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Q2 Begins Upbeat After Dismal Q1

U.S. equities finished higher in a rollercoaster ride of a session, starting Q2 off in positive fashion after posting the worst quarterly performance in two years in Q1. Investors sifted through a slew of key economic data and assessed with what the implications are for how aggressive the Fed will be. The labor report showed that although job growth missed, underlying components were solid, while ISM and S&P Global indicated that manufacturing growth remains healthy, but inflation and supply chain challenges continued. Meanwhile, the ongoing war in Ukraine remained in focus with Russia and Ukraine continuing ceasefire talks today. Treasuries were mixed, with the yield curve inverting for the first time since 2006, and the U.S. dollar gained ground, while crude oil prices fell below the $100 per barrel mark, and gold tumbled. Equity news remained sparse, with BlackBerry missing cybersecurity revenue projections and offering a disappointing outlook, GameStop announced plans to ask for shareholder approval to increase its share count to pave the way for a stock split, while some automakers reported disappointing Q1 U.S. sales. Stocks in Europe gained ground despite another record high consumer price inflation report, while markets in Asia closed out the week mixed.

The Dow Jones Industrial Average rose 140 points (0.4%) to 34,818, the S&P 500 Index gained 15 points (0.3%) to 4,546, and the Nasdaq Composite increased 41 points (0.3%) to 14,262. In moderate volume, 4.5 billion shares of NYSE-listed stocks were traded, and 4.9 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.01 to $99.27 per barrel. Elsewhere, the gold spot price traded $27.10 lower to $1,926.90 per ounce, and the Dollar Index was 0.3% higher at 98.58. Markets were mixed for the week, as the DJIA was down 0.1%, while the S&P 500 gained 0.1%, and the Nasdaq Composite increased 0.7%.

BlackBerry Limited (BB $7) reported adjusted fiscal Q4 earnings-per-share (EPS) of $0.01, compared to the FactSet estimate calling for a $0.05 per share loss, as revenues fell 11.9% year-over-year (y/y) to $185 million, above the Street's forecast of $177 million. However, the company's cybersecurity revenues, which are the largest portion of its sales, came in below estimates. BB issued current year guidance that was softer than expected, with the company noting a number of industry-wide challenges, such as supply chain constraints and the war in Ukraine. Shares fell.

GameStop Corp. (GME $165) announced that it is seeking stockholder approval to increase the number of authorized shares from 300 million to 1 billion in order to implement a stock split. Shares of the video game retailer were lower.

Shares of General Motors Company (GM $43) fell after the automaker reported a 20% decline in Q1 U.S. auto sales, losing out to Toyota Motor Company (TM $180) for a second consecutive quarter, as the Japanese car manufacturer kept its position as the world's top seller, albeit seeing a 15% drop in sales for the quarter. South Korea's Hyundai Motor Company(HYMPY $36) posted a 1.4% increase in the U.S., even though overall sales for the brand declined 4%. The companies continued to cite a dearth in semiconductor chips and the supply-chain disruptions due to the pandemic for the declines. TM moved modestly higher, while HYMPY traded lower.

The equity markets turned higher late in the day after coming off a dismal start of the year as Q1 performance was the worst quarter in two years even as a recent rally brought the S&P 500 out of correction territory and rescued the Nasdaq from a bear market. The bounce back has come amid resiliency in the face of the ongoing war between Russia and Ukraine. Optimism for a diplomatic resolution has faded somewhat as multiple rounds of talks between the two have yielded little to no progress. However, the two sides are set to continue talks today after Russia called discussions earlier this week "constructive" which seemed to offer some hope but skepticism remains. Meanwhile, the markets continue to be grappling with expectations that the Fed is set to get aggressive with its monetary policy tightening campaign to try to tame elevated inflation pressures. Also, the Treasury bond markets are being closely watched with portions of the curve inverting and other parts close to inverting as well. Such occasions have historically preceded recessions but with a wide range of the length of time before they occur.

Amid this backdrop Schwab's Chief Investment Strategist Liz Ann Sonders offers her article, Recession Blues: Unfounded Fear?, noting how even if a recession is not imminent, the playbook deserves a dusting off as rising inflation, tighter monetary policy, and the war in Ukraine all crimp economic growth prospects. Liz Ann also points out in her latest article, Will Rising Federal Debt Slow Economic Growth?, how over the past 70 years, rising government debt generally has been accompanied by weaker economic activity, but it's not a simple relationship.

Additionally, we recently changed all our sector calls to "neutral" until there's more clarity on how the Russia-Ukraine war will affect the global economy as discussed in our latest Schwab Sector Views: War Clouds Our Outlook.

