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Markets Head into Weekend Slightly Higher, G20 in Focus

U.S. equities finished with modest increases, but snapped a string of weekly gains, amid palpable caution ahead of the highly-anticipated meeting between President Trump and Chinese President Xi tomorrow. An unexpected contraction in domestic regional manufacturing activity and an earnings miss by Dow member Nike also helped to keep gains in check. Treasury yields and the U.S. dollar were nearly unchanged as the data was joined by a mixed personal income and spending report and slight upward revision to consumer sentiment. Crude oil prices were lower and gold was higher. Elsewhere on the equity front, Constellation Brands was higher following an upbeat earnings report and increased guidance.

The Dow Jones Industrial Average (DJIA) rose 73 points (0.3%) to 26,600, the S&P 500 Index gained 17 points (0.6%) to 2,942, and the Nasdaq Composite added 39 points (0.5%) to 8,006. In heavy volume, 2.0 billion shares were traded on the NYSE and 3.7 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.96 to $58.47 per barrel and wholesale gasoline was down $0.01 at $1.90 per gallon. Elsewhere, the Bloomberg gold spot price inched $0.90 higher to $1,410.68 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was flat at 96.19. Markets were lower for the week, as the DJIA declined 0.5%, while the S&P 500 Index and the Nasdaq Composite decreased 0.4%.

Dow member Nike Inc. (NKE $84) reported fiscal Q4 earnings-per-share (EPS) of $0.62, versus the $0.66 FactSet estimate, as revenues rose 4.0% year-over-year (y/y) to $10.2 billion, roughly in line with forecasts. North American revenues were above estimates, along with its Greater China revenues, and sales out of its Europe, Middle East and Africa unit matched forecasts, while its Asia Pacific and Latin America revenues were south of projections. The company noted higher average selling prices, impacts from foreign exchange and growth in its Nike Direct, which were partially offset by higher product costs and supply chain investments. Shares were modestly higher.

Constellation Brands Inc. (STZ $197) reported fiscal Q1 EPS of $2.40 excluding the contribution from its investment in Canopy Growth Corporation (CGC $40), versus the expected $2.05, with revenues growing 2.0% y/y to $2.1 billion, mostly in line with estimates. STZ raised its full-year revenue guidance and shares were up nicely.

Personal income and spending mixed, consumer sentiment adjusted higher

Personal income (chart) rose 0.5% month-over-month (m/m) in May, versus the Bloomberg forecast of a 0.3% gain, and matching April's unrevised rise. Personal spending increased 0.4%, below estimates of a 0.5% increase, and following April's upwardly-revised 0.6% rise. The May savings rate as a percentage of disposable income was 6.1%. The PCE Deflator was up 0.2% m/m, matching expectations and below the prior month's unrevised 0.3% advance. Compared to last year, the deflator was 1.5% higher, in line with expectations and compared to the upwardly-revised 1.6% rise seen in April. Excluding food and energy, the PCE Core Index was up 0.2% m/m, matching expectations and April's unadjusted increase. The index was 1.6% higher y/y, above estimates of a 1.5% rise, and in line with April's unrevised rise.

The final June University of Michigan Consumer Sentiment Index (chart) was unexpectedly adjusted higher to 98.2, from the preliminary figure of 97.9, where it was expected to remain. The index was below May's 100.0 level. The 1-year inflation forecast fell to 2.7% from May's 2.9% rate, and the 5-10 year inflation outlook dropped to 2.3% from 2.6%.

The Chicago PMI Index fell to 49.7 in June from May's 54.2 level and compared to the expected decrease to 53.5. This was the first figure in contraction territory (a reading below 50) since January 2017 as new orders and order backlogs both contracted, more than offsetting continued expansion in production and employment.

Treasuries finished unchanged, as the yields on the 2-year and 10-year notes, along with the 30-year bond, were flat at 1.73%, 2.01% and 2.53%, respectively. For a look at the bond markets check out Schwab's Chief Fixed Income Strategist Kathy Jones' Fixed Income Mid-Year Outlook: "Lower for Longer" is Back, in which she notes that we feel fixed income returns should remain positive in the second half of the year, but probably won't repeat the first half's sharp gains.

