days to get the 50 “yes” votes needed for passage.

Republicans control the Senate by a 52-48 margin and cannot afford to lose more than two from within their ranks because of united Democratic opposition, but two Republican senators already have declared opposition. A dozen more Republican senators have expressed concern or remain noncommittal.

A major test for McConnell’s legislation expected early next week is an analysis by the nonpartisan Congressional Budget Office, which last month forecast that the prior version of the bill would have resulted in 22 million Americans losing insurance over the next decade.

Financial Review

Halftime

Sinclair Noe — June 30, 2017

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

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DOW + 62 = 21,349
SPX + 3 = 2423
NAS – 3 = 6140
RUT – 0.84 = 1415
10 Y + .03 = 2.30%
OIL + 1.40 = 46.33
GOLD – 4.20 = 1242.20
BITCOIN + 0.39% = 2509.80 USD
ETHEREUM – 6.64% = 279.09

I’m not sure we established a trading pattern this week. Down, up, down, up. We did see a return to volatility. The indexes saw big moves, much sound and fury amounting to very little. It might just be window dressing to finish out the quarter and heading into a long holiday weekend.

The markets will be open for a half day on Monday, but, this is the beginning of a long holiday weekend.

As we wrap up the second quarter and the first half of the year, let’s check where we stand.
For the month: the Dow gained 1.6%, the S&P gained 0.5%, the Nasdaq lost 0.9% for the month, and the Russell gained 3%.

For the second quarter: the Dow gained 3.3%, the S&P up 2.6%, the Nasdaq up 3.9%, and the Russell up 3.9%.

For the first half: the Dow is up 8%, the S&P up 8.2%, the Nasdaq up 14%, and the Russell up 6.1%.

So, the Nasdaq is the big winner so far, this year, but seemed to lose momentum in June. The S&P 500 recorded its biggest percentage first-half gain since climbing 12.6 percent in the first six months of 2013. The Nasdaq posted its biggest first-half gain since 2009.

Oil is down 14% from the start of the year and down 5% for the month of June. OPEC and certain other oil-producing countries agreed to extend their production cuts, originally set to expire at the end of June, by nine months (ending March 2018). They didn’t count on US shale producers ramping up production to fill the void.

The count of working oil rigs in the US fell this week for the first time in 24 weeks, breaking the record streak of increases. After several upward revisions, the International Energy Agency currently expects U.S. crude production to end the year 0.8 mmb/d higher than year-end 2016; although some traders are expecting closer to 1 mmb/d.

As such, the rapid U.S. shale growth in the back half of the year could meaningfully increase U.S. oil supply. Meanwhile, when OPEC cuts fall off in early 2018, look for the global oil glut to come roaring back.

The yield on the 10-year Treasury note has dropped 14 basis points from the start of the year, however the yield has been climbing in the past week or so, after hitting a low for the year at 2.13%.

This is still the most contrary move among major asset classes because the Federal Reserve has raised interest rates twice in the first half, and promises another cut in the second half plus plans to trim its balance sheet.

US 10-year yield has now moved above 200-day moving average, and broke the down trendline from March.

Second-quarter corporate results are set to begin in earnest in the coming weeks, with S&P 500 companies expected to post an 8-percent rise in earnings. Investors have been looking for earnings to support historically high valuations, with the S&P 500 trading at about 18 times earnings estimates for the next 12 months compared to the long-term average of 15 times.

We’re bumping right along the top end of historic valuation levels. It’s getting harder to find undervalued stocks with so much optimism factored into stock prices.

The U.S. dollar recovered slightly today, but posted its biggest quarterly decline against a basket of rival currencies in nearly seven years after hawkish signals from foreign central banks this week pressured the greenback further. The dollar index declined 4.6% in the second quarter to mark its steepest quarterly percentage drop since the third quarter of 2010.

The euro accelerated more than 7 percent against the greenback for its biggest quarterly percentage gain since the third quarter of 2010.

