Schwab Market Update

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U.S. stocks continue to trade higher as the week’s end draws near, with the S&P 500 adding to a weekly advance, which would notch the fourth-straight weekly gain. Inflation data this week came in cooler than expected, easing expectations of how aggressive the Fed will need to remain, and a drop in import prices appears to be adding to the eased sentiment. In other economic news, preliminary August consumer sentiment, reported by the University of Michigan, continued to bounce off June's record low. Treasuries are mixed and yields remain volatile. The U.S. dollar is trimming a weekly drop, crude oil prices are falling, and gold is higher. In light equity news, Toast posted a smaller-than-expected loss and raised its guidance. Asia finished mixed with Japan rallying following yesterday's holiday, and Europe was mostly higher posting a weekly gain.        

At 12:45 p.m. ET, the Dow Jones Industrial Average is up 0.8%, the S&P 500 Index is rising 1.0%, and the Nasdaq Composite is gaining 1.4%. WTI crude oil is falling $2.19 to $92.15 per barrel, and Brent crude oil is dropping $1.35 at $98.25 per barrel. The gold spot price is trading $6.60 higher to $1,813.80 per ounce, and the Dollar Index is advancing 0.6% to 105.74.

Toast Inc. (TOST $20) reported a Q2 loss of $0.11 per share, slightly smaller than the $0.12 per share shortfall that the FactSet estimate called for. Revenues rose 58.0% year-over-year (y/y) to $675 million, topping the Street's forecast of $651 million. The restaurant technology platform raised its full-year guidance. Shares are rallying over 10%. 

Q2 earnings season is heading down the home stretch, and of the 455 S&P 500 companies that have reported thus far, roughly 63% have topped revenue forecasts and approximately 75% have bested profit projections, per data compiled by Bloomberg. Compared to last year, revenue growth is tracking to be up 14.8% and earnings are 8.7% higher.  

The S&P 500 is on track to gain ground for a fourth-straight week as earnings season has held up and July inflation data came in cooler than expected to ease concerns about continued ultra-aggressive Fed monetary policy tightening. The markets have seen broad-based sector gains, led by Energy, Financials, and Materials, while the defensively natured Consumer Staples and Health Care sectors lagged.

Schwab's Chief Investment Strategist, Liz Ann Sonders discusses the market environment in her latest article, Both Sides Now: Fed's Dueling Mandates, how July's hot jobs report will likely keep the Fed in a hawkish position, but key to watch moving forward is a continued softening in leading labor and inflation indicators. 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.

Consumer sentiment continues to improve from June's record low, import prices cool

The preliminary University of Michigan Consumer Sentiment Index (chart) for August showed that sentiment improved more than expected, rising to 55.1 from July's final reading of 51.5, and compared to the Bloomberg consensus estimate calling for a rise to 52.5. The index continued to move off the record low seen in June as the expectations component of the report increased noticeably to more than offset a decline in the current conditions portion. The 1-year inflation forecast decreased to 5.0% from 5.2% in July, versus expectations of a dip to 5.1%, but the 5-10-year inflation outlook increased unexpectedly to 3.0%, from 2.9%, compared to forecasts of a decline to 2.8%. 

The Import Price Index (chart) fell 1.4% month-over-month (m/m) for July, versus the Bloomberg consensus estimate of a 1.0% drop, and compared to June's upwardly revised 0.3% gain. Versus last year, prices were up by 8.8%, below forecasts of a 9.4% increase and June's unrevised 10.7% rise. Import prices excluding petroleum were down 0.7% m/m, versus estimates to decline 0.2%.

Treasuries have been choppy this week as the markets digested some cooler-than-expected July inflation data that seemed to dampen speculation regarding how aggressive the Fed will have to remain to try to restore price stability. The U.S. dollar saw some pressure amid the eased inflation and Fed expectations. The greenback has come off of the multi-decade highs hit last month as the Fed raised rates by 75 basis points (bps) for a second-straight meeting. 

Schwab's Chief Fixed Income Strategist Kathy Jones discusses in her latest article, The Strong Dollar: Can It Continue?, how a trifecta of factors support the dollar, including the relatively strong performance of the U.S. economy, tightening monetary policy by the Federal Reserve, and safe-haven buying. Kathy notes that these are likely to remain intact into 2023. You can follow Kathy on Twitter: @KathyJones, and check out our latest edition of our Financial Decoder podcast, When Interest Rates Rise, What Should You Do with Bonds?, featuring Kathy Jones. 

