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Positive Economic Data Lifts Stocks

U.S. equities rallied heading into the weekend, but the bounce wasn't enough to keep the major indexes out of negative territory for the week. The markets digested a host of economic and earnings data. June retail sales rose more than expected, consumer sentiment improved from record lows, July manufacturing output in New York surprisingly jumped into expansion territory, and import price inflation came in cooler than expected. However, not all the data was upbeat as industrial production and capacity utilization came in below forecasts. The Street reacted positively to Q2 earnings season as it started to heat up. Wells Fargo & Company missed expectations but offered favorable net interest income performance and guidance, while Citigroup topped forecasts, along with Dow component UnitedHealth Group. Treasuries were higher following the data, to apply downside pressure on yields, and the yield curve inversion remained intact. The U.S. dollar pulled back somewhat but remained at multi-decade highs following a recent rally. Gold was lower and crude oil prices were solidly higher. Europe was higher to close out the week, while Asia finished mixed, with China and Hong Kong falling after a softer-than-expected Chinese Q2 GDP report.

The Dow Jones Industrial Average rallied 658 points (2.2%) to 31,288, the S&P 500 Index increased 73 points (1.9%) to 3,863, and the Nasdaq Composite rose 201 points (1.8%) to 11,452. In moderate volume, 4.1 billion shares of NYSE-listed stocks were traded, and 4.3 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.81 to $97.59 per barrel. Elsewhere, the gold spot price nudged $2.60 lower to $1,703.20 per ounce, and the Dollar Index lost 0.4% to 108.10. Markets were lower for the week, as the DJIA shed 0.2%, the S&P 500 fell 0.9%, and the Nasdaq Composite lost 1.6%.

Wells Fargo & Company (WFC $41) reported Q2 earnings-per-share (EPS) of $0.74, including an $0.08 per share impairment charge relating to equity securities predominantly in its affiliated venture capital business driven by market conditions. FactSet had expected the company to report EPS of $0.80. Revenues declined 16.0% year-over-year (y/y) to $17.0 billion, compared to the forecasted $17.5 billion. The company noted that while its net income declined in Q2, its underlying results reflected its improving earnings capacity with expenses declining and rising interest rates driving strong net interest income growth. WFC added that loan balances increased with growth in both consumer and commercial loans, and credit quality remaining strong, though noninterest income declined as higher interest rates and weaker financial markets reduced its venture capital, mortgage banking, investment banking, and brokerage advisory results. Looking ahead, the company said its results should continue to benefit from the rising interest rate environment, but it does expect credit losses to increase from "these incredibly low levels," but it has yet to see a meaningful deterioration in either its consumer or commercial portfolios. WFC traded solidly higher as the markets seem upbeat about its net interest income performance and guidance.

Citigroup Inc. (C $50) posted Q2 EPS of $2.19, compared to the estimated $1.68, with revenues rising 11.0% y/y to $19.6 billion, versus the projected $18.4 billion. The company said higher interest income was primarily driven by the benefits of higher rates as well as strong volumes across its institutional clients group and personal banking and wealth management. Also, C noted that its non-interest revenue also increased, driven by fixed income markets, which more than offset lower non-interest income in investment banking. The company said its net income fell y/y, however, as higher cost of credit and an increase in expenses more than offset its rise in revenues. C also said it will suspend its share repurchase program. Shares rallied.

Dow member UnitedHealth Group Incorporated (UNH $530) announced adjusted Q2 profits of $5.57 per share, above the expected $5.21, as revenues grew 13.0% y/y to $80.3 billion, topping the forecasted $79.7 billion. UNH raised its full-year EPS guidance. Shares were higher.

The markets remained volatile as they digested today's corporate results, mainly from the Financials sector, as Q2 earnings season heated up.

Schwab's Chief Investment Strategist, Liz Ann Sonders discusses the economy in her latest article, What's Going On…With Jobs, how the June jobs report was cheered by economic bulls given its strength in level terms, but rates of change among leading indicators don't favor a soft-landing outcome for the economy. You can follow Liz Ann on Twitter: @LizAnnSonders.

Read all our market commentary on our Insights & Education page, and you can follow us on Twitter at @SchwabResearch.

