U.S. stocks are trading mixed in pre-market action, with the markets anticipating tomorrow's start of a flood of July inflation data. Equities are trading cautiously while also digesting a warning from Micron Technology and a miss from Take-Two Interactive Software. The economic calendar was mixed, as small business optimism improved modestly from multi-year lows, while Q2 productivity continued to drop and unit labor costs remained severely elevated. Treasuries are losing ground to lift yields, and the U.S. dollar is seeing some pressure. Crude oil prices are gaining ground, along with gold. Asia finished mixed and Europe is also diverging as the markets tread with caution ahead of the U.S. inflation data as monetary policies remain in focus.
As of 8:57 a.m. ET, the September S&P 500 Index future is 8 points below fair value, the DJIA future is 19 points above fair value, and the Nasdaq Index future is 71 points south of fair value. WTI crude oil is increasing $1.34 to $92.10 per barrel and Brent crude oil is gaining $1.27 to $97.92 per barrel. The gold spot price is rising $4.30 to $1,809.50 per ounce. Elsewhere, the Dollar Index is decreasing 0.4% to 106.06.
Micron Technology Inc. (MU $61) is falling after the memory chip company noted that industry demand for DRAM and NAND have declined and it expects a challenging market environment for Q4 2022 and Q1 2023. The company noted macroeconomic factors and supply chain constraints, which has seen a broadening of customer inventory adjustments.
Take-Two Interactive Software Inc. (TTWO $126) reported adjusted fiscal Q1 earnings of $0.71 per share, below the $0.87 FactSet estimate, as revenues rose 36.0% year-over-year to $1.1 billion, compared to the Street's forecast of $1.2 billion. The video game publisher issued full-year earnings and bookings guidance that came in well below expectations, including that impact of its combination with Zynga.
Q2 earnings season is heading down the home stretch, and of the 446 S&P 500 companies that have reported thus far, roughly 63% have topped revenue forecasts and approximately 75% have bested profit projections, per data compiled by Bloomberg. Compared to last year, revenue growth is tracking to be up 14.9% and earnings are 8.7% higher.
Schwab's Chief Investment Strategist, Liz Ann Sonders discusses the market environment in her latest article, Both Sides Now: Fed's Dueling Mandates, how July's hot jobs report will likely keep the Fed in a hawkish position, but key to watch moving forward is a continued softening in leading labor and inflation indicators.
Small business optimism improves, productivity and labor costs suggest continued pressures
The National Federation of Independent Business (NFIB) Small Business Optimism Index for July increased to 89.9 from June's 89.5 level, where the Bloomberg consensus estimate called for it to remain. The index came off the lowest level since early 2013 and posted the sixth-consecutive month below the 48-year average of 98, with small businesses noting the inflation was their single most important problem in operating their business, reaching the highest level since Q4 of 1979.
The NFIB said, "The uncertainty in the small business sector is climbing again as owners continue to manage historic inflation, labor shortages, and supply chain disruptions…. As we move into the second half of 2022, owners will continue to manage their businesses into a very uncertain future."
Preliminary Q2 nonfarm productivity (chart) fell by 4.6% on an annualized basis, in line with expectations, and following the upwardly revised 7.4% drop seen in Q1. Unit labor costs increased by 10.8%, above forecasts of a 9.5% rise. However, the figure decreased from Q1's upwardly adjusted 12.7% increase in unit labor costs.
Treasuries are lower and yields are rising ahead of tomorrow's start of the July inflation picture developing. The markets continue to grapple with persisting inflation pressures that prompted last month's Fed monetary policy decision to raise its benchmark interest rate by 75 basis points (bps) for the second-straight meeting, and the markets appeared to take comments from Chairman Jerome Powell as less hawkish. However, Fedspeak last week suggested that a Fed pivot is not in the offing and more aggressive rate hikes could continue. The U.S. dollar is declining after last week's rebound, continuing to come off multi-decade highs.
Schwab's Chief Fixed Income Strategist Kathy Jones discusses in her latest article, The Strong Dollar: Can It Continue?, how a trifecta of factors support the dollar, including the relatively strong performance of the U.S. economy, tightening monetary policy by the Federal Reserve, and safe-haven buying. Kathy notes that these are likely to remain intact into 2023. You can follow Kathy on Twitter: @KathyJones, and check out our latest edition of our Financial Decoder podcast, When Interest Rates Rise, What Should You Do with Bonds?, featuring Kathy Jones.
The yield on the 2-year Treasury note is up 2 bps to 3.23%, the yield on the 10-year note is increasing 3 bps to 2.79%, and the 30-year bond rate is ticking 1 bp higher to 3.01%.
Europe mixed ahead of U.S. data
European equities are mixed in midday trading, with the markets cautious ahead of tomorrow's key July inflation data, while continuing to grapple with the economic and monetary policy implications of Friday's much stronger-than-expected U.S. July nonfarm payroll report. The data seemed to intensify concerns about more aggressive monetary policies, while also easing concerns about a recession. Inflation has driven aggressive global tightening of monetary policies, but Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his article, Shortages Have Led to Gluts, how inventory gluts have been bad news for the stocks of companies experiencing them, but could also be indicating an inflation peak, which tends to be an ingredient for market bottoms. In economic news, U.K. retail sales rose in July. The euro and British pound are higher versus the U.S. dollar, and bond yields in the Eurozone and the U.K. are trading higher.
The U.K. FTSE 100 Index is up 0.1%, Germany's DAX Index is dropping 1.0%, France's CAC-40 Index is declining 0.4%, Italy's FTSE MIB Index is decreasing 0.6%, Spain's IBEX 35 Index is rising 0.2%, and Switzerland's Swiss Market Index is trading 0.3% lower.
Asia mixed as caution sets in ahead of U.S. data
Stocks in Asia finished mixed as the markets await some key inflation data beginning tomorrow out of the U.S., while also keeping an eye on heightened geopolitical tensions between the U.S. and China over Taiwan. Some Chinese economic data recently has shown improvement and eased economic concerns that have ramped up, exacerbated by China's COVID-induced lockdowns. Schwab's Jeffrey Kleintop notes in his article, China's Yo-Yo Economy, that although an economic rebound in China is underway according to government and private sector data, its economy and stock market may remain volatile. With the inflation data in the U.S. looming, monetary policies continue to be in focus as central banks out of the U.S., U.K., Australia, and India have all recently announced aggressive monetary policy tightening to try to fight persisting inflation pressures, but Japan and China have held off on moving down the tightening path. In light economic news, Australia's August consumer confidence deteriorated and the country's business sentiment for July also unexpectedly declined.
Japan's Nikkei 225 Index rose 0.3%, with the yen holding steady after recently softening as the U.S. dollar rallied on Friday's strong jobs report. The yen remains near multi-decade lows versus the U.S. amid a drop that began in March as the Fed and Bank of Japan diverge with their monetary policies. Japanese markets were bogged down by SoftBank Group Corp's (SFTBY $21) $23.4 billion net loss due to the selloff in tech stocks during the quarter, which hampered its Vision Fund's portfolio holdings. China's Shanghai Composite Index increased 0.3%, but the Hong Kong Hang Seng Index dipped 0.2%. South Korea's Kospi Index increased 0.4%, and Australia's S&P/ASX 200 Index ticked 0.1% higher. Markets in India were closed for a holiday.
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