In late May, we told you the Midwest experienced flooding that damaged corn and wheat crops. Since then, the northern Plains states have experienced a drought that left crops withering in the field. Spring wheat, traded on the Minneapolis Grain Exchange, has soared 32 percent in June. Spring wheat is a thinly traded commodity, but it was a big winner, especially considering futures contracts are leveraged, this was a killer trade.

As we wrap up the first half we are once again reminded that the heavyweight champion of traders is still Warren Buffett. Warren Buffett is set to pull in $12 billion in profits on a single deal with Bank of America. Buffett invested $5 billion in Bank of America in 2011. That move came at a critical time for Bank of America with the company trying to leave behind the financial crisis with its new CEO Brian Moynihan.

Buffett negotiated a favorable deal with the bank, due to his investment acting as a public vote of confidence in the company’s future. His $5 billion investment in preferred shares came with the option to convert those to common stock shares until 2021. The preferred shares paid $300 million annually in dividends.

Buffett’s common stock shares are currently worth about $17 billion, $12 billion more than the purchase price. Warren Buffett’s Berkshire Hathaway is now the biggest owner of two of the world’s largest banks: Bank of America and Wells Fargo.

Consumer spending rose modestly in May and inflation cooled, pointing to a slow-but-steady economic expansion. Consumer spending rose 0.1 percent last month. Consumer prices excluding food and energy rose 1.4 percent on a yearly basis, compared to a 1.5 percent gain in April.

The Fed’s preferred gauge of inflation, the personal consumption expenditures (PCE) price index fell 0.1 percent in May from April, dragged lower by drops in prices for consumer goods and energy. When food and energy were excluded, the index was up 0.1 percent.

The slowdown in inflation has boosted consumer spending power. After-tax personal income adjusted for inflation rose 0.6 percent in May, the largest gain since April 2015.

Even so, the University of Michigan’s consumer sentiment index fell to 95.1 this month, its lowest since November, according to a final reading for the gauge published today. The index has been rising steadily since 2008 and in November it hit its highest level since before the 2007-09 recession.

Senate Republicans still don’t have a healthcare deal. Senate Republicans headed home for a week-long recess without coming to an agreement on their bill, named the Better Care Reconciliation Act. This represents another delay for the Trump agenda.

Illinois is poised to enter its third straight fiscal year without a budget. The Illinois House adjourned on Friday, the last day of the budget year, without enacting a plan and will reconvene at 11 a.m. local time on Saturday. While negotiations continue, it signals the legislature will blow the midnight deadline and extend the unprecedented impasse that’s left Illinois without a full-year budget since mid-2015.

Without a deal around July 1, S&P Global Ratings has warned that the nation’s fifth-most-populous state will likely get downgraded again, losing its investment-grade status. The state of Illinois will be rated junk. Without a spending plan, the state has effectively been on autopilot, leaving it with a record $15 billion of unpaid bills as it spent over $6 billion more than it brought in over the past year.

The impasse has devastated social-service providers, shuttering services for the homeless, disabled and poor. The lack of state aid has wreaked havoc on universities, putting their accreditation at risk. If the standoff isn’t resolved, Illinois officials have said they won’t be able to pay contractors and road construction will shut down, putting thousands out of work.

The yields on the state’s bonds have risen as investors anticipate a downgrade. Without a budget that includes borrowing to pay down the bill backlog, Illinois by August will run out of money for key expenses. That means school funding, state payroll, and pension payments could be affected. This won’t jeopardize debt-service payments. Illinois hasn’t missed any bond payments and state law requires it to make monthly deposits to its debt-service funds.

President Trump says he is “sending in Federal help” to Chicago to help curb gun violence. The president tweeted early Friday that crime in Chicago has reached “epidemic proportions,” citing more than 1,700 shootings in the city so far, this year.

