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Schwab Market Update

Markets Close Out Week on Down Note

U.S. equities were unable to notch a third-straight weekly gain, as stocks lost steam in the final hour of trading to finish lower. The updraft for technology shares, that initially lead the markets higher on upbeat quarterly results from Dow member Microsoft, fizzled along with most other sectors, as President Donald Trump's latest warning of more tariffs on China and his criticism of the Fed's rate hike campaign seemed to be too much uncertainty for investors. Treasury yields were higher, especially at the longer end of the yield curve amid a dormant economic calendar, crude oil prices were up, but lower for a third week, while the U.S. dollar was lower and gold rose.

The Dow Jones Industrial Average (DJIA) fell 6 points to 25,058, the S&P 500 Index decreased 3 points (0.1%) to 2,802, and the Nasdaq Composite declined 5 points (0.1%) to 7,820. In moderate volume, 815 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil gained $1.00 to $70.46 per barrel and wholesale gasoline added $0.03 to $2.07 per gallon. Elsewhere, the Bloomberg gold spot price traded $6.88 higher to $1,229.85 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was down 0.8% at 94.45. Markets were mixed for the week, as the DJIA ticked 0.1% higher, the S&P 500 Index was nearly unchanged and the Nasdaq Composite declined 0.1%. 

Dow member Microsoft Corp. (MSFT $106) reported fiscal Q4 earnings-per-share (EPS) of $1.14, or $1.13 ex-items, versus the $1.08 FactSet estimate, as revenues rose 17.0% year-over-year (y/y) to $30.1 billion, above the projected $29.2 billion. Shares were higher.

General Electric Co. (GE $13) posted Q2 EPS of $0.08, or $0.19 ex-items, compared to the projected $0.18, with revenues rising 3.0% y/y to $30.1 billion, north of the estimated $29.4 billion. GE reaffirmed its full-year EPS outlook. However, shares finished lower as the company's cash flow performance and guidance appeared to foster some analyst caution regarding the company's ability to hit its cash flow target for the year.  

Honeywell International Inc. (HON $153) announced Q2 profits of $1.68 per share, or $2.12 ex-items, versus the forecasted $2.01, as revenues rose 8.0% y/y to $10.9 billion, above the expected $10.8 billion. HON raised its full-year revenue outlook, and shares traded nicely higher.   

Treasury yield curve posting relatively rare steepening with the economic calendar quiet

Treasuries were lower as the economic calendar is void of any major releases today, as the yield on the 2-year note was 1 basis point (bp) higher at 2.60%, while the yield on the 10-year note rose 5 basis points (bps) to 2.89% and the 30-year bond rate increased 6 bps to 3.02%.

This week, Treasury yields have bucked a recent trend as the yield curve steepened and the U.S. dollar trimmed a recent advance, while the stock markets just missed posting a third-straight weekly gain, finishing out the week mixed-to-little-changed. The moves came as Congressional monetary policy testimony from Federal Reserve Chairman Jerome Powell offered an upbeat view of the economy, notably the strong labor market, while reaffirming expectations of a gradual pace of rate hikes this year. The remarks seemed to keep concerns that the Fed may be forced to accelerate its tightening campaign in check. The greenback paused a recent rally as President Donald Trump criticized the Fed's rate hike campaign, while global trade uneasiness remained relatively calm even as President Trump continued to lob threats of more tariffs on Chinese goods.

Q2 earnings season also ramped up but results continued to face scrutiny against the backdrop of lofty expectations. Financials led the way as results from the sector were mostly positive, while energy issues saw pressure, with crude oil prices choppy in the wake of a recent tumble on growing expectations of increase global supply. Out of the 86 companies in the S&P 500 that have reported thus far, 78% have topped revenue forecasts and 94% have exceeded earnings estimates per data compiled by Bloomberg.  

Schwab's Chief Fixed Income Strategist, Kathy Jones offers in her commentary Mid-Year Bond Outlook: Last One Out, Turn Off the Lights, that the yield curve will likely continue to flatten and we expect one to two rate hikes by the Federal Reserve in the second half of the year, but short-term rates will likely rise more than long-term interest rates. Kathy also discusses in her latest article, What Happened to the Bond Bear Market?, that slowing growth outside the U.S. and escalating trade conflicts are calling into question the strength of the global expansion. She adds that while China has taken steps to boost its economy and let the yuan drift lower against the dollar, if the U.S. dollar continues to rally it will mean tighter financial conditions globally. Kathy concludes that Federal Reserve tightening has helped tame expectations for long-term inflation, helping to keep longer-term yields in check.

With the job market buoying the Fed's outlook, Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Quality or Quantity: Skills' Deficit, Jobs' Surplus, that for the first time in more than a decade, the U.S. economy is essentially at full employment. She adds that typically, fiscal policy would be getting tighter to prevent economic over-heating; but clearly that’s not the case in this cycle, with fiscal policy going full-out courtesy of tax cuts, regulatory reform and government spending. Liz Ann concludes that the risk of over-heating is real—if not yet in our sights. Finally, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, discusses the all-important U.S. consumer in his latest Schwab Sector Views: Christmas in July!, adding that the state of the American consumer is key to economic outlooks for both the U.S. and, at times the World. However, Brad points out that higher energy prices, sluggish wage growth, and intense competition all are risks that keep us neutral on both major consumer categories … for now.

Next week's economic docket will likely take a back seat to the continued ramping up of earnings season, but will provide some key reads on housing, economic output and the consumer. June existing and new home sales, along with Markit's July business activity reports, will get the ball rolling, while the week will be closed out by the first look (of three) at Q2 GDP, preliminary June durable goods orders, and the final University of Michigan Consumer Sentiment Index for this month.    

Europe mostly lower amid lingering uncertainties, Asia mostly higher

European equities finished mostly lower, with global trade concerns lingering, while the euro and British pound rose amid a slump for the U.S. dollar, which comes as U.S. President Donald Trump voiced some criticism toward the Federal Reserve's rate hike campaign. The markets also dealt with festering Brexit uncertainty, a flare-up in political uncertainty in Italy, and as earnings season on both sides of the pond continued to ramp up. Bond yields in the region were mostly higher. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his article, 2018 Global Mid-Year Outlook: From Sugar High to High Tariffs?, global economic and earnings growth momentum is slowing, but still growing, while pointing out that how the ongoing trade conflicts develop pose a risk to markets the second half of the year. Jeff concludes that prepared investors should consider rebalancing their portfolios back towards a balance in geography, style, and size after many years have seen trends pushed to historical extremes.

Stocks in Asia finished mostly to the upside to close out the week, with the markets digesting ramping up earnings seasons in the U.S. and Europe, showing some resiliency in the face of lingering China trade concerns and recent mixed Chinese economic data. For a look at the trade landscape in the region, check out our video, Tariffs on China: A Look Ahead. Mainland Chinese equities rallied and those traded in Hong Kong also gained ground, with the yuan recovering late in the session from a drop as of late that was exacerbated by the People's Bank of China lowering its daily reference rate to the weakest in over a year. Stock in South Korea, Australia and India advanced, but shares in Japan were lower,  paring a solid weekly gain, as the yen rebounded somewhat from recent weakness, even as the nation reported consumer price inflation for last month that came in cooler than expected for the headline rate.

International economic reports due out next week that deserve a mention include: China—industrial profits. Eurozone—Markit's business activity reports and European Central Bank monetary policy decision, as well as German business confidence.   

Schwab Center for Financial Research - Market Analysis Group

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