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Bull Push Fizzles, Pressure from Tech Too Much

While the bulls gave it a valiant effort, with the Dow and S&P 500 clawing their way out of an early hole, pressure from the technology sector on a warning from Broadcom was hard to overcome, with stocks finishing lower, while a mixed bag of economic data domestically and abroad, as well as heightened geopolitical tensions in the Middle East added to the negative sentiment. Treasury yields were mixed and the U.S. dollar gained ground following the economic reports, while crude oil prices bounced off of their lows to trade higher, adding to yesterday's gains in the wake of attacks on tankers in the Gulf of Oman, while gold finished slightly lower, paring solid early gains.

The Dow Jones Industrial Average (DJIA) declined 17 points (0.1%) to 26,090, the S&P 500 Index lost 5 points (0.2%) to 2,887, and the Nasdaq Composite fell 40 points (0.5%) to 7,797. In moderate volume, 732 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil advanced $0.23 to $52.51 per barrel and wholesale gasoline was up $0.01 at $1.73 per gallon. Elsewhere, the Bloomberg gold spot price traded $1.57 lower to $1,341.10 per ounce, and the Dollar Index— a comparison of the U.S. dollar to six major world currencies—rose 0.6% to 97.56. Markets were higher for the week, as the DJIA rose 0.4%, the S&P 500 Index increased 0.5%, and the Nasdaq Composite was 0.7% higher.

Shares of Broadcom Inc. (AVGO $266) fell after it warned of a distinct slowdown in chip demand, citing the ongoing trade dispute between the U.S. and China, as well as strict constraints of exports to Huawei Technologies, the Chinese technology company embroiled within the standoff between the two counties. As a result, the chipmaker cut its revenue forecast for the year by 8%. The news came as the company reported fiscal Q2 earnings-per-share (EPS) of $1.64, or adjusted EPS of $5.21, ahead of the $5.19 FactSet estimate, but revenues missed forecasts, rising 10% year-over-year (y/y) to $5.52 billion compared to the $5.68 billion estimate.

Mixed bag of economic data

Advance retail sales (chart) for May rose 0.5% month-over-month (m/m), versus the Bloomberg forecast of a 0.6% increase, and April’s 0.2% decline was favorably-revised to a 0.3% gain. Last month's sales ex-autos moved 0.5% higher m/m, compared to expectations of a 0.4% gain and April's upwardly-revised 0.5% rise. Sales ex-autos and gas also increased 0.5%, compared to estimates of a 0.4% gain, and April's favorably-adjusted 0.1% increase. The control group, a figure used to calculate GDP, gained 0.5%, versus projections of a 0.4% rise. Gains were seen in sales for sporting goods, hobby, musical instruments and book stores, as well as electronics and at non-store retailers, which includes online venues, while food & beverage establishments moderated slightly.

The Federal Reserve's industrial production (chart) rose 0.4% m/m in May, compared to estimates calling for a 0.2% increase, and April’s 0.5% decline was revised to a 0.4% decrease. Manufacturing and mining output both gained ground, while utilities production also increased. Capacity utilization rose to 78.1% from the prior month's unrevised 77.9% rate, a tick above forecasts of 78.0%. Capacity utilization is 1.7 percentage points below its long-run average.

The June preliminary University of Michigan Consumer Sentiment Index (chart) fell to 97.9 from May's read of 100.0, slightly below the 98.0 expectation. A rise in the current conditions component of the index was tempered by a decline in the index of consumer expectations. The 1-year inflation forecast declined to 2.6% from 2.9%, and the 5-10 year inflation forecast decreased to 2.2% from the previous 2.6% rate, its lowest level in the history of the measure.

Business inventories (chart) rose 0.5% m/m in April, in line with forecasts, while March’s flat reading was unrevised.

Treasuries were mixed, as the yield on the 2-year note was up 2 basis points (bps) to 1.84%, while the yield on the 10-year note was flat at 2.08%, and the 30-year bond rate was down 1 bp at 2.59%.

Europe and Asia lower as geopolitical tensions gain focus more disappointing Chinese data

European equities finished lower, with technology stocks leading the way following Broadcom's warning, and as geopolitical tensions ratcheted higher after the U.S. blamed Iran for yesterday's attacks on the tankers in the Gulf of Oman. Economic news in the region was mixed, as wholesale price inflation in Germany and consumer prices in France came in cooler than expected, while industrial orders in Italy were sharply lower, with economists looking for a gain. Brexit remained in focus after Boris Johnson secured the largest amount of votes, and by a whopping majority, in the first ballot of the British Conservative Party leadership, whom will likely replace outgoing Prime Minister Theresa May. The euro and the British pound were lower versus the U.S. dollar amid the uneasiness, while bond yields in the region fell. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers some analysis for investors navigating the choppy global market environment in his commentary, Diversification: Finally Back After 20 Years. He points out that the lower correlation between the world's stock markets enhances the potential risk-reducing benefits of diversification.

