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Markets Head into Holiday Weekend Lower

U.S. equities finished the last session of a holiday-shortened week lower, investors sifted through a flurry of economic and earnings data. Dow member Goldman Sachs, Citigroup, and Morgan Stanley all reported mostly better-than-expected results, but Wells Fargo missed on revenues, and all of the financial companies noted challenges from the geopolitical and macro environments. In other earnings news, Dow component UnitedHealth Group topped expectations and raised its guidance. Outside earnings, Twitter remained in focus after Elon Musk said he is making a takeover offer for the social media platform. In economic news, retail sales came in mixed for March, but February's figures were revised higher, jobless claims rose off a severely low level, consumer sentiment unexpectedly jumped, import prices came in hotter than expected, and business inventories continued to grow. Treasuries were sharply lower in the wake of the data, lifting yields, and the U.S. dollar traded higher, while crude oil prices jumped to add to recent gains, and gold fell. Europe gained ground as the markets focused on the European Central Bank's unchanged monetary policy decision, while markets in Asia finished mostly higher, with the Bank of Korea raising rates.

The Dow Jones Industrial Average fell 113 points (0.3%) to 34,451, the S&P 500 Index lost 54 points (1.2%) to 4,393, and the Nasdaq Composite decreased 293 points (2.1%) to 13,351. In moderate volume, 4.0 billion shares of NYSE-listed stocks were traded, and 4.5 billion shares changed hands on the Nasdaq. WTI crude oil rose $2.70 to $106.95 per barrel. Elsewhere, the gold spot price traded $9.60 lower to $1,975.10 per ounce, and the Dollar Index was 0.5% higher at 100.34. Markets were lower for the week, as the DJIA was down 0.8%, the S&P 500 lost 2.1%, and the Nasdaq Composite decreased 2.6%.

Dow component Goldman Sachs Group Inc. (GS $320) reported Q1 earnings-per-share (EPS) of $10.76, topping the $8.90 FactSet estimate, as revenues fell 26.9% year-over-year (y/y) to $12.9 billion, above the Street's forecast of $11.9 billion. The company said, "It was a turbulent quarter dominated by the devastating invasion of Ukraine. The rapidly evolving market environment had a significant effect on client activity as risk intermediation came to the fore and equity issuance came to a near standstill. Despite the environment, our results in the quarter show we continued to effectively support our clients and I am encouraged that our more resilient and diversified franchise can generate solid returns in uncertain markets." Shares came off the best levels of the day and were modestly lower.

Morgan Stanley (MS $85) posted adjusted Q1 EPS of $2.06, above the expected $1.71, with revenues declining 5.8% y/y to $14.8 billion, exceeding the estimated $14.3 billion. The company said, "The Firm delivered a strong ROTCE of 20% in the face of market volatility and economic uncertainty, demonstrating the resilience of our global diversified business. Institutional Securities navigated volatility on behalf of clients extraordinarily well, Wealth Management's margin proved resilient and the business added $142 billion net new assets in the quarter, and Investment Management benefited from its diversification. The quarter's results affirm our sustainable business model is well positioned to drive growth over the long term." Shares were higher.

Citigroup Inc. (C $51) announced Q1 earnings of $2.02 per share, topping the expected $1.43, with revenues declining 2.0% y/y to $19.2 billion, exceeding the forecasted $18.2 billion. The company noted a more volatile geopolitical and macro environment, highlighting its Treasury and trade solutions, along with fee growth, trade loans and cross-border transactions that benefited from higher rates. C also said its securities services unit also performed well, but said the current backdrop hurt its investment banking segment, and it saw higher cost of credit and higher expenses. Shares traded higher.

Wells Fargo & Company (WFC $46) reported Q1 EPS of $0.88, north of the projected $0.81, as revenues decreased 5.1% y/y to $17.6 billion, below the estimated $17.8 billion. WFC said its results included a $1.1 billion, or $0.21 per share, negative impact related to an allowance for credit losses. The company said its results in Q1 reflected the continued economic recovery and the progress it has made on its strategic priorities. WFC added that it had broad-based loan growth, growing both consumer and commercial loans from Q4, while credit quality remained strong despite the allowance for credit losses. The company added that while it will likely see an increase in credit losses from historical lows, it should be a net beneficiary from rising rates, it has a strong capital position, and its lower expense base creates greater margins from which to invest. Shares saw some pressure.

