Domestic stocks were mostly higher with financials leading the advance as Treasury yields gained ground early-on before finishing mostly flat, on the heels of a hotter-than-expected wholesale inflation report and a jump in small business optimism. The Nasdaq lagged its counterparts with technology shares finding pressure. Market participants are awaiting tomorrow's Fed decision, which is highly-expected to produce an increase to the target range for the fed funds rate, while the tax reform reconciliation process will also garner some attention. Crude oil prices declined, the U.S. dollar was higher and gold saw minor losses.
The Dow Jones Industrial Average (DJIA) increased 119 points (0.5%) to 24,505, the S&P 500 Index was 4 points (0.2%) higher at 2,664, and the Nasdaq Composite declined 13 points (0.2%) to 6,862. In moderate volume, 855 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.85 to $57.14 per barrel and wholesale gasoline lost $0.03 to $1.70 per gallon. Elsewhere, the Bloomberg gold spot price moved $0.80 lower to $1,242.69 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 94.05.
Dow member Boeing Co. (BA $290) announced a 20% increase to its quarterly dividend to $1.71 per share, while announcing a new $18 billion share repurchase program. Shares traded nicely higher.
Eli Lilly and Co. (LLY $87) reported that it will increase its quarterly dividend by 8% to $0.5625 per share. Shares of LLY dipped.
Urban Outfitters Inc. (URBN $32) finished to the upside after reporting that so far Q4 sales are tracking to be up in the mid-single-digits, which is above what FactSet is estimating.
Wholesale price inflation tops forecasts, small business optimism jumps
The Producer Price Index (PPI) (chart) showed prices at the wholesale level in November were up 0.4% month-over-month (m/m), above the Bloomberg expectation of a 0.3% gain, and matching October's unrevised increase. The core rate, which excludes food and energy, rose 0.3%, compared to forecasts of a 0.2% advance and versus October's unrevised 0.4% rise. Y/Y, the headline rate was 3.1% higher, north of projections of a 2.9% gain, after October's 2.8% increase. The core PPI rose 2.4% last month, matching estimates and October's gain.
Tomorrow, the economic calendar will complete the inflation picture, with the release of the Consumer Price Index (CPI), projected to rise 0.4% m/m in November, after the prior month's 0.1% gain, while the core CPI is forecasted to match October's 0.2% increase. Y/Y, the prices are expected to accelerate to a 2.2% gain from a 2.0% rise, and the core CPI is anticipated to match the prior month's 1.8% gain.
The National Federation of Independent Business (NFIB) Small Business Optimism Index for November jumped to 107.5, the highest level in over three decades, from October's unrevised 103.8 level, versus expectations of a gain to 104.0.
Treasuries were mostly flat, with the yields on the 2-year note and the 30-year bond nearly unchanged at 1.82% and 2.78%, respectively, while the yield on the 10-year note ticked 1 basis point higher to 2.40%.
In her video, What Could Fixed Income Investors Expect in 2018?, Schwab's Chief Fixed Income Strategist Kathy Jones offers three reasons we think investors might want to be a bit more cautious about where they look for yield in 2018. Also, heading into the New Year, as noted in our 2018 Schwab Market Outlook: Executive Summary, we anticipate solid growth in 2018 and don't see a recession on the horizon. However, with markets priced for ongoing moderate growth and low volatility, the risks we’re monitoring include the potential for higher inflation and more central bank tightening than expected.
Finally, the markets continue to eye the tax reform reconciliation process, and Schwab's Director of Tax and Financial Planning, Hayden Adams, CPA, offers analysis of this process and what investors should be paying attention to, in his article, Tax Reform: What Investors Should Know, while also addressing questions regarding how the potential tax overhaul may affect you as an investor in his article, Tax Reform: Frequently Asked Questions. Moreover, as you conduct your year-end tax planning, check out our latest article, Tax Reform: 11 Questions to Ask Your Advisor.
This sets the stage for tomorrow's conclusion of the Fed's two-day monetary policy meeting, which is highly expected to bring a third rate hike of this year. The accompanying updated Fed projections and subsequent final press conference by Chairwoman Janet Yellen are likely to garner the most attention as the markets try to determine the pace of rate hikes in 2018. As noted in the latest Schwab Market Perspective: The Big Picture Heading into 2018, there doesn’t appear to be any waning in the desire by the Federal Reserve to continue normalizing policy. However, with Jerome Powell taking over the Fed chair position in 2018, and several new members set to be appointed, uncertainty is elevated. Judging by the comments from Powell during his confirmation hearings, continuity and transparency are priorities; but if inflation should flare up, or growth start to lag, the Fed may be challenged early in the new regime.
Tomorrow's domestic docket will also include weekly MBA mortgage applications.
Europe mostly higher on tech rebound, Asia mostly lower ahead of central bank decisions
European equities traded mostly to the upside, with technology issues recovering from a recent bout of weakness. Energy issues led to the upside even as crude oil prices gave back some of yesterday's rally that came amid exacerbated oil and gas supply concerns following a hairline crack found in the North Sea Forties pipeline, as well as an explosion at a natural gas plant in Austria. However, weakness in consumer discretionary and telecom issues bogged down the Spanish markets. The British pound dipped versus the U.S. dollar in choppy trading as a hotter-than-expected read on U.K. consumer price inflation was countered by festering Brexit uncertainty. The euro was lower compared to the greenback after a mixed read on German investor confidence as the current situation unexpectedly improved for this month but the expectations component declined more than expected. Bond yields in the region moved higher. The markets awaited tomorrow's Fed monetary policy decision in the U.S., which will be followed by Thursday's decisions by the European Central Bank and the Bank of England. Also, U.S. tax reform continued to be a source of market focus as the reconciliation process rolls on.
Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his, 2018 Global Market Outlook: Three Actions to Take for the Year Ahead, in which he says stay invested: for 2018 global stock market gains that could potentially be in the double-digits, and go global: as international stocks may outperform U.S. stocks in 2018. Finally, Jeff says rebalance: with rebalancing back to target allocations important as 2018 gains in stocks may result in a higher risk asset allocation ahead of a potential recession and bear market.
Stocks in Asia finished mostly to the downside, with the markets treading cautiously ahead of tomorrow's Fed monetary policy decision, which is highly expected to deliver a rate hike, and will be followed by decisions from the European Central Bank and Bank of England. The U.S. tax reform reconciliation process continues to garner attention, while a rise in crude oil prices offered support to the energy sector. Japanese equities declined, with the yen paring some of yesterday's gains, and South Korean shares declined. Stocks trading in mainland China and Hong Kong finished lower despite late yesterday's stronger-than-expected November lending statistics, with insurers leading to the downside. Indian equities dropped, while Australian securities gained ground, with energy issues moving higher. The broadest economic growth in a decade has underpinned this year's global market rally, and is expected to continue in 2018 as discussed by Schwab's Jeffrey Kleintop, CFA, in his article, 5 Reasons Investors Should Give Thanks.
The international economic calendar for tomorrow will yield consumer confidence from Australia, the unemployment rate from South Korea, employment data from the U.K., wholesale prices and CPI from Germany and industrial production from Italy and the Eurozoone.
Schwab Center for Financial Research - Market Analysis Group
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