U.S. stocks are subdued following yesterday’s release of the minutes from the Fed’s July monetary policy meeting. Economic data came in better-than-expected on jobless claims and manufacturing output out of Philadelphia. Stronger-than-anticipated earnings results from Dow member Cisco Systems are lifting its shares, though Kohl's Corporation's miss and lowered guidance is weighing on its shares. BJ Wholesale Club is trading higher after beating forecasts and issuing higher FY guidance. In other economic news, existing home sales fell more than expected, marking the sixth straight monthly decline. Additionally, the Leading Index decreased less than expected. Treasuries are edging higher to pressure yields, and the U.S. dollar is increasing. Crude oil prices are rising, while gold is trading lower. Asia finished mostly lower in the wake of recent disappointing Chinese economic and earnings data, while Europe is ticking mostly higher despite some unfavorable economic data.
At 10:52 a.m. ET, the Dow Jones Industrial Average is down 0.2%, while the S&P 500 Index and Nasdaq Composite are up 0.1%. WTI crude oil is rising $2.29 to $90.40 per barrel, and Brent crude oil is up $2.54 at $94.19 per barrel. The gold spot price is trading $0.40 lower to $1,776.30 per ounce, and the Dollar Index is 0.5% higher to 107.08.
Dow component Cisco Systems Inc. (CSCO $50) reported adjusted fiscal Q4 earnings-per-share (EPS) of $0.83, above the $0.82 FactSet estimate, as revenues were flat year-over-year (y/y) at $13.1 billion, topping the Street's forecast of $12.7 billion. The company said it saw strong demand with record full year product orders and backlog and it made progress on its business model transformation with annualized recurring revenue rising 8.0% y/y. CSCO issued current year revenue guidance that was above estimates, and an EPS outlook that was mostly in line with expectations. Shares of CSCO are trading higher.
Kohl's Corporation (KSS $32) reported Q2 EPS of $1.11, one penny short of expectations, with revenues dropping 8.1% y/y to $4.1 billion, just above the estimated $4.0 billion. Q2 same-store sales declined 7.7% y/y, compared to the forecasted 8.1% decrease, and its gross margin came in below projections. The company said its Q2 results were impacted by a weakening macro environment, high inflation, and dampened consumer spending, which especially pressured its middle-income customers. KSS lowered its full year guidance, but said it is accelerating its share repurchase program to buy back approximately $500 million of its stock. Shares are lower.
BJ Wholesale Club Holdings Inc. (BJ $75) announced adjusted Q2 EPS of $1.06, north of the $0.80 estimate, as total revenues rose 22.2% y/y to $5.1 billion, above the forecasted $4.7 billion read. While gross profit increased in the second quarter, merchandise margins decreased 50 basis points due to increased freight costs as well as investments in inflationary categories. The discount retailer stated that its expansion plans remain on track, as 11 new club openings are expected in FY22. BJ’s President and Chief Executive Officer stated, “We are expanding our footprint into new and existing markets with success. Our business model is designed to work well in the current consumer environment where value is king…” The company issued guidance that came in higher than expected. Shares are trading noticeably higher.
With the retail sector putting the finishing touches on Q2 earnings season, of the 470 S&P 500 companies that have reported thus far, roughly 63% have topped revenue forecasts and approximately 76% have bested profit projections, per data compiled by Bloomberg. Compared to last year, revenue growth is tracking to be up 14.1% and earnings are 8.2% higher.
Schwab's Chief Investment Strategist, Liz Ann Sonders points out in our latest Schwab Market Perspective: Mixed Signals, how the unexpectedly strong July jobs report belied considerable nuance in the broader economic picture. But she notes that leading economic indicators and an inverted U.S. Treasury yield curve—historically harbingers of recession—are showing pockets of weakness in the economy.
Jobless claims dip, Philly manufacturing improves, existing home sales and Leading Index fall
Weekly initial jobless claims (chart) came in at a level of 250,000 for the week ended August 13, better than the Bloomberg estimate of 264,000 and down from the prior week's downwardly revised 252,000 level. The four-week moving average declined by 2,750 to 246,750, and continuing claims for the week ended August 6 rose by 7,000 to 1,437,000, versus estimates of 1,455,000. The four-week moving average of continuing claims increased by 13,250 to 1,413,000.
The Philly Fed Manufacturing Business Outlook Index unexpectedly moved back into expansion territory (a reading above zero) for August. The index rose to 6.2 versus estimates of an increase to -5.0 from July's -12.3 level. New orders improved solidly but remained in contraction territory, and shipments grew at a much faster pace, while employment growth accelerated and prices paid decelerated but remained elevated.