Treasuries are mixed, with the yield on the 2-year Treasury note up 5 bps to 3.24%, while the yield on the 10-year note is declining 3 bps to 2.86%, and the rate on the 30-year bond is down 4 bps to 3.13%.

Next week, the U.S. economic calendar will remain a key focal point for the markets, with timely reads on August regional manufacturing beginning to pour in, courtesy of reads out of New York and Philadelphia. Additionally, housing will be prominent, with reports on homebuilder sentiment, building permits and housing starts, as well as exiting home sales. However, the headlining reports due out next week will likely be the July retail sales report, and the minutes from the Fed's July monetary policy meeting. Other reports that could garner attention include, the Leading Index and initial jobless claims for the week ended August 13.

Europe mostly higher following U.S. inflation data and host of U.K. reports

European equities closed mostly higher in the final session of the week, as the markets digested this week's cooler-than-expected July inflation data out of the U.S., while also trying to assess the economic and monetary policy implications. Inflation has driven aggressive global tightening of monetary policies, but Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his article, Shortages Have Led to Gluts, 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. Meanwhile, a plethora of U.K. economic data was sifted through, as its preliminary Q2 quarter-over-quarter contraction was modestly smaller than expected, and June GDP fell by a smaller rate than anticipated, while its manufacturing and industrial production output for June declined by lesser amounts than forecasted. Also, Eurozone industrial production rose by a larger amount than projected for June. The euro and British pound fell as the U.S. dollar rebounds from the week's drop that followed the favorable inflation data. Bond yields in the U.K. advanced, whereas yields across the Eurozone moved mostly higher, with Switzerland bond yields being the exception.

The U.K. FTSE 100 Index and Italy's FTSE MIB Index closed 0.5% higher, France's CAC-40 Index was up 0.1%, Germany's DAX Index rose 0.7%, and Spain's IBEX 35 Index ascended 0.2%, while Switzerland's Swiss Market Index ended the day 0.2% lower.

Asia mixed to close out the week

Stocks in Asia finished mixed in the final session of the week, with the markets continuing to focus on the week's cooler-than-expected inflation data which has dampened Fed expectations, and has the U.S. markets on track to post a string of weekly gains. Also, the reduced inflation and monetary policy concerns lifted the Asian markets for the week, except for Hong Kong which was bogged down by weakness in the Technology sector. Japanese markets returned to action following yesterday's holiday break. Economic data was light during the session but after the markets closed China reported much softer-than-expected July aggregate financing figures—measuring total credit issued—and new yuan loans, while India's industrial production for June came in stronger than anticipated and its consumer price inflation statistics slowed by a slightly larger amount than expected for July. Inflation has driven central banks out of the U.S., U.K., Australia, and India to all announce aggressive monetary policy tightening, but Japan and China have held off on moving down the tightening path.

The Chinese economic data comes as economic concerns have been exacerbated by COVID-induced lockdowns, and Schwab's Jeffrey Kleintop notes in his article, China's Yo-Yo Economy, that although an economic rebound in China is underway according to government and private sector data, its economy and stock market may remain volatile.

Japan's Nikkei 225 Index rallied 2.6%, with the yen softening versus the U.S. dollar after recently rebounding from multi-decade lows as the Bank of Japan lags other key global central banks in monetary policy. China's Shanghai Composite Index dipped 0.2%, and the Hong Kong Hang Seng Index rose 0.5%, continuing to chip away at the week's losses. South Korea's Kospi Index advanced 0.2%, Australia's S&P/ASX 200 Index traded 0.5% lower, and India's S&P BSE Sensex 30 Index gained 0.2%.

Next week's international economic calendar will also offer some reports that could move the markets, with reports worth noting including: Australia—unemployment change. China—industrial production, retail sales, and new home prices. India—trade balance. Japan—Q2 GDP, trade balance, core machine orders, and consumer price inflation figures. Eurozone—Q2 GDP, trade balance, and consumer price inflation statistics, along with German investor sentiment and producer price inflation data. U.K.—employment change, inflations statistics, and retail sales. 

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