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. March jobs report shows labor market remains tight, manufacturing growth remains

Nonfarm payrolls (chart) rose by 431,000 jobs month-over-month (m/m) in March, compared to the Bloomberg consensus estimate of a 490,000 rise, while February's figure was adjusted higher to an increase of 750,000 from the initial reading of a 678,000 gain. Excluding government hiring and firing, private sector payrolls advanced by 426,000, versus the forecasted rise of 496,000, after increasing by 739,000, revised higher from the preliminarily reported 654,000 gain in February. The labor force participation rate rose to 62.4% from February's unrevised 62.3% figure, and matching forecasts.

The Bureau of Labor Statistics said notable job gains continued in leisure and hospitality, professional and business services, retail trade, and manufacturing.

The unemployment rate dropped to 3.6%, from 3.8%, with forecasts calling for it to dip to 3.7%. The underemployment rate—including total unemployed and those employed part time for economic reasons, along with people who are marginally attached to the labor force—declined to 6.9% from the prior month's 7.2% rate. Average hourly earnings were up 0.4% m/m, in line with projections, and compared to February's upwardly-revised 0.1% rise. Compared to last year, wages were 5.6% higher, north of forecasts of a 5.5% rise. Finally, average weekly hours dipped to 34.6 from February's unrevised 34.7, where it was expected to remain.

The March Institute for Supply Management (ISM) Manufacturing Index (chart) showed manufacturing growth (a reading above 50) unexpectedly deteriorated but continued to show expansion. The index declined to 57.1 from February's 58.6 level, and versus estimates of an increase to 59.0. The softer-than-expected report came as both new orders and production fell but continued to grow. However, inventories expanded, employment growth accelerated, and supplier delivery times slowed. Inflation pressures ramped back up, with prices paid jumping 11.5 points to 87.1.

The ISM said, "The U.S. manufacturing sector remains in a demand-driven, supply chain-constrained environment. In March, progress was made to solve the labor shortage problems at all tiers of the supply chain, which will result in improved factory throughput and supplier deliveries. Panelists reported lower rates of quits and early retirements compared to previous months, as well as improving internal and supplier labor positions. March brought back increasing rates of price expansion, due primarily to instability in global energy markets. Suppliers are not waiting to experience the full impacts of price increases before negotiating with their customers. Panel sentiment remained strongly optimistic regarding demand, with six positive growth comments for every cautious comment, down from February’s ratio of 12-to-1."

The final March S&P Global U.S. Manufacturing PMI Index was upwardly-revised to 58.8, above estimates calling for an unrevised 58.5 level. The index was above February's reading of 57.3. A reading above 50 denotes expansion.

S&P Global said the report signaled a sharp improvement in operating conditions across the U.S. manufacturing sector. It added that overall growth was supported by faster increases in output and new orders, as domestic and foreign client demand ticked higher, while firms noted that fewer supply bottlenecks allowed production to expand at a faster rate. The report also showed supplier delivery times deteriorated to the smallest extent since January 2021, and amid the stronger demand conditions firms stepped up their hiring activity, but costs continued to soar.

Construction spending (chart) increased 0.5% m/m in February, versus projections of a 1.0% gain and down from January's upwardly-revised 1.6% rise. Residential spending grew 1.1%, and non-residential spending dipped 0.1%.

Treasuries were mixed after a recent drop that lifted yields amid increased expectations of a more aggressive Fed monetary policy tightening cycle as it tries to combat the surge in inflation. Also, the yield curve spread is garnering heavy attention, with some portions of the curve inverting to foster talk of the potential for a recession on the horizon. 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. 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. Investors should be prepared for a bumpy ride.

The yield on the 2-year note rose 17 basis points (bps) to 2.45%, the yield on the 10-year note gained 6 bps to 2.38%, while the 30-year bond rate ticked 3 bps lower to 2.43%.

Europe higher despite data, Asia mixed to close out week

European equities finished higher, as the markets continued to eye the ongoing war in Ukraine, with ceasefire talks continuing today, but there remains a healthy amount of skepticism as several rounds have failed to deliver positive outcomes. Also, the moves in the oil market continued to garner attention, with prices falling after the U.S. announced another release from its strategic reserves and OPEC and its allies, known as OPEC+, held its production targets steady. Moreover, this week Europe's largest economy of Germany enacted an emergency gas plan to prepare for a potential cut-off of Russian gas as President Putin is insisting that natural gas be paid in rubles.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses the crisis and its implications in his latest article War: Impact on Earnings, noting how the geopolitical impact on earnings, the most important driver of stock prices, has remained modest so far and global companies appear to be on a path for earnings growth in 2022. Jeff also discusses the potential impact on the region in his commentary, War in Ukraine: Recession in Europe?.Jeff suggests the odds of a recession in Europe are above average and rising but still below 50%. He 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.

