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Market Update

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Posted: 2/27/2017 4:15 PM ET

Markets Indifferent to Start the Week

U.S. equities spent most of the day hugging the flatline, finishing with modest gains, with tomorrow's speech to Congress by President Donald Trump appearing to keep conviction in check. Equity news was in short supply, but the economic calendar showed durable goods orders and pending home sales missed estimates, while another read on regional manufacturing activity hit a multi-year high. Treasury yields and crude oil prices ticked higher, while gold was lower and the U.S. dollar was little changed.

The Dow Jones Industrial Average (DJIA) rose 16 points (0.1%) to 20,837, the S&P 500 Index added 2 points (0.1%) to 2,370, and the Nasdaq Composite gained 17 points (0.3%) to 5,862. In moderate volume, 834 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.06 higher to $54.05 per barrel and wholesale gasoline was unchanged at $1.74 per gallon. Elsewhere, the Bloomberg gold spot price declined $5.83 to $1,251.36 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was flat at 101.13.

Berkshire Hathaway Inc. (BRK/B $171) reported 4Q earnings-per-share of $1.78, compared to the FactSet estimate of $1.82, though results out of its insurance unit exceeded the Street's forecasts. Shares were modestly higher.

Sotheby's (BID $46) posted 4Q EPS of $1.20, or $1.35 ex-items, versus the projected $1.17, as revenues declined 8.1% year-over-year (y/y) to $309 million, topping the expected $269 million. Shares were sharply higher. The auction house said it had a number of strong 4Q sales and the results reflect growing confidence in the market.

Core durable goods orders miss, while regional manufacturing activity hits multi-year highs

January preliminary durable goods orders (chart) rose 1.8% month-over-month (m/m), compared to the Bloomberg estimate of a 1.6% rise and December's downwardly revised 0.8% decline. Ex-transportation, orders declined 0.2% m/m, compared to forecasts of a 0.5% gain and versus December's upwardly revised 0.9% increase. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, decreased 0.4%, versus projections of a 0.5% increase, and following the favorably revised 1.1% increase in the month prior.

The Dallas Fed Manufacturing Activity Index unexpectedly rose further into a level depicting expansion (a reading above zero), increasing to 24.5 in February—the highest level since April 2006—from 22.1 in January, and compared to the expected dip to 19.4.

Pending home sales fell 2.8% m/m in January, versus projections of a 0.6% gain, and following the downwardly revised 0.8% increase registered in December. Compared to last year, sales were 2.7% higher. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which rose more than expected in January to the fastest pace since February 2007.

Today's data kicks off a fully-loaded economic docket for the week, as the markets grapple with the possibility of a March Fed rate. Tomorrow will be one of the heaviest days, with reports slated for release to include the second look (of three) at 4Q GDP, with economists expecting the headline figure to be revised higher to a 2.1% quarter-over-quarter annualized expansion from the 1.9% posted in the first report, and personal consumption to tick higher to 2.6% from the 2.5% initially recorded, while the report's inflation figures are expected to remain the same. As well, the advanced goods trade balance is forecasted to show that the deficit widened to $66.0 billion in January from $65.0 billion the month prior, and Consumer Confidence will be released, forecasted to move to a level of 53.5 for February from the 50.3 registered in January. Rounding out the day will be the Chicago Purchasing Manager's Survey, the Richmond Fed Manufacturing Index, and the S&P CoreLogic Case-Shiller Home Price Index. Also, President Donald Trump will deliver his speech in front of Congress tomorrow evening.

Treasuries were lower, as the yields on the 2-year and 10-year notes rose 5 basis points (bps) to 1.20% and 2.37%, respectively, while the 30-year bond rate gained 3 bps to 2.98%. For a look at the bond markets, see Schwab's Director of Income Planning, Rob Williams', CFP, and Senior Research Analyst, Cooper Howard's, CFA, latest article, Short-Term Bonds: Why They Could Outperform As Interest Rates Rise, at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

Treasury yields and the U.S. dollar remain in focus, with the stock markets remaining near all-time highs, amid festering political and monetary policy uncertainty, along with signs that the economy continues to gain momentum. As noted in the latest Schwab Market Perspective: Not So Fast!, elevated earnings and economic expectations could lead to a pullback or more sideways action but we believe the bull market in U.S. stocks will continue. If economic data continues to surprise on the upside, a March rate hike is likely to be on the table; while there is an additional risk that the Fed may be forced to speed up the tightening process should inflation accelerate from here. Read more at www.schwab.com/marketinsight, where you can also find Schwab's Chief Fixed Income Strategist, Kathy Jones' article, What would a shake-up at the Fed mean for bond investors?. Follow Kathy on Twitter: @kathyjones. Finally, for a look at the U.S. political front, see Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's latest article, Washington's Way: Why Trump's Policy Changes Could Take Time, at www.schwab.com/insights.

Europe ticks higher despite political uncertainty, Asia sees declines to begin the week

European equities nudged higher, shrugging off festering political concerns and a possible thwarted merger agreement among some key exchanges. The British pound overcame early pressure that stemmed from a report from the London Times which suggesting that another Scottish independence vote could be in the offing. The news came amid heightened political risk in the U.S. and Europe with the former dealing with high expectations of promised reflationary policy pledges and the latter facing a looming key French Presidential election. However, Italian political uneasiness cooled off after former Prime Minister Renzi suggested he will not push for early elections. For more on the global markets and the European political risk, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, latest article, The stock market sees nothing to worry about—that may be about to change. Jeff notes that Europe's economy is performing the best in many years on many key measures and stock markets are currently behaving as if there is nothing to worry about, but that may be about to change now that we are within 45 trading days of the French Presidential election. He concludes that savvy investors should be prepared for a rise in volatility in global stock markets in the coming months. Read more at www.schwab.com/oninternational, and be sure to check out Jeff's article, Five Reasons to Stay Invested Despite Heightened Uncertainty. Follow Jeff on Twitter: @jeffreykleintop. In economic news, eurozone economic confidence improved modestly but slightly missed expectations for February. The euro traded higher versus the U.S. dollar and bond yields in the region were mixed.

Asian stocks finished lower with the global market rally pausing amid continued U.S. and European political uncertainty, while data was on the light side. Japanese equities dropped, with the yen remaining choppy after a recent rebound, while Australian securities also declined. Stocks in mainland China and those traded in Hong Kong Hang cooled from rallies as of late, both finishing lower, and India's markets declined in its return to action following Friday's holiday break, while South Korean listing also lost ground. Schwab's Director of International Research, Michelle Gibley, CFA, provides some timely analysis of global investing in her articles, Currency Hedging: 5 Things You Need to Know and Emerging Markets: Why They Deserve a Place in Your Portfolio at www.schwab.com/oninternational, and be sure to check out our release, Why Your Portfolio Needs International Stocks—Despite 2017 Risks at www.schwab.com/insights.

Tomorrow's international economic calendar will be somewhat busy, with reports scheduled for release to include industrial production, construction orders, housing starts and retail sales from Japan, new home sales and business confidence from Australia, consumer confidence from the U.K., GDP and CPI from France, and CPI from Italy.

Schwab Center for Financial Research - Market Analysis Group

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