Markets Remain Resilient

Charles Schwab: On the Market

Posted: 8/31/2017 4:15 PM ET

Markets Remain Resilient

U.S. equities continued their advance despite a jump in gasoline prices amid the impact of Hurricane Harvey, as well as a mixed bag of economic news and continued anxiety surrounding political and global monetary policy uncertainty. Treasury yields were little changed and the U.S. dollar was modestly lower, while crude oil prices and gold were solidly higher.

The Dow Jones Industrial Average (DJIA) advanced 60 points (0.3%) to 21,952, the S&P 500 Index gained 14 points (0.6%) to 2,472, and the Nasdaq Composite rallied 60 points (1.0%) to 6,429. In moderately heavy volume, 905 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.27 to $47.23 per barrel and wholesale gasoline jumped $0.14 to $1.78 per gallon. Elsewhere, the Bloomberg gold spot price was $14.36 higher at $1,322.96 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—declined 0.2% to 92.69.

Campbell Soup Co. (CPB $46) reported fiscal Q4 earnings-per-share (EPS) of $1.04, or $0.52 ex-items, versus the $0.55 FactSet estimate, as revenues declined 1.0% year-over-year (y/y) to $1.7 billion, roughly in line with expectations. The company noted that the packaged foods industry remains challenging. CPB issued full-year EPS guidance that came in below the Street's forecasts. Shares were solidly lower.

Dollar General Corp. (DG $73) posted Q2 EPS of $1.08, or $1.10 ex-items, compared to the estimated $1.09, with revenues growing 8.1% y/y to $5.8 billion, mostly matching expectations. Q2 same-store sales rose 2.6% y/y, versus the projected 1.6% increase. DG raised the low end of its full-year profit outlook and noted that it expects same-store sales growth will be toward the upper end of its previous guidance. However, shares were sharply lower as the company's gross margin declined more than expected, due to higher markdowns and sales of lower margin products.

Costco Wholesale Corp. (COST $157) announced August same-store sales grew 7.3% y/y, above the forecasted 6.1%. Excluding the impact of changes in gasoline prices and foreign exchange, same-store sales increased 5.9%. COST traded higher.

Shares of Ciena Corp. (CIEN $22) came under heavy pressure as the network strategy and technology company issued Q4 revenue guidance that came in noticeably below estimates, which overshadowed its stronger-than-expected Q3 results.

Personal income and spending data mixed

Personal income (chart) was 0.4% higher month-over-month (m/m) in July, above the Bloomberg forecast of a 0.3% gain, and compared to June's unrevised flat reading. Personal spending rose 0.3% last month, below expectations of a 0.4% gain, and versus June's upwardly revised 0.2% gain. The July savings rate as a percentage of disposable income was 3.5%. The PCE Deflator expectedly moved 0.1% higher, after the prior month's unrevised flat reading. Compared to last year, the deflator was 1.4% higher, matching estimates and June's unrevised figure. Excluding food and energy, the PCE Core Index was 0.1% higher m/m, in line with expectations, and the index was 1.4% higher y/y, matching estimates. June's y/y figure was unrevised at a 1.5% increase.

Weekly initial jobless claims (chart) rose by 1,000 to 236,000 last week, below forecasts of 238,000, with the prior week’s figure revised higher by 1,000 to 235,000. The four-week moving average declined by 1,250 to 236,750, while continuing claims fell 12,000 to 1,942,000, south of estimates of 1,951,000.

Pending home sales declined 0.8% m/m in July, versus projections of a 0.3% increase, and following June's downwardly revised 1.3% gain. Compared to last year, sales were 0.5% lower. Pending home sales are used as a gauge of the pipeline of existing home sales, which unexpectedly fell in July.

The Chicago Purchasing Managers Index (chart) continued to show solid expansion (above 50) for August, after remaining at July's unrevised 58.9 level, versus expectations calling for a decrease to 58.5.

Treasuries were little changed, as the yields on the 2-year and 10-year notes, along with the 30-year bond, were flat at 1.33%, 2.13% and 2.73%, respectively. Bond yields have been quiet though the U.S. Dollar Index has rebounded from recent pressure on eased concerns toward flared-up tensions toward North Korea, lingering global monetary policy and U.S. political uncertainties, and the impact of Hurricane Harvey.