Existing home sales were down 5.9% m/m in July, more than the Bloomberg consensus estimate of a 5.1% decrease, to an annual rate of 4.81 million units, versus the forecast of 4.86 million, while June’s figure was downwardly adjusted to 5.11 million units. Contract closings fell for the sixth-straight month to its lowest level since May 2020, as sales all over the country were lower. Northeastern and Midwestern sales were down more than last month’s figures, while sales in the South and West declined less than in June, but were still negative. According to Bloomberg, the nearly 26% decline in previously owned home sales since January of 2022 marks the steepest six-month plunge on record since 1999, and underscores a housing market that’s reeling from elevated mortgage rates and prices.
The median existing home price was up 10.8% from a year ago to $403,800, but slightly lower than last month’s countrywide average price of $420,900. The number of homes for sale rose slightly form last month, and at the current sales pace, it would take 3.3 months to sell all the houses on the market, which marks the sixth-straight monthly rise. National Association of Realtors Chief Economist Lawrence Yun said, "We’re witnessing a housing recession in terms of declining home sales and home building,” but went on to say, “It’s not a recession in home prices. Inventory remains tight and prices continue to rise nationally.” Existing home sales account for a large majority of the home sales market and reflect contract closings instead of signings.
The Conference Board's Leading Economic Index (LEI) for July declined 0.4% month-over-month (m/m), less than estimates calling for a 0.5% decrease, and compared to June’s upwardly revised 0.7% drop. The index recorded its fifth negative read in a row as jobless claims, ISM new orders, building permits, and average consumer expectations were the biggest drags, more than offsetting gains in the average workweek, credit conditions, interest rate spread, and less noticeable increases in other categories.
Treasuries have been choppy as of late with the markets digesting some cooler-than-expected July inflation data and last month's stronger-than-expected labor report, grappling with the economic and monetary policy implications. The U.S. dollar has also resumed a rally after a recent pullback from multi-decade highs reached in July.
Schwab's Chief Fixed Income Strategist Kathy Jones discusses in our Schwab Market Perspective, how the Fed has embarked on one of the most rapid tightening cycles in over 40 years, and with inflation continuing to outpace wage growth, more rate hikes are likely on the horizon. Kathy also offers analysis of the greenback in her commentary, The Strong Dollar: Can It Continue? 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.
Treasuries are higher, with the yield on the 2-year Treasury note down 6 basis points (bps) to 3.22%, while the yields on the 10-year note and the 30-year bond are dipping 4 bp to 2.85% and 3.12%, respectively.
Europe ticking mostly higher despite data
European equities are nudging mostly higher in late-day trading, despite reports showing Eurozone construction output declined in June and consumer price inflation for July was unrevised at a record high. A host of hot inflation data has forced the Bank of England to join the Fed in aggressively tightening monetary policy and has pushed the European Central Bank down the tightening path. Energy stocks are leading to the upside as crude oil prices are rebounding from recent tumbles, while the Materials and Industrials sectors are also moving to the upside to help lift the markets. The euro and British pound are dipping versus the U.S. dollar and bond yields in the Eurozone and the U.K. continue to trade higher.
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. Also, Jeff discusses in his latest article, The End of Rate Hikes?, how the signals from central banks that rate hikes, which began last year, may be coming to an end could be welcome news for investors looking ahead to the next 12 months.
The U.K. FTSE 100 Index, France's CAC-40 Index, and Switzerland's Swiss Market Index are up 0.2%, Germany's DAX Index is increasing 0.3%, and Italy's FTSE MIB Index is rising 0.8%, while Spain's IBEX 35 Index is mostly unchanged.
Asia mostly lower as markets digest recent data
Stocks in Asia finished mostly lower, with the markets continuing to digest disappointing economic data out of China recently, which prompted its central bank to cut some key interest rates this week. Also, some lackluster Chinese earnings reports appeared to weigh on sentiment, headlined by tech giant Tencent Holdings Ltd's (TCEHY $40) first ever revenue drop amid the regulatory scrutiny and COVID-related lockdowns. China's rate cuts diverged from key central banks in North America, Europe and the U.K.—led by the Fed—which are aggressively tightening monetary policy to fight persisting inflation pressures. China's economy has slowed noticeably in the face of the COVID-induced lockdowns and 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. Economic data was light, with Australia reporting an unexpected decline in its employment change for July. Meanwhile, geopolitical tensions between the U.S. and China remained elevated, mostly due to the evolving situation in Taiwan, with the U.S. set to begin trade negotiations in September, of which China has expressed opposition.
Japan's Nikkei 225 Index decreased 1.0%, with the yen trimming some of a recent rebound versus the U.S. dollar from multi-decade lows. The yen has chipped away at a sharp drop that began in March as the Bank of Japan also lags other key global central banks in monetary policy. China's Shanghai Composite Index declined 0.5% and the Hong Kong Hang Seng Index fell 0.8%. Australia's S&P/ASX 200 Index traded 0.2% to the downside, and South Korea's Kospi Index dipped 0.3%, while India's S&P BSE Sensex 30 Index bucked the trend, ticking 0.1% higher to extend a recent winning streak to five sessions.
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