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Stocks Head into the Weekend Higher

U.S. equities ended higher in the final trading session of the week, notching weekly gains in the process, seeing strength in Information Technology stocks that seemed to regain some footing. The moves came as the markets got another hotter-than-expected read on wholesale price inflation, and as Treasuries saw some pressure, with yields paring back some of the declines seen this week. The U.S. dollar also paused in its weekly pullback, while gold and crude oil prices were lower. In equity news, Levi Strauss topped Q1 earnings forecasts, Netflix signed a deal with Sony Pictures, and Dow member Boeing Company recommended to 16 customers that they address a potential electrical issue in a specific group of 737 MAX airplanes. Europe finished mixed after some disappointing German and French economic reports, while Asia was mostly lower following some hotter-than-expected Chinese inflation figures.

The Dow Jones Industrial Average rose 297 points (0.9%) to 33,801, the S&P 500 Index increased 32 points (0.8%) to 4,129, and the Nasdaq Composite was up 71 points (0.5%) at 13,900. In moderate volume, 789 million shares were traded on the NYSE and 3.9 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.28 to $59.32 per barrel. Elsewhere, the Bloomberg gold spot price was $12.17 lower at $1,743.67 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—nudged 0.1% higher to 92.16. Markets were higher for the week, as the DJIA moved 2.0% to the upside, the S&P 500 gained 2.7%, and the Nasdaq Composite jumped 3.1%.

Levi Strauss & Co. (LEVI $26) reported Q1 earnings-per-share (EPS) of $0.34 ex-items, versus the $0.24 FactSet estimate, while including one-items EPS were $0.35. Revenues declined 13.0% year-over-year (y/y) to $1.3 billion, roughly in line with the Street's forecast. The jeanswear company noted a faster-than-expected recovery in its business and a 41% y/y increase in digital revenues, but the continued negative impact of the COVID-19 pandemic, notably in Europe where approximately a third of its full store footprint was closed during the quarter, and 15% globally. LEVI issued Q2 EPS guidance that was slightly north of expectations and announced an increase of its quarterly dividend to $0.06 per share from $0.04 per share. Shares were higher.

Netflix Inc. (NFLX $555) is in focus on news that is has signed a deal with Sony Pictures, the entertainment division of Japan's Sony Group Corporation (SONY $112), for exclusive U.S. rights to its movies including "Spider Man" and "Jumanji" after they have left the theaters. NFLX was lower and SONY gained ground.

Shares of Dow member Boeing Company (BA $252) slipped after reporting that it has recommended to 16 customers that they address a potential electrical issue in a specific group of 737 MAX airplanes prior to further operations. BA added that it is working closely with the U.S. Federal Aviation Administration on this production issue.

With the S&P 500 back in record high territory Schwab's Chief Investment Strategist Liz Ann Sonders offers her article, Hit Me With Your Best Shot: Speculative Trades Take a Breather, noting how trendy and speculative trades have gained micro bubble status and rolled over of late, but their weakness hasn't infected the broader market. She also notes how major indices have climbed higher this year, but not without large and swift shifts in leadership among sectors, while some valuation metrics are near or above levels seen during the early-2000s tech bust, but there are healthier underlying fundamentals this time around.

Wholesale price inflation tops expectations, Treasury yields and dollar trimming weekly losses

The Producer Price Index (PPI) (chart), showed prices at the wholesale level in March rose 1.0% month-over-month (m/m), north of the Bloomberg consensus estimate calling for a match of February's 0.5% gain. The core rate, which excludes food and energy, increased 0.7% m/m, topping estimates to match the prior month's 0.2% increase. Y/Y, the headline rate was 4.2% higher, above projections of a 3.8% gain and the prior month's 2.8% rise. The core PPI increased 3.1% y/y last month, above estimates of a 2.7% increase and February's 2.5% rise.

February wholesale inventories (chart) were revised higher to a 0.6% m/m gain, versus expectations to be unrevised at the preliminary estimate of a 0.5% increase and compared to January's unrevised 1.4% gain. Sales declined 0.8% after January's downwardly revised 4.4% rise.

Treasuries were lower, as the yield on the 2-year note ticked 1 basis point (bp) higher to 0.16%, the yield on the 10-year note gained 4 bps to 1.66%, and the 30-year bond rate rose 3 bps to 2.34%. Bond yields and the U.S. Dollar Index pared weekly losses and Schwab's Chief Fixed Income Strategist Kathy Jones discusses bonds and the greenback in her articles Why Bonds Still Matter and Will the U.S. Dollar Lose its Reserve Status?

Moreover, amid the backdrop of the massive amounts of monetary and fiscal stimulus support, Schwab's Liz Ann Sonders addresses in her latest commentary the question of Will Rising Federal Debt Slow Economic Growth?, and Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his latest article, Stimulus Payback: 2023.

Europe mixed with data in focus, Asia mostly lower following China inflation reports

European equities finished mixed following some solid weekly gains in most of the region, as the markets digested some disappointing February economic data out of Germany and France, which was bookended by hotter-than-expected inflation data in China and the U.S. Germany's exports rose by a slightly smaller amount than projected and the nation's industrial production unexpectedly fell. Moreover, France's industrial production and manufacturing output both surprisingly dropped. The euro and the British pound declined versus the U.S. dollar, as the greenback rebounded from a drop seen this week. Bond yields in the Eurozone and the U.K. moved higher to likely stymie the Financials sector, while Energy issues also lagged as crude oil prices added to a weekly loss. However, Industrials and Information Technology issues rose as the lingering global economic optimism appeared to overshadow the uptick in bond yields, along with the continued dovish tone from U.S. Federal Reserve Chairman Jerome Powell at the International Monetary Fund's (IMF) Spring meeting.