Schwab's Chief Fixed Income Strategist Kathy Jones offers a look at the bond markets in her article, What's the Bigger Risk: Bond Market Bubble or Complacency?, on the Fixed Income page at www.schwab.com, and for analysis of investing styles, see Schwab's Chief Investment Strategist Liz Ann Sonders' latest article, Radioactive II: Could the Tide Finally Be Turning for Active vs. Passive on the Markets & Economy page. Follow Kathy and Liz Ann on Twitter: @kathyjones and @lizannsonders.

Tomorrow, the domestic economic calendar will end the week with a bang, courtesy of a plethora of August reports, such as the ISM Manufacturing Index, Markit's Manufacturing PMI Index, the final University of Michigan Consumer Sentiment Index, and auto sales. Manufacturing activity is expected to continue to depict growth and consumer sentiment is projected to remain near January's thirteen-year high. However, the headlining report will likely be the release of the August nonfarm payroll report, projected to show jobs grew by 180,000 after July's 209,000 gain, and employment in the private sector is expected to increase by 170,000 jobs after the prior month's 205,000 advance. The unemployment rate is expected to remain at 4.3%, while average hourly earnings are estimated to rise 0.2% m/m after growing 0.3% in July. Compared to the last year, earnings are forecasted to be up 2.6%, after July's 2.5% gain. Construction spending for July is also on tap for tomorrow.

Yesterday's stronger-than-expected Q2 GDP report caused Fed rate hike probability for December to tick higher but remain below 50%, per Bloomberg, and another dose of strong economic data could move the needle a bit further. Employment has been solid but inflation—the other side of the Central Bank's dual mandate—has been stubbornly low, setting the stage for the wage component of the labor report to continue to garner the most scrutiny. Fed rate hike uncertainty remains but our latest Schwab Market Perspective: Volatility Returns!, notes that the Fed is expected to move into uncharted territory by embarking on unwinding its behemoth $4.5 trillion balance sheet, which we continue to believe will be an additional volatility driver. Read more on the Markets & Economy page at www.schwab.com.

Europe and Asia higher following positive day in U.S.

European equities gained ground, with the euro continuing to give back a recent rally following reports that showed European Central Bank members were getting concerned with the currency's recent surge, and despite a hotter-than-expected read on eurozone inflation for August. In other economic news, the eurozone unemployment rate remained at 9.1% for July and German retail sales fell more than forecasted for last month. The British pound lost ground on the U.S. dollar and bond yields in the region dipped. The latest round of U.K. Brexit negotiations are wrapping up, while geopolitical, monetary policy and U.S. political uncertainties continue to fester. For a look at Brexit talks, see our article, Brexit Begins: What's Next for the U.K.? on the Insights & Ideas page. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA offers a look at a potential milestone for global profits in his latest article, Earnings may be about to do something they've never done before, on the Markets & Economy page at www.schwab.com and his video with Vice President of Trading and Derivatives, Randy Frederick, Is An Optimistic Outlook for Global Equities Warranted? on the Insights & Ideas page. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick.

Stocks in Asia finished mostly higher after another positive session in the U.S., aided by a stronger-than-expected read on Q2 GDP growth for the world's largest economy, which helped overshadow lingering global monetary policy and U.S. political uncertainties, and lingering geopolitical concerns. For analysis of this backdrop, see Schwab's Jeffrey Kleintop's, CFA, article, Missiles and Markets: An investor guide to geopolitical risks, on the International Investing page at www.schwab.com, as well as his video with Randy Frederick, Political Risk: How Should Investors Respond?, on the Insights & Ideas page.

Japanese equities advanced, with the yen extending a pullback from a recent jump and despite a larger-than-expected decline in the nation's industrial production for July. Mainland Chinese stocks and those traded in Hong Kong declined, with a stronger-than-expected Manufacturing PMI Index being met with the non-Manufacturing PMI Index that showed growth slowed for August. Australian securities rose, while listings in South Korea declined. Meanwhile, markets in India advanced ahead of the nation's report on Q2 GDP growth after the closing bell, which showed expansion decelerated to a 5.7% y/y pace, versus forecasts of a 6.5% gain and compared to the 6.1% increase posted in Q1.

The Markit manufacturing PMI reports from across the globe will dominate tomorrow's international economic calendar while other reports of note that deserve a mention include CPI, trade data and GDP from South Korea, consumer confidence from Japan, and GDP from Italy.