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Schwab Market Update

Stocks Solidly Lower on Trade Anxiety

U.S. equities finished solidly in the red and near the lows of the day, as President Trump instructed his U.S. Trade Representative to levy $50 billion of tariffs on Chinese imports. Economic news was mixed and unable to lend any support, with diverging reports on business activity, an unexpected rise in jobless claims countering an upbeat read on leading indicators. Treasury yields, gold and crude oil prices were all lower, while the U.S. dollar was little changed. Equity news focused on earnings reports that were mostly upbeat.

The Dow Jones Industrial Average (DJIA) plunged 724 points (2.9%) to 23,958, the S&P 500 Index fell 68 points (2.5%) to 2,644, and the Nasdaq Composite tumbled 179 points (2.4%) to 7,167. In heavy volume, 950 million shares were traded on the NYSE and 2.3 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.87 to $64.30 per barrel and wholesale gasoline was unchanged at $2.02 per gallon. Elsewhere, the Bloomberg gold spot price moved $3.38 lower to $1,328.86 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was flat at 89.79.

Accenture Plc. (ACN $150) announced Q2 earnings-per-share (EPS) of $1.37, including a $0.21 charge related to the Tax Cuts and Jobs Act (TCJA), or $1.58 ex-items, versus the $1.49 FactSet estimate, while revenues jumped 15.3% year-over-year (y/y) to $9.6 billion to top expectations. The company updated its fiscal 2018 outlook and now expects net revenue growth for the year to be in the range of 7-9% in local currency, compared to 6-8% previously. Shares were sharply lower despite the results.

Darden Restaurants Inc. (DRI $86) reported Q3 EPS of $1.74, including the impact of the TCJA, or $1.71ex-items, versus the $1.64 FactSet estimate, while revenues increased 13.3% y/y to $2.1 billion, just shy of the $2.2 billion forecast. DRI was solidly lower.

ConAgra Brands Inc. (CAG $35) revealed Q3 EPS of $0.87, including the impact of the TCJA, or $0.61 ex-items, compared to the $0.56 FactSet estimate, while revenues ticked 0.7% higher y/y to $2.0 billion, roughly matching expectations. CAG also updated its full-year guidance, increasing the range of expected EPS to $2.03-2.05 from the prior guidance of $1.95-2.02. Shares of CAG gained ground.

Business activity reports deliver mixed reads, weekly jobless claims unexpectedly increase

The preliminary Markit U.S. Manufacturing PMI Index showed expansion in output accelerated slightly, rising to 55.7 in March from February's 55.3 figure. The preliminary Markit U.S. Services PMI Index showed growth for the key U.S. sector unexpectedly decelerated this month to 54.1 from February's 55.9 figure, and versus forecasts calling for a slight rise to 56.0. Readings above 50 for both indexes denote expansion.

Weekly initial jobless claims (chart) increased by 3,000 to 229,000, versus the Bloomberg expectation calling for a slight decline to 225,000, with the prior week's figure unrevised at 226,000. The four-week moving average increased by 2,250 to 223,750, while continuing claims declined by 57,000 to 1,828,000, south of estimates of 1,870,000.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) for February rose 0.6% month-over-month (m/m), above projections of a 0.5% gain, and versus January's downwardly revised 0.8% rise. The index has not seen a decline since May 2016. Eight of the ten components of the index improved, led by solid gains for average workweek, jobless claims and ISM new orders.

The Kansas City Fed Manufacturing Activity Index for March remained at 17, unchanged from February and in line with expectations. A reading above zero denotes expansion.  

Treasuries were higher, as the yield on the 2-year note decreased 3 basis points (bps) to 2.28%, the yield on the 10-year note lost 8 bps to 2.82%, and the 30-year bond rate fell 7 bps to 3.06%.

Yesterday, as expected, the Federal Reserve raised its target range for the federal funds rate and Schwab's Chief Fixed Income Strategist, Kathy Jones, dives deep into the decision in her latest article Fed's March Meeting: Another Hike, More Hawkish Tone. Kathy informs us that the Fed also stuck with its forecast of three hikes for this year, meaning it expects two more in the months to come. At the same time, however, the central bank also raised its forecast for the number of rate hikes likely over the coming few years.

Also, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his most recent Schwab Sector Views: Fantastic Financials?, that higher interest rates and favorable credit conditions also have been good for the sector, and appear likely to continue to provide support and we believe the financials group will continue to outperform.

The economic calendar will round out the week tomorrow with the release of preliminary durable goods orders for February, forecasted to indicate a 1.7% m/m increase, while ex-transportation orders are expected to have risen 0.6% m/m, and nondefense capital goods ex-aircraft are anticipated to post a 0.7% m/m gain. Shortly after the opening bell, new home sales for February will be released, with economists expecting a 4.5% m/m rise to a rate of 620,000 units.

European stocks lower, Asia closed mixed

European equities finished trading well to the downside as market participants reacted to yesterday's Federal Reserve policy change, today's Bank of England (BoE) decision to hold rates steady and further tariff developments from U.S. President Trump. The BoE concluded its recent monetary policy meeting and announced the decision to hold its current monetary policy steady, as widely expected, reiterating that Brexit is the most significant influence on its economic outlook and that U.S. President Trump's plans to impose tariffs have sparked concern that a trade war may ensue. In other economic developments in the region, Markit business activity reports across Europe showed the area's private sector grew at the slowest pace in 14 months, though at least some of the slowing is being ascribed to bad weather. Markit also said that supply-chain bottlenecks and raw material shortages were reported to have hindered manufacturing production and if this trend were to continue, it could possibly complicate the European Central Bank's debate over when to end its stimulus program. As noted in the recent Schwab Market Perspective: March Market Madness!, Mario Draghi, the head of the European Central Bank (ECB), made it clear that the ECB is satisfied with its base-case inflation outlook, has become more confident in that outlook, and is on track to retire quantitative easing (QE) this year as anticipated. Bonds in the region were mostly higher, while the euro and the British pound traded lower versus the U.S. dollar.  

Stocks in Asia finished mixed in some choppy action after yesterday's interest rate hike by the U.S. Federal Reserve influenced a similar, but modest move by the People's Bank of China (PBOC) and as President Trump is expected to impose approximately $50 billion worth of tariffs against China, possibly later today. Both markets in mainland China and Hong Kong were lower, as the PBOC moved to increase the rate it charges on reverse-repurchase agreements by five basis points. Separately, China's former vice commerce minister said that if Trump enacts his proposed tariffs it would be a declaration of a trade war with China and further stated "there will be no winner, and there will be no good outcome for both nations."

Returning to action after being shuttered for a holiday yesterday, markets in Japan advanced, despite some strength in the yen and as the island nation's government is expected to issue a warning against Biance, one of the world's largest cryptocurrency exchanges, for operating in the country without registration, adding to concerns for digital assets. Stocks in India dipped, as Prime Minister Modi's administration was reported to have plans to increase the foreign direct investment cap in niche defense technologies with aims to be among the top five countries in aerospace and defense. Meanwhile Australian equities declined modestly, while those traded in South Korea gained ground.

The international economic calendar for tomorrow will offer a look at CPI from Japan, construction orders and the Ifo Business Climate Survey from Germany, and PPI from Spain.

Schwab Center for Financial Research - Market Analysis Group

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Next Steps

Fed’s March Meeting: Another Hike, More Hawkish Tone

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