U.S. stocks finished the trading session higher, allowing the major domestic indexes to post a third-straight week of gains, as energy and commodity issues continued to rebound, bolstered by an extension of gains for crude oil prices. In economic news, traders digested a mixed February labor report, which showed stronger-than-expected job growth and a surprising decline in average hourly earnings. Treasuries, gold and the U.S. dollar were all lower.
The Dow Jones Industrial Average (DJIA) advanced 63 points (0.4%) to 17,007 and the S&P 500 Index was 7 points (0.3%) higher at 2,000, and the Nasdaq Composite gained 10 points (0.2%) to 4,717. In heavy volume, 1.4 billion shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil increased $1.35 to $35.92 per barrel and wholesale gasoline was $0.03 higher at $1.33 per gallon, while the Bloomberg gold spot price lost $2.35 to $1,261.90 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 97.33. Markets were higher for the week, as the DJIA increased 2.2%, the S&P 500 Index added 2.7%, and the Nasdaq Composite Index gained 2.8%.
Hewlett Packard Enterprise Co. (NYSE:HPE $15) reported fiscal 1Q earnings-per-share (EPS) ex-items of $0.41, one penny above the FactSet estimate, as revenues declined 3.0% year-over-year (y/y) to $12.7 billion, roughly in line with forecasts. HPE issued stronger-than-expected full-year EPS guidance and shares finished sharply higher.
H&R Block Inc. (NYSE:HRB $28) posted a fiscal 3Q loss ex-items of $0.34 per share, wider than the $0.24 per share shortfall that was expected, as revenues decreased 6.7% y/y to $475 million, below the expected $502 million. The company said this tax season has been marked by the continued impact of fraud on the industry, the continuing trend of taxpayers filing their returns later in the season and tax refunds taking longer to process. Shares of HRB fell sharply.
Staples Inc. (NASDAQ:SPLS $10) announced 4Q EPS of $0.26, two cents south of forecasts, with revenues decreasing 7.0% y/y to $5.3 billion, compared to the projected $5.4 billion. Shares closed lower even as SPLS' 1Q earnings outlook came in mostly above expectations.
February employment report tops forecasts, though wages unexpectedly dipped
Nonfarm payrolls rose by 242,000 jobs month-over-month (m/m) in February, compared to the Bloomberg forecast of a 195,000 increase. The initial rise of 151,000 seen in January was revised to a gain of 172,000 jobs. Excluding government hiring and firing, private sector payrolls increased by 230,000, versus the forecasted gain of 190,000, after expanding by an upwardly revised 182,000 in January, from the 158,000 rise that was initially reported. The unemployment rate remained at 4.9%, as expected, while average hourly earnings dipped 0.1% m/m, versus projections of a 0.2% gain, and January's 0.5% increase was unadjusted. Finally, average weekly hours declined to 34.4 from January's unrevised 34.6 hours level, where it was expected to remain.Employment gains were seen in health care and social assistance, retail trade, food services and drinking places, as well as educational services, while job losses continued in mining.
The markets are grappled with the mixed report as job growth came in much stronger than expected. However, the accompanying unexpected dip in wage growth may have kept Fed rate hike expectations in check due to its implications on inflation, which continues to run below the Central Bank's target. Recession fears have risen, and the market is now expecting fewer Fed rate hikes this year. We believe those fears are overdone and that chances of a recession, while higher than late last year, are still low. With the labor market tightening, we believe the Fed will be able to move toward normalization of monetary policy with a rate hike or two this year—less than expected late last year, but still beneficial to much of the financial sector.
The trade balance showed that the deficit widened to $45.7 billion in January, compared to the $44.0 billion estimate. December's deficit was revised to $44.7 billion from the initially reported $43.4 billion. Exports dropped 2.1% m/m to $176.4 billion, and imports decreased 1.3% m/m to $222.1 billion.
Treasuries declined, with the yield on the 2-year note rising 2 basis points (bps) to 0.87%, while the yields on the 10-year note and the 30-year bond gained 4 bps to 1.88% and 2.70%, respectively.
