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Stocks Mixed Amid Caution Ahead of Fed

U.S. stocks are mixed in afternoon trading with investors keeping an eye on the trade front, while also exuding some caution ahead of this afternoon's monetary policy decision from the Fed. Yesterday's report from the Wall Street Journal that the U.S. and China could delay further tariffs that are expected to kick in on December 15 is keeping optimism higher, while a revised deal on the U.S., Mexico and Canada trade agreement (USMCA) also remains a positive development. The Dow is lagging following softer-than-expected guidance from Home Depot, a large write down from Chevron and comments from the FAA's chief about the recertification of Boeing's troubled 737 MAX jet. In other equity news, GameStop severely missed earnings expectations. Treasury yields are lower and the U.S. dollar is little changed following a rise in consumer price inflation, while gold is higher and crude oil prices are falling after an unexpected rise in oil inventories. Europe finished higher ahead of tomorrow's European Central Bank monetary policy decision and U.K. election.

At 12:50 p.m. ET, the Dow Jones Industrial Average is dipping 0.2%, while the S&P 500 Index and the Nasdaq Composite are ticking 0.1% higher. WTI crude oil is falling $0.40 to $58.84 per barrel, Brent crude oil is down $0.54 at $63.80 per barrel, and wholesale gasoline is off $0.02 at $1.63 per gallon. The Bloomberg gold spot price is advancing $6.42 at $1,470.81 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is little changed at 97.42.

Dow member Home Depot Inc. (HD $212) is seeing some pressure after the world's largest home improvement retailer issued a preliminary 2020 outlook that suggested revenues and same-store sales will be below FactSet estimates. The company also reaffirmed its 2019 guidance. The updated outlook comes ahead of today's investor and analyst day conference and as the company has made investments to execute its "One Home Depot" strategy.

GameStop Corp. (GME $5) reported a Q3 loss of $1.02 per share, or a shortfall of $0.49 per share ex-items, compared to the FactSet estimate of a $0.11 per share profit. Revenues fell 25.7% year-over-year (y/y) to $1.4 billion, south of the projected $1.6 billion. Q3 same-store sales tumbled 23.2% y/y, versus the estimated 13.4% drop. The video game retailer said the results continue to reflect the prevailing industry trends, most notably the unprecedented decline in new hardware sales seen across the market as the current generation of gaming consoles reach the end of their lifecycle and consumers delay their spending in anticipation of new hardware releases. GME slashed its full-year EPS and same-store sales forecasts. Shares are falling over 15%.

Corporate profitability is key to watch for in the New Year as discussed by Schwab’s Chief Investment Strategist Liz Ann Sonders in her 2020 Market Outlook: U.S. Stocks and Economy. She notes that the macroeconomic environment, including easier monetary policy and lending conditions, supported price-earnings (P/E) expansion in 2019, but those effects are fading. Liz Ann adds that the wide gap between stock market performance and corporate after-tax profits suggests the latter needs to accelerate. She points out that earnings are expected to accelerate in 2020, but that expectation is partly predicated on a positive outcome to the U.S.-China trade war, which remains uncertain. In addition, Liz Ann says that due to the effects of tariffs and rising labor costs, profit margins could come under pressure in 2020.

Dow component Chevron Corporation (CVX $117) announced that as a result of its disciplined approach to capital allocation and a downward revision in its longer-term commodity price outlook it estimates after tax impairment charges of $10-11 billion in Q4. Shares are lower.

Boeing Company (BA $345) is weighing on the Dow after the Federal Aviation Administration (FAA) Chief Steve Dickson told CNBC that the recertification process for the company's troubled 737 MAX jets will extend into 2020. The head of the FAA's comments contrast Boeing's guidance of recertification by year end.