Stocks in Asia finished mostly lower following more disappointing economic data out of China, upping global growth fears, and amid intensified geopolitical tension after two attacks on tankers in the Gulf of Oman. Industrial production in China came in well below forecasts and at its weakest level of growth in over 17 years, and fixed asset investment decelerated more than projections, while retail sales was a bright spot, after increasing from the prior month and ahead of consensus estimates, but some analysts attributed the strength to higher inflation as opposed to increased consumer sentiment. Meanwhile, banks in Hong Kong reopened after being shuttered amid protests regarding a contentious extradition law that has shaken the city this week, however reports have surfaced that demonstrations are planned for the weekend. Stocks in both mainland China and Hong Kong tumbled.

Elsewhere, Indian equities fell amid the heightened geopolitical concerns in the region, and South Korean securities declined, with technology stocks leading the way on Broadcom's warning of future chip demand, and as trade worries festered after the latest threats from President Trump of following through on increased tariffs if a meeting with Chinese President Xi at the G-20 summit later this month did not occur. Amid the lingering trade uncertainty, Schwab's Jeffrey Kleintop, CFA, offers his latest commentary, U.S. Imports From China Plunge As Other Emerging Markets Fill The Gap, noting U.S. imports from China have plunged this year, offset by import gains for other emerging markets not subject to U.S. tariffs. He adds that the rise in U.S. imports from just five emerging market countries more than offset the falloff from China, as sourcing shifts for key categories like auto parts. Jeff concludes that if this trend continues, emerging market companies may fare better than investors feared should the China tariffs continue or increase. Stocks in Japan bucked the trend to finish higher, amid some weakness in the yen and an in line industrial production report, while markets in Australia finished higher on strength in energy stocks.

Stocks gyrate throughout the week, but end higher

U.S. stocks got off to a good start early, adding to last week's rally that notched the best weekly gain of the year on eased trade fears after a migration agreement helped Mexico avoid increased U.S. tariffs. However, the mood quickly shifted amid renewed posturing within the U.S.-China trade standoff, capped off by Friday's drop in technology shares following Broadcom's warning of a significant slowdown in demand. Ramped-up Fed rate cut expectations, which accelerated after last Friday's softer-than-expected May Labor Report, helped to keeps markets in the green for the week, with tame reads in the Producer Price Index (PPI), the Consumer Price Index (CPI) and the Import Price Index this week aiding in those hopes. More disappointing data out of China heightened global growth worries, and attacks on tankers in the Gulf of Oman intensified geopolitical concerns to add to some caution through the week.

Treasury yields rebounded from a recent slide that took the 10-year yield to lows not seen since September 2017, but remained lower amid the myriad of uncertainties plaguing the market, and the U.S. Dollar Index bounced off of last week's decline. Crude oil prices recovered from hitting their lowest level in five months following attacks on tankers in the Gulf of Oman, but were 2.7% lower for the week. Second to the technology sector, energy shares lagged amid the tumble in prices, despite the gains seen in the latter part of the week, while communication services and consumer discretionary stocks were the leaders.

Next week's economic calendar will be robust with a focus on housing, courtesy of the NAHB Housing Market Index, housing starts and building permits, and existing home sales. Preliminary reads on manufacturing and services activity from Markit are also on tap, as well as some regional data from New York and Philadelphia, and the Index of Leading Economic Indicators will come later in the week. However, the highlight of the docket will likely be the rate decision following the conclusion of the Federal Open Market Committee's two-day meeting on June 19, with updated economic projections and Chairman Jerome Powell's press conference to follow, amid the heightened optimism that a rate cut may in the offing.

As noted in our latest Schwab Market Perspective: Dangers Rising…or Potential Opportunity Emerging?, U.S. stocks suffered a 7-10% pullback throughout May as trade tensions and growth concerns heated up. The selling was disconcerting and bouts of weakness could persist, but potential opportunities may also emerge. Warning signs are increasingly flashing for economic growth, while recession probability models have been moving higher; but for now we believe the bar remains relatively high for Fed rate cuts this year—although futures have priced in a 80% likelihood by July. Elevated consumer confidence in the world's economic leaders may not be painting an accurate economic picture.

The international economic week will also be fully-loaded with potential market-moving releases that include: Australia—housing prices and the minutes from the Reserve Bank of Australia's latest monetary policy meeting. India—lending statistics. Japan—trade balance, the Bank of Japan's monetary policy decision, the All-Industry Activity Index, CPI and the Markit Manufacturing Index. Eurozone—wage data, trade balance, consumer confidence and CPI, as well as German PPI and Zew Economic Survey, and the Markit Manufacturing and Services reads from across the region. U.K.—the Retail Price Index, retail sales, CPI, PPI, public sector net borrowing, and the Bank of England's monetary policy decision.

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