The global markets awaited tomorrow's highly-anticipated meeting between President Donald Trump and Chinese President Xi, and Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her U.S. Stocks/Market Mid-Year Outlook: Battle Symphony, ongoing battles, including trade, Fed vs market, Fed vs politicians, slowdown vs. recession, bonds vs. stocks, and bulls vs. bears may continue to drive volatility. Recession risk is rising, but keeping it at bay could mean rate cut(s) lead to a stronger stock market based on history, but leading indicators' rate of change rolled over last September, suggesting slower growth ahead.

Europe higher, Asia dips with global attention on G20 developments

European equities were higher, as the global markets treaded with some caution as the G-20 summit in Japan continues and is expected to culminate with tomorrow's meeting between U.S. President Donald Trump and Chinese President Xi amid the backdrop of escalated trade tensions. Eurozone core consumer price inflation accelerated more than expected y/y for this month, while U.K. Q1 GDP growth was unrevised at a 1.8% y/y pace, up from the 1.4% expansion seen in Q4. The euro and British pound rose versus the U.S. dollar and bond yields in the region were mostly lower. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his Global Stocks Mid-Year Outlook, in which he points out that in the second half of 2019, stock markets around the world will likely have to contend with slowing global economic growth as leading indicators point to an increasingly vulnerable world economy that may be worsened by shocks from trade tariffs and other factors. Jeff adds that the potential for reversals in long-term market performance trends may catch unprepared investors by surprise, suggesting investors should ensure they have an appropriate amount of broad international exposure, including both emerging and developed markets, in their portfolios to potentially benefit from opportunities for performance and diversification.

Stocks in Asia finished lower to close out the week, with the global markets appearing to remain cautious ahead of tomorrow's much-anticipated meeting at the G-20 summit in Japan between U.S. President Donald Trump and Chinese President Xi, which comes as trade tensions continue to be elevated. Japanese equities declined, with the yen edging higher and following slightly hotter-than-expected Tokyo consumer price inflation figures for this month and a stronger-than-expected May industrial production report. Stocks in mainland China and those traded in Hong Kong traded lower, and markets in Australia and India fell, while South Korean securities moved to the downside following a mixed May industrial production report. With volatility in the global markets looking to be here to stay, Schwab's 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 end weekly winning streak ahead of G20 meeting

U.S. stocks snapped a three week winning streak, with the markets grappling with some mixed economic data and caution ahead of Saturday's highly-anticipated meeting between President Trump and Chinese President Xi at the G-20 summit in Japan. Stocks also were hamstrung by a speech from Fed Chairman Jerome Powell that appeared to temper expectations of an imminent rate cut, along with continued softening in regional manufacturing activity and drops in Consumer Confidence and new home sales. However, the final read on Q1 GDP showed growth remained above 3.0%. Financials bucked the trend as the latest round of banking sector stress tests did not uncover any major trouble spots, and despite the continued drop in Treasury yields that took the 10-year yield below the 2.00% mark for the first time since late 2016. The real estate sector was the biggest decliner on the data and as earnings reports from the group delivered mixed results. The U.S. dollar slipped for a second-consecutive week and crude oil prices added to the prior week's sharp surge, aided by a bullish oil inventory report.

Although next week will be shortened by the Independence Day holiday break, the economic calendar will remain robust, with June reads on activity in the manufacturing and service sectors from ISM, the trade balance, and factory orders. However, the headlining report will likely be Friday's June nonfarm payroll data after May's much softer-than-expected release.

As noted in our latest Schwab Market Perspective: Running in Place, the past 18 months have been marked by major swings, but ultimately little movement. Economic data has yet to reflect a significant impact from the trade war, but that's unlikely to last if the stalemate drags on and/or if the next round of tariffs kick in. The burning question is whether the Fed has sufficient ammunition to offset a trade-related slowdown or recession. As well, geopolitical tensions have heated up, but market reactions to past escalations have been relatively limited.

Next week's international economic front is also likely to garner attention with key releases including: Australia—Reserve Bank of Australia's monetary policy decision and trade balance. China—Manufacturing and non-Manufacturing PMIs. India—2020 budget presentation. Japan—Q2 Tankan Large Manufacturing Index and household spending. Eurozone—Markit's business activity reports and retail sales, along with German unemployment change and factory orders. U.K.—Markit's business activity reports.

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Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & 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.

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