So, the Feds are sending in a strike force of 20 Alcohol, Tobacco, and Firearm, or ATF agents for what officials called a “laser focus” on the illegal trafficking of weapons. They join 41 ATF agents already in Chicago. The force will also focus on investigating and prosecuting repeat gun offenders. Don’t hold your breath.

This week saw a couple of important anniversaries. 20 years ago, the British handed over rule of Hong Kong to the Chinese. 10 years ago, the first iPhone was sold. Apple sold more than 50 million iPhones in the first three months of 2017 alone, bringing in $33.2 billion.

Drivers are set to pay the lowest Independence Day price for gasoline since 2005 — and for the first time on record, the Fourth of July holiday per-gallon cost will run below the price from New Year’s Day, according to GasBuddy.

Motorists on the road for the Fourth of July holiday weekend are expected to pay an average of $2.21 a gallon for gasoline, well below the 10-year average of $3.14. If you are driving, be careful out there, and have a great Independence Day.

Stocks Mixed in Final Trading Session of First Half of 2017

Charles Schwab: On the Market

Posted: 6/30/2017 4:15 PM ET

Stocks Mixed in Final Trading Session of First Half of 2017

U.S. stocks finished the last trading session of the first half of 2017 mixed as tech issues succumbed to some late-day pressure. The major equity indexes were lower for the week, with the Nasdaq outpacing its peers for the steepest decline. Some favorable earnings and economic data may have aided in today's advance as Dow member Nike's results were met with cheers and Chicago-area manufacturing activity unexpectedly jumped further into expansion territory. U.S. Treasuries were lower, joining a wave of global yield gains in the wake of some recent rhetoric from central bank officials. The U.S. dollar was nearly unchanged, crude oil prices were higher and gold saw a minor decline.

The Dow Jones Industrial Average (DJIA) increased 63 points (0.3%) to 21,350, the S&P 500 Index gained 4 points (0.2%) to 2,423, and the Nasdaq Composite declined 4 points (0.1%) to 6,140. In moderately-heavy volume, 952 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil gained $1.11 to $46.04 per barrel and wholesale gasoline was $0.03 higher at $1.51 per gallon. Elsewhere, the Bloomberg gold spot price decreased $4.29 to $1,241.22 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 95.69. Markets were lower for the week, as the DJIA was 0.2% lower, the S&P 500 Index declined 0.6% and the Nasdaq Composite tumbled 2.0%.

Dow member Nike Inc. (NKE $59) reported Q4 earnings-per-share (EPS) of $0.60, above the FactSet estimate of $0.50, as revenues rose 5.0% year-over-year (y/y) to $8.7 billion, north of the projected $8.6 billion. The company said it had double-digit revenue growth in Western Europe, Greater China, and the Emerging Markets, as well as strong growth in sportswear and running, helping offset continued sluggishness in North America. The company offered full-year guidance that appeared to please analysts, notably its forecast for a rebound in sales in North America, while announcing plans to sell products directly on Amazon.com (AMZN $968) and Facebook Inc's. (FB $151) Instagram. Shares of NKE traded nicely higher.

Micron Technology Inc. (MU $30) posted fiscal Q3 EPS of $1.40, or $1.62 ex-items, versus the projected $1.52, as revenues rose 20% quarter-over-quarter (q/q) to $5.6 billion, above the forecasted $5.4 billion. The chip maker said its results reflect solid execution of its cost reduction plans and ongoing favorable industry supply and demand dynamics as DRAM average selling prices rose double digits and NAND sales volumes jumped. MU issued Q4 guidance that exceeded the Street's forecasts. Shares gave up early gains and finished lower despite the results.

The tech sector has led the markets solidly lower for the week and yesterday's decisive decline, on heightened volatility as the group is facing scrutiny regarding valuations as discussed in our article, Tech's Rough Ride: Is There More Turmoil Ahead? on the Insights & Ideas page at www.schwab.com.