Retail sales top forecasts, import prices cool, July consumer sentiment improves from record low

Advance retail sales (chart) for June rose 1.0% month-over-month (m/m), versus the Bloomberg consensus forecast of a 0.9% rise, and compared to May's positively-adjusted 0.1% decrease. Last month's sales ex-autos also gained 1.0% m/m, compared to expectations of a 0.7% rise and as May's figure was revised higher to a 0.6% increase. Sales ex-autos and gas were up 0.7% m/m, topping estimates of a 0.1% rise, while May's reading was adjusted lower to a 0.1% dip. The control group, a figure used to calculate GDP, advanced 0.8% m/m, versus projections of a 0.3% increase, and following May's negatively-revised 0.3% decrease.

The report showed solid gains for nonstore retailers—including online activity—as well as motor vehicles, furniture, food services and drinking places, and sporting goods. However, sales at gasoline stations led the way, reflecting the surge in gas prices. Building materials, clothing, and health & personal care sales all moved lower.

In other consumer related news, the preliminary University of Michigan Consumer Sentiment Index (chart) for July showed that sentiment unexpectedly improved, rising to 51.1 from June's final reading of 50.0, where it was expected to remain. The index moved off a record low as a continued deterioration in the expectations component of the report was more than offset by solid improvement in the current conditions portion. The 1-year inflation forecast dipped to 5.2% from 5.3% in June, versus expectations that it would hold at June's level, and the 5-10-year inflation outlook also declined to 2.8%, from 3.1%, compared to forecasts of a dip to 3.0%.

The Empire Manufacturing Index, a measure of activity in the New York region, showed the index unexpectedly jumped back into a level depicting expansion (a reading above zero) this month. The index rose to 11.1 from the -1.2 reading posted in June and compared to estimates of a decline to -2.0.

The Import Price Index (chart) rose 0.2% m/m for June, versus estimates of a 0.7% gain, and compared to May's downwardly-revised 0.5% gain. Versus last year, prices were up by 10.7%, well below forecasts of an 11.4% increase and May's downwardly-revised 11.6% rise. Import prices excluding petroleum were down 0.4% m/m, versus estimates to rise 0.2%.

The Federal Reserve's report on industrial production (chart) showed a 0.2% m/m decrease in June, compared to estimates of a 0.1% gain, and versus May's downwardly revised flat reading. The Fed said manufacturing output declined for a second-straight month but even so, it rose at an annual growth rate of 4.2% in Q2. The report also showed mining production rose solidly, but utilities output fell. Capacity utilization dipped to 80.0% from the prior month's upwardly adjusted 80.3% rate, and versus forecasts of an increase to 80.8%. Capacity utilization is a 0.4 percentage point above its long-run average.

Business inventories (chart) rose 1.4% m/m in May, matching forecasts, after April's upwardly-revised increase of 1.3%.

Treasuries were higher following the data. The inversion of the 2-year and 10-year notes continued, with the markets grappling with what the ultimate impact of an aggressive Fed to fight high inflation will be on the economy.

Schwab's Chief Fixed Income Strategist Kathy Jones discusses this in her latest article, Fed Rate Hikes: Why Are Bond Yields Falling?, noting that the Federal Reserve's pledge to curb inflation appears to have resonated with the market. She adds that if the central bank raises rates as much as recent projections indicate, the risk of recession rises. Kathy concludes that consequently, bond yields have been pulling back from recent highs and the yield curve has flattened. You can follow Kathy on Twitter: @KathyJones.

The yield on the 2-year Treasury note was down 1 basis point (bp) to 3.12%, the yield on the 10-year note declined 4 bps to 2.92%, and the 30-year bond rate decreased 1 bp to 3.09%.

Europe mostly higher to close out the week

European equities rebounded to trim some of the week's losses, as the markets sifted through some mixed earnings reports and relatively upbeat economic data out of the U.S. Inflation concerns remained elevated, exacerbated by this week's decision by Russia to suspended gas delivery to Germany due to maintenance on the Nord Stream 1 pipeline which stoked fears that Russia may further disrupt their deliveries past the planned maintenance. The markets have been choppy as of late as high inflation drives monetary policies on both sides of the pond to aggressively tighten their stances to try to arrest the surge in pricing pressures. However, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Shortages Have Led to Gluts, noting how inventory gluts have been bad news for the stocks of companies experiencing them, but could also be indicating an inflation peak, which tends to be an ingredient for market bottoms. You can follow Jeff on Twitter: @JeffreyKleintop.

The economic calendar in Europe remained relatively quiet but new car registrations in the Eurozone fell in June and the Eurozone trade deficit unexpectedly narrowed for May. Political uncertainty also lingered after Italian Prime Minister Mario Draghi announced his resignation after yesterday's parliamentary confidence vote. However, Italy's President Mattarella rejected his resignation. The euro and British pound rebounded versus the U.S. dollar, with both finishing higher. The greenback has rallied sharply to multi-decade highs which saw the euro reach parity with the greenback for the first time in 20 years. Bond yields in the Eurozone were mixed and rates in the U.K. traded lower.