Europe higher, Asia posts modest gains
European equities finished higher, with mining stocks continuing their recent rally, while traders grappled with the stronger-than-expected U.S. February job growth figures, though the wage component of the report was on the disappointing side. Ahead of next week's monetary policy meeting from the European Central Bank, the Stoxx Europe 600 Index posted a weekly rally of over 3.0% after rising four out of the last five sessions. The euro was higher versus the U.S. dollar and bond yields in the region moved to the upside. In economic news, growth in German construction output accelerated in February as reported by Markit, while Italy's 4Q GDP growth was unrevised at a 0.1% quarter-over-quarter pace, matching forecasts.
Stocks in Asia finished mostly higher extending a positive week that saw global sentiment improve after China announced further stimulus measures and data out of the U.S. and Europe that was relatively upbeat. Also, traders may have treaded with some caution ahead of today's February labor report in the U.S. Japanese equities rose, posting a four-session winning streak, after showing some late-day resiliency as the yen gave up early gains. Chinese stocks advanced, bolstered by reports that the government intervened to support the markets before the start of the country's annual economic policy meetings over the weekend, per Bloomberg. The meetings are for the government to set a five-year plan for the economy and will include its annual growth target. Australian securities gained ground with continued strength in basic materials stocks helping offset a report showing the nation's retail sales rose at a smaller-than-expected rate in January. Finally, Indian equities nudged higher, extending their rally to four sessions, while South Korean listings dipped trimming the weekly gain.
Stocks higher for third-straight week
Domestic stocks posted their third-consecutive week of gains with energy issues leading the major sectors broadly higher, along with the materials sector, as crude oil and other commodity prices continued to recover. Also, the recently-battered financial sector was among the standout winners. Relatively favorable reads on U.S. manufacturing and non-manufacturing activity from the ISM teamed up with a mostly upbeat Fed Beige Book, to help ease unnerved global sentiment, along with some positive reports out of the eurozone. Moreover, another dose of disappointing Chinese manufacturing and services sector data was met with the announcement of further stimulus measures from the People's Bank of China (PBoC) in the form of a 50 bp cut of its banking sector reserve requirement ratio—the amount of cash that banks need to keep on reserve instead of using in the financial system—to 17.00%.
The sharp downward move by stocks to start the year has abated, but volatility is likely to persist. We believe the bulls will ultimately win the tug-of-war, but risks are elevated. The roller coaster ride in stocks is reflected in the mixed readings among recent economic releases. This, combined with signs some inflation has re-emerged, complicates the Fed’s upcoming decisions on rates and adds to uncertainty. Global stocks have joined in on the wild ride, with some comforting words from China aiding the rebound; but the upcoming European Central Bank decision could ignite further volatility.
Next week's data light in the U.S. but focus could be on the other side of the pond
Next week, the U.S. economic calendar will take a bit of a breather, with the key releases being the NFIB Small Business Optimism Index, wholesale inventories, and weekly jobless claims. However, the global markets will likely focus across the pond, with the highly-anticipated monetary policy meeting from the European Central Bank (ECB), which will be preceded by the eurozone's preliminary 4Q GDP report. The ECB needs to avoid actions that may undermine the financial sector to help sustain the stock market rally. Investors may want to watch for several key developments that could help determine the direction for Europe’s stock market. A cut to the key rate on banks’ deposits at the ECB is priced into futures markets, but a bigger cut may be viewed negatively by investors since it may raise banks’ costs. An introduction of a tiered system to shield some of banks’ deposits from the cost of negative interest rates would likely be viewed as a positive by the stock market. Any expansion of the ECB’s quantitative easing (QE) asset purchase program from the current monthly pace of 60 billion euros may be welcomed by market participants.
Other international reports slated for next week include: Australia—consumer confidence. China—trade balance, CPI and PPI, new yuan loans, aggregate financing, industrial production, and retail sales. India—trade balance and industrial production. Japan—final 4Q GDP and trade balance. U.K.—trade balance, industrial and manufacturing production, and construction output.
Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab (NYSE:SCHW) & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.