Stocks Continuing Weekly Rally, Trimming August's Selloff

U.S. stocks are higher for a third-consecutive session, chipping away at Au-gust's drop, with U.S.-China trade worries remaining relatively subdued and Treasury yields continuing to stabilize from a recent tumble. However, volume is a bit light-er than usual ahead of the three-day Labor Day holiday weekend. Ulta Beauty is falling after missing earnings expectations and lowering its guidance, but Camp-bell Soup is rising following its quarterly results. The eco-nomic front was also mixed as personal income missed but spending topped forecasts, regional manu-facturing activity returned to expansion territory and consumer sentiment fell sharply. Treasury yields are mostly gaining mod-est ground and the U.S. dollar is little changed, while gold is ticking higher and crude oil prices are falling. Asia finished mostly higher and Europe is rising.

At 10:50 a.m. ET, the Dow Jones Industrial Average is up 0.4%, the S&P 500 Index is gaining 0.3%, and the Nasdaq Composite is ticking 0.1% higher. WTI crude oil is dropping $1.43 to $55.28 per barrel and Brent crude oil is falling $1.45 at $59.04 per barrel, and wholesale gasoline is off $0.05 at $1.52 per gallon. The Bloomberg gold spot price is $1.00 higher at $1,528.70 per ounce, and the Dollar Index—a com-parison of the U.S. dollar to six major world currencies—is little changed at 98.45

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Ulta Beauty Inc. (ULTA $241) reported Q2 earnings-per-share (EPS) of $2.76, below

the $2.80 FactSet estimate, as revenues rose 12.0% year-over-year (y/y) to $1.7 billion, roughly in line with forecasts. Q2 same-store sales increased 6.2% y/y, south of the ex-pected 6.6% gain. ULTA lowered its full-year guidance, reflecting the "head-winds we are currently seeing in the U.S. cosmetics market." Shares are falling more than 25%.

Tesla Inc. (TSLA $228) is gaining ground amid reports that the electric vehicle maker will be exempted from China's auto purchase tax.

Campbell Soup Company (CPB $47) posted a fiscal Q4 loss of $0.02 per share, or EPS of $0.49 ex-items, compared to the estimated profit of $0.41 per share, with rev-enues increasing 2.0% y/y to $2.0 billion, mostly in line with expectations. Campbell's recent divestiture of its international segment may be impacting comparability to the Street's expectations. The company's organic sales growth—excluding acqui-sitions and divestitures—out of its simple meals and beverages and snacks units both topped ex-pectations, while its troubled soup category improved. Shares are rallying.

Personal income and spending mixed, regional manufacturing back to expansion, sentiment falls

Personal income (chart) ticked 0.1% higher month-over-month (m/m) in July, versus the Bloomberg forecast of a 0.3% gain, and versus June's upwardly revised 0.5% rise. Personal spending rose 0.6%, above estimates of a 0.5% increase, and follow-ing June's unrevised 0.3% rise. The July savings rate as a percentage of dis-posable in-come was 7.7%. The PCE Deflator was up 0.2% m/m, in line with expectation stations and compared to the prior month's unrevised 0.1% advance. Compared to last year, the deflator was 1.4% higher, matching expectations and com-pared to June's downwardly-revised 1.3% rise. Excluding food and energy, the PCE Core Index was 0.2% higher m/m, in line with expectations calling for it to be in line with June's unadjusted gain. The index was 1.6% higher y/y, in line with estimates to match June's unrevised rise

The final August University of Michigan Consumer Sentiment Index (chart) was downwardly adjusted to 89.8, from the preliminary figure of 92.1, compared to estimates of 92.4. The index was below July's 98.4 level and hit the lowest level since October 2016. Both the current conditions and expectations components of the index fell. The 1-year inflation forecast ticked higher to 2.7% from July's 2.6% rate, and the 5-10 year inflation outlook rose to 2.6% from 2.5%.

The Chicago PMI Index surprisingly moved back to a level depicting expansions (a reading above 50), rising to 50.4 in August from July's 44.4 level and compared to the expected increase to 47.5. This snapped a string of two months in contraction terri-tory as new orders and order backlog regained expansion territory, while contrac-tions in employment and production decelerated.