However, the tech sector remains one of the best performers over the past twelve months and Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest commentary, The Space Between … Tech Today Doesn't Resemble Tech Circa 2000, that tech companies' fundamentals and valuations look vastly dissimilar to the 2000 era. We think the latest pullback in tech is more likely to represent a pause that refreshes some excess optimistic sentiment than it is the start of something nastier. We are maintaining our outperform rating on the tech sector, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: From the Top Down for more, but as with any fast-growing segment of a portfolio’s holdings, we also remind investors of the power of diversification and periodic rebalancing. Read both articles on the Markets & Economy page at www.schwab.com and be sure to follow us and Liz Ann on Twitter: @schwabresearch and @lizannsonders.

Personal income and spending tick higher, Chicago PMI jumps 

Personal income (chart) was up 0.4% month-over-month (m/m) in May, above the Bloomberg forecast of a 0.3% gain, and compared to April's downwardly revised 0.3% increase. Personal spending ticked 0.1% higher last month, in line with expectations and versus April's unrevised 0.4% gain. The May savings rate as a percentage of disposable income was 5.5%. The PCE Deflator was down 0.1%, matching expectations, after the prior month's 0.2% rise. Compared to last year, the deflator was 1.4% higher, below estimates of a 1.5% gain. April's y/y figure was un revised at a 1.7% increase. Excluding food and energy, the PCE Core Index was up 0.1% m/m, in line wih expectations, and the index was 1.4% higher y/y, matching estimates. April's y/y figure was unrevised at a 1.5% increase.

The final May University of Michigan Consumer Sentiment Index (chart) was unexpectedly revised higher to 95.1 from the preliminary level of 94.5, where it was expected to remain. But the index is down versus May's level of 97.1. Compared to last month, the expectations component dipped, while the current conditions component jumped. The 1-year inflation outlook remained at May's 2.6% rate, while the 5-10 year forecast dipped to 2.5% from 2.6%.

The Chicago Purchasing Managers Index (chart) surprising surged further into a level depicting expansion (above 50), after jumping to 65.7 in June—the highest since May 2014—from 59.4 in May, and versus the expectations of a decrease to 58.0.

Treasuries dipped, with the yield on the 2-year note gaining 1 basis point (bp) to 1.38%, the yield on the 10-year note adding 3 bps to 2.30% and the 30-year bond rate ticking 2 bps higher to 2.83%. Bond yields have rebounded from depressed levels and 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. We expect the Federal Reserve to continue to tighten monetary policy and reduce its balance sheet gradually, assuming inflation doesn't slip further. Read more, including how we feel investors should position themselves in this environment on the Fixed Income page at www.schwab.com and follow Kathy on Twitter: @kathyjones.

Finally, the political front remains in focus with uncertainty being exacerbated by this week's delayed Senate healthcare bill vote until after the July 4th holiday, while the debt ceiling debate continues and the markets are looking for any developments on tax and regulatory reforms, as well as other reflationary policy implementation. As such, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Washington Midyear Update: 4 Key Issues for Investors to Watch, on the Insights & Ideas page at www.schwab.com.

Europe dips and Asia mixed following recent tech slide

European equities turned lower on some possible quarter end posturing with the markets continuing to grapple with the recent rallies in the euro and British pound and bond yields in the region. These moves have come courtesy of commentary from European Central Bank (ECB) President Mario Draghi and Bank of England (BoE) Governor Mark Carney that have caused some uneasiness that global central banks may be turning more hawkish. Amid this backdrop, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his article, Are bonds signaling a major stock market peak? on the Markets & Economy page at www.schwab.com. The euro and British pound pared recent gains but bond yields continued to move higher. Also, the recent tech rollover that has pressured the markets also remained in focus, with the group showing some modest signs of stabilization. In economic news, German retail sales topped forecasts and the eurozone consumer price inflation estimate came in a bit hotter than expected, while U.K. Q1 GDP growth was unrevised at a 0.2% q/q gain, as projected. The political front continued to garner attention ahead of key elections in the eurozone and as U.K. Brexit negotiations are set to ramp up. Jeff and Vice President of Trading and Derivatives, Randy Frederick offer the 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?. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick.