The U.K. FTSE 100 Index and Switzerland's Swiss Market Index were up 1.7%, France's CAC-40 Index increased 2.0%, Germany's DAX Index rose 2.8%, while Italy's FTSE MIB Index and Spain's IBEX 35 Index were 1.8% higher.

Asia mixed as China and Hong Kong markets fall on the heels of data

Stocks in Asia finished mixed with the markets continuing to wrestle with rising global recession concerns that have ramped up amid tightening monetary policies globally, and COVID lockdowns in China. Also, the persistent rally in the U.S. dollar is adding to the uneasiness, with the greenback hitting a multi-decade high versus the yen as the Bank of Japan abstains from moving off its ultra-loose policy. China, which has also diverged from global central banks to try to combat the impact of the lockdowns was in focus today as it released a host of mixed economic data. China's Q2 GDP growth came in at a 0.4% y/y pace, down sharply from the 4.8% growth in Q1 and below expectations of a 1.2% gain. Additionally, China's industrial production for June rebounded but by a smaller amount than anticipated, but its retail sales for last month rose at a faster pace than anticipated.

Amid this backdrop Schwab's Jeffrey Kleintop discusses in his article, Recession in China?, how China's economy and consumer market has likely slipped into a recession, at least by China's standards. Jeff takes a look at the short-term and long-term impacts of any extended disruption of the lockdowns on consumer spending and business output.

Japan's Nikkei 225 Index rose 0.5%, with the yen stabilizing versus the U.S. dollar after its recent dramatic drop versus the greenback. China's Shanghai Composite Index fell 1.6%, the Hong Kong Hang Seng Index dropped 2.2%, with technology stocks seeing pressure as regulatory scrutiny has resurfaced this week. South Korea's Kospi Index increased 0.4%, Australia's S&P/ASX 200 Index declined 0.7%, and India's S&P BSE Sensex 30 Index moved 0.7% to the upside.

Despite Friday bunce back stocks end week lower

The S&P 500 Index continued to alternate between weekly gains and losses, following last week's advance with a pullback this week. The markets continued to be at the mercy of uncertainty regarding the ultimate implications of aggressive Fed tightening amid the backdrop of signs of slowing economic activity. Volatility remained palpable as the markets digested hot June inflation data, along with the start of Q2 earnings season that produced mixed results. The Financials sector was in focus as some of the biggest institutions got the ball rolling and their results showed still strong consumer activity and trading revenues—amid the lingering volatility—was offset by higher credit costs and declining investment banking results as M&A and IPO action cools.

Consumer and producer price inflation data for last month fostered uncertainty regarding if the Fed will get even more aggressive with monetary policy, preserving elevated recession concerns. The Treasury yield curve widened its inversion as rates on the mid-to-long end moved lower amid the recession concerns, while short-term rates were buoyed by increasing expectations that the Fed may push harder on the monetary policy tightening accelerator. The U.S. dollar's continued rally to 20-year highs added another layer to the uneasiness, which may have contributed to the declines for crude oil and gold prices, with the latter hitting lows not seen in over a year. The markets did trim weekly declines, aided by the host of upbeat reads on retail sales, consumer sentiment, and manufacturing output in New York.

Next week, although the economic calendar will be relatively light and the Fed goes quiet ahead of the July 27 monetary policy decision, the earnings calendar will continue to shift into high gear to pick up the slack. However, there are some reports on the economic docket that could garner attention. Housing data will headline the docket, with the releases of the NAHB Housing Market Index for July, as well as June reports on housing starts and building permits, and existing home sales. The Leading Index for last month will also come into focus, along with jobless claims for the week ended July 16. However, the headlining report may be S&P Global's preliminary July Manufacturing and Non-Manufacturing PMIs, which will join a plethora of global reports out of Australia, Japan, the Eurozone, and the U.K.

In addition to the global PMI reports, next week's international economic calendar could move the markets, headlined by monetary policy decisions out of the Eurozone and Japan. Other reports due out next week that deserve a mention include China—1-year and 5-year loan prime rate decisions. Japan—trade balance, and national consumer price inflation statistics. Eurozone—consumer confidence, construction output, and the final read on consumer price inflation. U.K.—inflation statistics, employment change, and retail sales.


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