Schwab's Jeffrey Kleintop notes in his article Bull? Bear? How about a "Bunny" Market?, that there are a variety of clashing factors affecting the stock market this year, including worries over rising interest rates countered by the confidence seen in booming business investment, and robust M&A activity. We expect the bunny market to continue hopping around in the weeks ahead, as it reacts to these factors.

The U.K. FTSE 100 Index was down 0.4%, France's CAC-40 Index ticked 0.1% higher, Germany's DAX Index gained 0.2%, Switzerland's Swiss Market Index rose 0.3%, Spain's IBEX 35 Index declined 0.8%, and Italy's FTSE MIB Index decreased 0.6%.

Stocks in Asia finished mostly to the downside to close out a mixed week, with China reporting that March consumer prices rebounded slightly more than expected though its wholesale price inflation rose much more than anticipated. The data comes as inflation expectations have gained ground and as the U.S. Central Bank has downplayed the structural threat of rising prices, mostly recently by Fed Chairman Powell's continued dovishness yesterday at the IMF's Spring meeting. Expectations of strong global economic recoveries and the increased inflation expectations have contributed to the recent spike in global bond yields that have hampered growth stocks like Information Technology, but bolstered gains in Financials and issues related to the early stages of the economic cycle. China's Shanghai Composite Index fell 0.9% and the Hong Kong Hang Seng Index dropped 1.1%. South Korea's Kospi Index declined 0.4%, India's S&P BSE Sensex 30 Index decreased 0.3% and Australia's S&P/ASX 200 Index dipped 0.1%. However, Japan's Nikkei 225 Index bucked the trend, rising 0.2% with the yen giving back some of yesterday's gain. Schwab's Jeffrey Kleintop discusses in his article, Have EM Stocks Lost Their Immunity to Rising Rates?, how Emerging Market (EM) stocks have taken the rise in yields the worst among major equity asset classes, but offering five reasons why EM stocks can likely still perform well as rates climb this year.

Stocks post a solid weekly gain amid a revival of growth stocks

U.S. stocks advanced solidly for the week following an extended Easter weekend, with the bullish theme remaining intact regarding expected robust economic and earnings growth in 2021. Growth stocks, particularly the Information Technology sector which lagged behind the strong Q1 performance from Financials and cyclically-natured sectors such as Energy and Industrials, led the charge this week. The revival for growth issues came as U.S. Treasury yields, which have spiked as of late to foster valuation adjustments of these names, pulled back despite continued signs of economic recovery. Services PMIs reported by ISM and Markit both surged above readings of 60—with 50 being the demarcation between expansion and contraction—while the markets digested another sharp increase in nonfarm payrolls for March released when the markets were closed on Good Friday last week. Yields cooled even as inflation data continued to fuel the debate between transitory and structural pricing pressures and as Fed Chairman Jerome Powell continued his adamantly dovish tone. The U.S. dollar also pulled back this week from a recent decisive bounce above its 200-day moving average and gold snapped a two-week losing streak. Financials, Industrials and Communication Services sectors were among the leaders, though Energy issues, which significantly outperformed in Q1, fell noticeably amid a drop in crude oil prices.

Next week, focus will likely remain on the economic calendar as the March inflation picture fully develops, courtesy of the Consumer Price Index (CPI) and the Import Price Index, and as March retail sales are projected to rebound sharply as households receive the latest wave of direct pandemic relief payments. Also, amid the backdrop of elevated inflation expectations and further fiscal relief, the April preliminary University of Michigan Consumer Sentiment Index will offer a timely read on the psyche of the all-important U.S. consumer. Other reports due out next week that have the potential to move the markets include: the NFIB Small Business Optimism Index, jobless claims for the week ended April 10, the Fed's industrial production and Beige Book releases, the NAHB's homebuilder sentiment report, housing starts and building permits, and April regional manufacturing reports. Fedspeak will also heat up, headlined by the midweek speech to the Economic Club of Washington by Fed Chief Jerome Powell.

However, the economic docket could share some attention with the unofficial start of Q1 earnings season, which will be heavily concentrated on the Financials sector. S&P 500 Q1 earnings growth is projected to be well above 20% y/y, which would mark the highest rate since Q3 2018 per data compiled by FactSet, which notes that the Financials sector recorded the second-largest increase in EPS estimates of all eleven sectors, trailing only the Energy sector's sharp increase. The major banks will get the ball rolling and the markets will likely be looking at forward guidance, the amount of reversals to loan loss reserves—which translate positively to the bottom line—and commentary on the health of U.S. consumer spending.

Next week will also be robust on the international economic front with reports worth noting including: Australia—consumer confidence and employment change. China—Q1 GDP, lending statistics, trade balance, retail sales and industrial production. India—CPI and PPI, industrial production and trade balance. Japan—core machine orders. Eurozone—retail sales, industrial production, trade balance and CPI, along with German investor confidence. U.K.—February GDP, industrial/manufacturing production and trade balance.

The Schwab Center for Financial Research (SCFR) delivers our Quarterly Market Outlook: Different Speeds, providing a few thoughts for investors on how economic growth is picking up and the stock market is trending higher, but in a choppy fashion. Also, with Q1 earnings season set to kick into gear check out our assessments, including our outperform rating on Financials, in our Schwab Sector Insights: A View on 11 Equity Sectors


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