Stocks in Asia finished mixed on the heels of some upbeat Chinese business activity data, while technology issues weighed on the markets after leading U.S. equities solidly lower yesterday. Uneasiness amid the apparent shift among global central banks to a slightly-more-hawkish stance also hampered the markets. China's official Manufacturing PMI Index surprisingly improved to 51.7 in June from 51.2 in May, and compared to the 51.0 level that was forecasted, with a reading above 50 denoting expansion. Additionally, China's key services sector growth accelerated. Mainland Chinese shares ticked higher and those traded in Hong Kong declined. Japanese equities fell with the yen gaining ground, while the nation reported cooler-than-expected national consumer price inflation data for May, which was accompanied by an unexpected flat reading for consumer price inflation for Tokyo in June, versus expectations of a slight gain. Also, Japan's household spending declined by a smaller amount than expected and industrial production dropped more than forecasted in May. Australian and South Korean securities declined, while Indian stocks rose. For a look at the global landscape, see Schwab's Jeffrey Kleintop's, CFA, 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks on the International Investing page at www.schwab.com.

Tech selloff, central banks and quarter-end conspire to pressure stocks

U.S. stocks finished the week lower amid some posturing to close out a strong quarter. The global equity markets felt pressure from the continued rollover in the tech sector, which had helped drive the markets higher for the past year. Also, the markets appeared slightly shaken by an apparent shift in tone to slightly more hawkish from global central banks. ECB President Draghi noted that "the threat of deflation is gone and reflationary forces are at play," while BoE Governor Carney said the discussion of beginning to remove stimulus will be on the docket in the months to come. The euro and British pound rallied versus the U.S. dollar, leading to a weekly pullback for the greenback, while Treasury yields bounced off recent lows amid a jump in global bond rates. The downward move for equities was limited by a rally in financials on the recovery in bond yields and bolstered by upbeat results from the Fed's latest banking sector stress tests, which opened the floodgates to a plethora of hiked dividends and share buybacks, headlined by Dow member JPMorgan Chase & Co. (JPM $91) and Citigroup Inc. (C $67). Energy issues also helped limit the damage as crude oil prices recovered from a recent tumble amid some resiliency in face of an unexpectedly bearish oil inventory data.

Next week, although the domestic markets will have an abbreviated session on Monday and be closed on Tuesday in observance of the Independence Day Holiday, the economic calendar will be robust possibly adding to the aforementioned central bank volatility. The week will commence with the release of the ISM Manufacturing PMI Index and monthly auto sales, while factory orders, the Fed's June meeting minutes, the ISM non-Manufacturing Index, and trade balance will come after the break. However, the headlining report will likely be Friday's June nonfarm payroll report, which is expected to show job growth remains steady at a 175,000 pace and average hourly earnings continue to creep higher, rising 0.3% m/m.

As noted in the Schwab Market Perspective: Shifting Sentiment?, technology stocks have hit a speed bump as investors may be questioning the durability of the U.S. bull market. Economic confusion may be contributing to investor skepticism, as the labor market continues to tighten and housing is in good shape, but inflation has been in retreat along with commodity prices. Meanwhile, for the first time in a while, the Fed sounded slightly more hawkish at its June meeting. However, we believe strong earnings growth and a solid economy will continue to support further gains, but more volatility should be expected. Read more on the Markets & Economy page at www.schwab.com.

International reports due out next that deserve mention include: Australia—building approvals, retail sales, trade balance and the Reserve Bank of Australia monetary policy decision. China—Caixin's manufacturing and services sector reports. India—manufacturing and services reports. Japan—Q2 Tankan Large Manufacturing Index. Eurozone—Markit's business activity reports, retail sales and ECB monetary policy meeting minutes, along with German factory orders and industrial production. U.K.—Markit's business activity reports, trade balance and industrial and manufacturing production.