The markets digested a host of economic data, headlined by the Eurozone estimating March consumer price inflation at a 7.5% y/y pace, a new record high, and up from the 5.9% rate posted in February. Meanwhile, March Eurozone and U.K. Manufacturing PMIs were both revised lower than initially reported, but both remained in expansion territory. The euro and British pound were lower versus the U.S. dollar and bond yields in the Eurozone and the U.K. gained ground.

The U.K. FTSE 100 Index was up 0.3%, France's CAC-40 Index rose 0.4%, Germany's DAX Index rallied 1.0%, Spain's IBEX 35 Index increased 0.7%, Italy's FTSE MIB Index advanced 0.6%, and Switzerland's Swiss Market Index gained 0.1%.

Stocks in Asia finished mixed to finish out a choppy week, with the markets continuing to monitor the ongoing war in Eastern Europe and prospects for tighter monetary policies in the U.S. and Europe to try to stymie persisting inflation pressures. Schwab's Jeffrey Kleintop, Liz Ann Sonders, and Kathy Jones note in our latest Schwab Market Perspective: Fog of War, how the Russian invasion of Ukraine overturned a lot of assumptions about the near-term direction of the global economy. "Black swan" events like this don't happen often, but we're in the middle of one now, and the situation is changing daily.

A host of economic data was in focus as Japan's Q1 Tankan Large Manufacturing Index showed sentiment among big manufacturers deteriorated quarter-over-quarter but not by as much as economists had anticipated. Japan's March Manufacturing PMI was also revised to a higher pace of expansion than initially reported. Elsewhere, a private survey of Chinese March manufacturing output fell more than expected and hit contraction territory, confirming yesterday's official government report.

Japan's Nikkei 225 Index decreased 0.6% following the data and as the yen resumed a slide after a recent rebound. Australia's S&P/ASX 200 Index dipped 0.1% and South Korea's Kospi Index declined 0.7%. Outperforming today, China's Shanghai Composite Index rose 0.9% amid some strength in consumer related stocks despite new COVID lockdowns this week, and despite some weakness in technology issues on continued concerns about potential U.S. de-listings. Also, the Hong Kong Hang Seng Index nudged 0.2% higher, and India's S&P BSE Sensex 30 Index rallied 1.2%.

Stocks subdued after two-week rally

Coming off a two-week rally that trimmed some of the dismal start to 2022, U.S. stocks were a bit lackluster this week as the markets still grappled with a flurry of headwinds. The ongoing war in Ukraine that has exacerbated inflation pressures and market skittishness remained among the biggest area of contention as talks continued to fail to reach any breakthrough. Moreover, growing expectations that the Fed will have to stomp on the monetary policy brakes to fight inflation continued to fuel wild swings in the markets. As such, inversions of parts of the Treasury yield curve garnered some heavy attention, given its track record for signaling recessions historically. The crude oil markets were also eyed as the commodity cooled a bit, with WTI prices falling below the $100 per barrel mark, possibly offering some reprieve. The U.S. dollar remained choppy and in a range that has followed its early March breakout and gold prices gave back some of last week's gains.

Sector performance was mixed as a result of this week's developments, with defensively-natured Real Estate, Utilities, and Consumer Staples among the outperformers, while Financials were the worst performers amid concerns about the impact of the yield curve inversions, which appeared to also weigh on cyclically-natured Industrials and Materials. Energy stocks took a breather from their decisive outperformance in Q1 as crude oil prices came off the boil.

With earnings season being a week out, next week's data releases will be a tad on the lighter side but there are some economic reports on the docket that the markets are likely to highly scrutinize. S&P Global and ISM will deliver their Services PMIs counterparts to show consumer behavior toward services consumption. However, the mid-week release of the minutes from the Federal Open Market Committee's (FOMC) March meeting where it began its rate hike campaign is likely to carry the most weight, along with a host of Fedspeak that bookend the release. Other reports due out next week that deserve a mention include, jobless claims for the week ended April 2 and the trade balance.

The international economic calendar next week has some reports that have the potential to foster market reactions, highlighted by a host of Services PMIs out of Australia, China, India, Japan, the Eurozone and the U.K. Monetary policy decisions from the Reserve Bank of Australia and the Reserve Bank of India are also some key events that may come into focus. Other overseas reports due out next week worth mentioning include, Eurozone retail sales and producer price inflation figures, along with German factory orders, industrial production and trade balance.

With volatility likely set to continue and the markets remaining at the mercy of the headlines surrounding the war in Ukraine and the Fed, check out Managing Director of Trading and Derivatives for the Schwab Center for Financial Research Randy Frederick's article, Trading the News, in which he offers four common types of news releases—and how to consider trading them.

©2022 Charles Schwab & Co., Inc. All rights reserved. Member SIPC.


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