With uncertainty roiling the markets and fostering heightened volatility, Schwab's Director of Market and Sector Analysis Brad Sorensen, CFA, offers his latest Schwab Sector Views: Drifting Toward Defensives, noting that it doesn't appear that the U.S. economy is on the cusp of a recession, but a global slowdown and trade dis-putes have heightened risks. Brad adds that we think it's time to use market rallies to add modestly to defensive positions. He concludes by saying we aren't changing our official recommendations … yet, as there remain potential upsides, but those are slowly being overcome and we may not be far away from an official change.

Later this morning, the economic calendar will bring the final University of Michigan Consumer Sentiment Index for August, estimated to be revised slightly higher to 92.4 from the preliminary estimate of 92.1, but below July's 98.4 figure. Also, the Chicago PMI Index will be released, expected to improve to 47.5 this month from 44.4 in July, but a reading below 50 denotes contraction.

Treasuries are mostly dipping, with the yield on the 2-year note little changed at 1.52%, the yield on the 10-year note rising 2 basis points (bps) to 1.51%, and the 30-year bond rate ticking 1 bp higher to 1.98%. For a look at the volatility in the fixed income markets, see Schwab's Chief Fixed Income Strategist Kathy Jones' latest article, Bond Market: Why Is Everything Upside Down?

Please note: the U.S. markets will be closed on Monday in observance of the Labor Day holiday.

Europe gaining ground as trade fears remain relatively subdued

European equities are mostly higher in late-day action, with comments from China confirming talks and lacking an escalation appearing to keep U.S.-China trade wor-ries in check, while the recent stabilization in global bond yields seems to be also lending sup-port. Schwab’s Chief Investment Strategist Liz Ann Sonders offers her latest article, War (What is it Good For?), noting investors, business leaders and consumers have been given a lot to chew on with regard to trade and its impact on the economy. She adds that although the consumer side of the economy has re-mained resilient, the fact that busi-nesses and capital investment are squarely in the crosshairs of a worsening trade war, means we need to keep a close eye on the stability in the line that divides the manu-facturing and consumer sides of the U.S. economy. The markets continue to shrug off escalating U.K. Brexit uncertainty in the wake of Prime Minister Boris Johnson's sus-pension of parliament ahead of the October 31st deadline. In economic news, German retail sales fell more than expec-ted m/m in July, while the Eurozone core consumer price inflation estimate was a bit cooler than expected for August. The euro is down versus the U.S. dollar and the British pound is higher, while bond yields in the region are mixed.

The U.K. FTSE 100 Index is up 0.4%, Germany's DAX Index and Switzerland's Swiss Market Index are rising 1.0%, France's CAC-40 Index is advancing 0.7%, and Spain's IBEX 35 Index is gaining 0.5%, while Italy's FTSE MIB Index is trading 0.2% lower.

Asia mostly higher to close out the week

Stocks in Asia were mostly higher amid some relatively calm U.S-China trade con-cerns as China confirmed continued talks and held off on threatening further reta-liation, even as the September 1st deadline looms for further U.S. tariffs to kick in. Amid the increased attention on trade from the global markets, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his article, Is The Tariff War Turning Into A Currency War?, discussing that if rate cuts aren't seen as enough to address slowing growth and policymakers turn to direct currency intervention, the resulting currency war could be bad news for investors. Jeff adds that in a tariff war, the U.S. has a big advantage over China due to the trade balance, but in a currency war, China has way more ammunition than the United States. Some stability in the plunge in global bond rates also appeared to aid sentiment. Japan's Nikkei 225 Index rose 1.2%, with the yen softening a bit, while data showed retail sales fell more than expected in July, but the nation's industrial production rose much more than expect-ed in July. The Hong Kong Hang Seng Index ticked 0.1% higher, though China's Shanghai Composite Index declined 0.2%. India's S&P BSE Sensex 30 Index advanced 0.7%, even as the country reported smaller-than-expected Q2 GDP growth just as the markets were closing, and Australia's S&P/ASX 200 Index rallied 1.5%. South Korea's Kospi Index jumped 1.8%, with the Bank of Korea leaving its benchmark interest rate unchanged and its July industrial production growing much more than anticipated.

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