The Financial sector remained in focus amid the noticeable rise in Treasury yields as the markets contemplate the implications of an expected highly aggressive Fed and as the sector kicked off Q1 earnings season. For Q1, FactSet is estimating year-over-year (y/y) earnings growth of 4.5%, which would mark the lowest pace of growth since Q4 2020.

Schwab's Chief Investment Strategist Liz Ann Sonders discusses the market action in equities in her latest article, No Quarter (For Consistency), noting how stocks enjoyed a relief rally off of the March 8 lows, but conviction is lacking as the rebound was disproportionately favored low-quality segments of the market. She points out how historically, lower-quality segments of the stock market—including non-profitable companies—have launched into leadership positions when there is an expectation of accelerating economic growth, which she says is not a safe bet in the current environment.

At the industry level, Liz Ann adds, economically sensitive areas have not held up as well as the broader S&P 500 Index. Moreover, she says given the brutal start for the bond market this year, selling there has been a key source of buying pressure for equities. However, Liz Ann concludes, earnings will start to matter again.

In other earnings news, Dow component UnitedHealth Group Incorporated (UNH $535) posted adjusted Q1 profits of $5.49 per share, above the projected $5.36, with revenues growing 14.0% y/y to $80.1 billion, north of the expected $78.7 billion. UNH raised its full-year EPS guidance. UNH traded lower.

Outside of earnings, Elon Musk announced that he is offering to buy Twitter Inc. (TWTR $45) for $54.20 per share in cash. Musk said that since making his recent investment in the social media platform he now realizes that the company will neither thrive nor serve this societal imperative in its current form. TWTR acknowledged receiving the offer, saying that it will carefully review it to determine the course of action that it believes in in the best interest of the company and all stockholders. The company held a meeting to discuss the offer. TWTR finished lower.

Amid the volatility in the markets, you can find all our market commentary on our Market Insights page, and you can follow us on Twitter at @SchwabResearch.

Retail sales mixed, jobless claims rise, April consumer sentiment unexpectedly jumps

Advance retail sales (chart) for March rose by 0.5% month-over-month (m/m), versus the Bloomberg consensus forecast of a 0.6% rise, and compared to February's upwardly-adjusted 0.8% increase. Last month's sales ex-autos grew 1.1% m/m, compared to expectations of a 1.0% gain and as February's figure was revised higher to a 0.6% increase. Sales ex-autos and gas were up 0.2% m/m, matching estimates, while February's reading was adjusted upward to a 0.1% decline. However, the control group, a figure used to calculate GDP, dipped 0.1% m/m, versus projections of a 0.1% increase, and following February's favorably-revised 0.9% decline.

Initial jobless claims (chart) came in at a level of 185,000, for the week ended April 9, versus estimates calling for 170,000, and versus the prior week's upwardly-revised 167,000 level. The four-week moving averageincreased by 2,000 to 172,250, and continuing claimsfor the week ended April 2 fell by 48,000 to 1,475,000, versus estimates of 1,500,000. The four-week moving average of continuing claims dropped by 29,750 to 1,511,500.

The preliminary University of Michigan Consumer Sentiment Index (chart) for April showed that sentiment improved unexpectedly, rising to 65.7 from March's final reading of 59.4, and versus an expected dip to 59.0. The index bounced off the lowest level since 2011 as the expectations component of the report posted the largest monthly increase since 2006, per Bloomberg, and the current conditions portion of the survey also improved. The release showed that sentiment was boosted by the strong jobs market and wage expectations, which countered multi-decade high inflation. The 1-year inflation expectation remained at 5.4%, versus the expected 5.6% rate, the highest since December of 1981, and the 5-10 year inflation outlook held steady at 3.0%.

The Import Price Index (chart) increased 2.6% m/m for March, versus estimates of a 2.3% gain, and compared to February's upwardly-revised 1.6% increase. Versus last year, prices were up by 12.5%, compared to forecasts of an 11.9% increase and February's upwardly-revised 11.3% rise.

Business inventories (chart) rose 1.5% m/m in February, above forecasts of a 1.3% increase, after January's upwardly-revised increase of 1.3%.