Consumer price inflation and mortgage apps rise, ahead of final Fed decision of 2019

The Consumer Price Index (CPI) (chart) rose 0.3% month-over-month (m/m) in November, above the Bloomberg estimate calling for a 0.2% increase, and versus October's unrevised 0.4% gain. The core rate, which strips out food and energy, was 0.2% higher m/m, in line with expectations to match October's unadjusted rise. Y/Y, prices were 2.1% higher for the headline rate, north of forecasts calling for a 2.0% gain and compared to October's unadjusted 1.8% increase. The core rate was up 2.3% y/y, matching projections to be in line with October's unadjusted gain.

The MBA Mortgage Application Index rose 3.8% last week, following the prior week's 9.2% drop. The increase came as an 8.7% jump in the Refinance Index more than offset a 0.4% dip for the Purchase Index. The average 30-year mortgage rate ticked 1 basis point (bp) higher to 3.98%.

Treasuries are higher, with the yield on the 2-year note dipping 2 bps to 1.64%, while the yields on the 10-year note and the 30-year bond are decreasing 3 bps to 1.81% and 2.23%, respectively.The yield curve steepened last week, courtesy of a blowout Labor Report and lingering optimism of a U.S.-China "phase one" trade deal ahead of the December 15 deadline for further U.S. tariffs on Chinese goods. However, the U.S.-China trade front remains uncertain though the revised U.S., Mexico and Canada Agreement (USMCA) was agreed to be taken to the House for a vote. Moreover, tomorrow Europe will come into focus with the European Central Bank delivering its final monetary policy decision of the year and the U.K. holding a general election that is highly likely to have major Brexit implications.

Finally, the Federal Open Market Committee (FOMC) is set to conclude its two-day monetary policy meeting today, which will be the last of 2019, and has the potential to be a pivotal event for the markets, and the FOMC is highly-expected to leave its fed funds target unchanged after three cuts this year. However, the accompanying updated economic projections with the FOMC's dot plot of estimates for the target fed funds rate next year and beyond and inflation expectations are likely to garner heavy scrutiny, along with the customary press conference from Chairman Jerome Powell in the wake of Friday's stellar Labor Report and amid this week's key data on November inflation.

Schwab's Chief Fixed Income Strategist Kathy Jones notes in her 2020 Market Outlook: Fixed Income that ten-year Treasury yields should move higher in 2020 as recession fears ease. Kathy points out the lagged impact of the Federal Reserve's interest rate cuts, signs of stabilization in the global economy and a modest uptick in inflation expectations should provide a boost to intermediate- and long-term bond yields. However, she cautions that the risk to our outlook is the ongoing threat of trade tariffs weighing on business investment.

Europe higher ahead of monetary policy decisions and U.K. election

European equities were higher, but the gains were kept in check amid caution ahead of today's monetary policy decision out of the U.S. and tomorrow's outcome from the European Central Bank, as well as Thursday's U.K. general election, which could have major implications on the path of the U.K.'s divorce from the European Union, known as Brexit. Expectations of a win for Prime Minister Boris Johnson's Conservative Party have been running high and have boosted the British pound, as a win for the party could bring the best case Brexit scenario of an exit with a deal in place. However, recent exit polls have suggested the lead for the Conservative Party has narrowed. The global markets continued to eye the prospect of a U.S.-China "phase one" trade deal and yesterday's report from the Wall Street Journal that the two sides might be planning to delay further tariffs set to take place on December 15 appeared to keep concerns in check. The euro ticked higher versus the U.S. dollar and the British pound also gained ground, while bond yields in the region were mostly lower. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, delivers his latest article, 2020 Global Market Outlook: New Heroes Needed, noting that in 2020, global economic growth may depend on comprehensive trade deals and fiscal stimulus rather than actions by central bankers to reverse last year's slowdown in manufacturing and business investment.

The U.K. FTSE 100 Index was little changed, Germany's DAX Index rose 0.6%, France's CAC-40 Index gained 0.2%, and Spain's IBEX 35 Index advanced 0.8%, while Italy's FTSE MIB Index and Switzerland's Swiss Market Index ticked 0.1% higher.

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