Treasuries were lower following the retail sales, jobs, sentiment, and inflation data, and on the heels of a recent drop that has seen rates jump and the yield curve steepen. The bond markets have been driven primarily by expectations that the Fed is set to get substantially aggressive with tightening monetary policy to try to combat surging inflation. Recent Fedspeak has been a key contributor to the bond market moves, along with the minutes from the Fed's March meeting gave details of the balance sheet reduction plan and suggested the potential for multiple rate hikes of 50 basis points (bps), which would be the first time it raised rates in excess of 25 bps in over 20 years.

Schwab's Chief Fixed Income Strategist Kathy Jones notes in her commentary, Liftoff: Fed Hikes Rates, Signals More to Come, the key message from the Fed is that it is focused on fighting inflation and is prepared to hike short-term interest rates steadily and reduce its balance sheet until it reaches its goals. Kathy points out how we have no reason to doubt the Fed’s intentions, but we see a risk that it may be over-correcting after having missed the inflation surge since late last year. She cautions investors to be prepared for a bumpy ride. Kathy also offers her latest article, At Last—Income in the Fixed Income Market, noting how the first quarter was brutal for fixed income investors, as bond prices fell and yields rose. However, she notes how the steep rise in yields should mean that income investors can finally earn relatively attractive yields in the bond market, after enduring nearly three years of near-zero interest rates.

The yield on the 2-year note advanced 10 bps to 2.45%, the yield on the 10-year note was up 14 bps at 2.83%, and the 30-year bond rate gained 13 bps to 2.92%.

Please note: the U.S. equity and bond markets will be closed on Good Friday.

Europe and Asia higher amid data and central bank policy decisions European equities finished higher, with the markets gaining ground despite a host of recent hotter-than-expected inflation data on both sides of the pond, which have solidified expectations that monetary policies are set to tighten. The markets digested the European Central Bank's (ECB) monetary policy decision to leave its benchmark interest rate unchanged, while paying close attention to the customary press conference from ECB President Christine Lagarde. The ECB reiterated that its net bond-buying program is slated to end in Q3 and that "gradual" rate hikes will follow "some time after," but it will make major decisions on policy changes in June. The central bank said it will take whatever action is needed to fulfill its mandate to pursue price stability and to contribute to safeguarding financial stability. The euro fell versus the U.S. dollar and bond yields in the Eurozone rose following the decision. The British pound declined versus the greenback and bond yields in the U.K. gained ground.

The ongoing war in Ukraine remained a key drain on conviction, after several failed rounds of ceasefire talks and last week's new sanctions on Russia from the U.S. and European Union. ECB President Lagarde warned that the war in Ukraine has increased risks that near-term inflation gets hotter, and she said it is very attentive to the current uncertainties and are closely monitoring the incoming data in relation to the implications for the medium-term inflation outlook. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses the crisis and its implications in his article, War in Ukraine: Recession in Europe?. Jeff notes that the European economy was strengthening and recovering in February from the omicron-driven slowdown, and real-time indicators across Europe are still showing solid demand and activity even following Russia's invasion. Jeff says that signs of stability could support European stocks, but on the other hand, a weakening picture could also mean more volatility. Also, Jeff offers fresh commentary on the current environment, Deglobalization is Political, Not Economic, discussing how politics may have little impact on economic globalization or corporate profits—which gives little reason for investors to deglobalize their portfolio despite the headlines.

The U.K. FTSE 100 Index was up 0.5%, Germany's DAX Index and Italy's FTSE MIB Index rose 0.6%, France's CAC-40 Index advanced 0.7%, Spain's IBEX 35 Index rallied 0.9%, and Switzerland's Swiss Market Index gained 0.8%.

Asia mostly higher following data and monetary policy tightening out of South Korea

Stocks in Asia finished mostly higher, showing some resiliency as the markets digested economic data in the region, as well as this week's continued hot inflation reports out of the U.S., which come as the markets continue to grapple with the potential monetary policy tightening out of the U.S. and Europe. The ongoing war in Ukraine also remained a point of contention for the markets, along with the recent lockdowns in China as the country faces COVID spreading. Schwab's Liz Ann Sonders, Jeffrey Kleintop, and Kathy Jones note in our latest Schwab Market Perspective: Fog of War, the Fed has been signaling tighter monetary policy for months, and if it fails to follow through, it could lose its inflation-fighting credibility. On the other hand, if it tightens policy too much or too fast, it could push the economy into a recession. Moreover, they discuss how the Russian invasion of Ukraine overturned a lot of assumptions about the near-term direction of the global economy. Moreover, the spreading of COVID cases in China that have resulted in further lockdowns remained a source of uneasiness regarding the global economic impact and the potential for them to exacerbate supply chain issues. In economic news, the Bank of Korea raised its benchmark interest rate by 25 bps to 1.50%, matching expectations, while Australia's employment change came in slightly below expectations for March.

Japan's Nikkei 225 Index continued to rebound, rising 1.2%, with the yen recovering somewhat after a recent noticeable tumble. China's Shanghai Composite Index also rose 1.2%, and the Hong Kong Hang Seng Index traded 0.7% higher. South Korea's Kospi Index finished little changed following the monetary policy decision, and Australia's S&P/ASX 200 Index advanced 0.6%. Markets in India were closed for a holiday.

Stocks slip in shortened week

U.S. stocks moved mostly to the downside as the markets digested the last comprehensive look at the inflation picture before the Fed's early May monetary policy decision. Consumer prices remained at 40-year highs, though the core rate came in cooler than expected. Moreover, producer price inflation registered record high m/m and y/y gains to exacerbate inflation concerns, despite increased chatter of a potential peak. The inflation figures did little to change expectations that the Fed is set to get highly aggressive with its monetary policy tightening campaign, as the Treasury yield curve steepened, with rates on the long end moving higher. Meanwhile, Q1 earnings season kicked off with the heavyweights from the Financials sector reporting results that were mixed. Most companies noted negative impacts from the geopolitical and macro fronts, resulting in some loan loss reserve increases, and softness in capital markets amid cooled M&A and IPO activity. However, loan growth and credit activity continued to improve, while trading revenues remained buoyed by the volatility in the markets. Conviction also remained hamstrung by the ongoing war in Ukraine, as well as recently implemented lockdowns in China—the world's second-largest economy—that threatened further supply chain disruption and dampened the outlook for the global economy.

As such, the Health Care, Information Technology, Communications Services—which make up about half of the S&P 500—sectors led to the downside, along with Financials as the markets grappled with the flattening of the Treasury yield curve seen so far in 2022 and this week's earnings results. However, Materials issues outperformed amid the continued rally in commodity prices, while Industrials also led to the upside, possibly aided by upbeat guidance and commentary from Delta Air Lines Inc. (DAL $42) that appeared to lift travel and leisure stocks. The defensively-natured Consumer Staples also helped trim the week's drawdown. Elsewhere, the U.S. dollar continued to rally, with the Dollar Index breaching the 100 mark for the first time since the summer of 2020, gold rose for a second-straight week, and crude oil prices rebounded, with WTI prices moving back above the $100 per barrel mark to keep inflation concerns palpable.

Next week, earnings season's ramp-up will likely be the main focus of the markets but the economic calendarwill also deliver some reports that could garner attention. Housing will be prominent and given the sharp jump in interest rates, the releases of the NAHB Housing Market Index, building permits and housing starts, and existing home sales, will likely be scrutinized as the markets look to see if affordability headwinds are starting to curb the red-hot housing market. The mid-week release of the Fed's Beige Bookhas the potential to move markets given it is a report on the nation's business activity that is used by the Central Bank to prepare for its May 4 monetary policy decision. Other reports due out next week that deserve a mention include, jobless claims for the week ended April 16, the Leading Index, and S&P Global's preliminary April Manufacturing and Services PMIs.

Next week's international economic calendar will be headlined by a plethora of S&P Global Manufacturing and Services PMIs out of Australia, Japan, the Eurozone, and U.K. Other reports due out that could foster market reactions include: China—Q1 GDP, industrial production, retail sales, and 1-year and 5-year loan prime rates. India—wholesale price inflation. Japan—trade balance, and national consumer price inflation statistics. Eurozone—industrial production, trade balance, and consumer confidence, along with the German Producer Price Index. U.K.—retail sales, and consumer confidence.

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