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Stocks Closed Mixed Amid Key Read on July's Payroll Report



U.S. stocks finished mixed to close out the week amid a host of earnings and economic data, including the highly anticipated July nonfarm payroll report that came in much stronger than expected. Job growth came in well above expectations, and the markets grappled with the possibility of more aggressive Fed monetary policy in response to the data, as well as eased concerns about an imminent recession. Treasuries fell to boost yields, and the U.S. dollar rallied. Crude oil prices rose, and gold traded to the downside. As Q2 earnings season heads down the home stretch, Expedia and Lyft both topped expectations, but Warner Bros Discovery missed forecasts in its earnings debut. In other economic news, consumer credit for June came in significantly higher than expected. Asia finished the week out in a positive fashion, and Europe closed mostly lower following the U.S. labor report.

The Dow Jones Industrial Average increased 77 points (0.2%) to 32,803, the S&P 500 Index went down 7 points (0.2%) to 4,145, and the Nasdaq Composite decreased 63 points (0.5%) to 12,658. In moderate volume, 4.1 billion shares of NYSE-listed stocks were traded, and 4.8 billion shares changed hands on the Nasdaq. WTI crude oil increased from $0.47 to $89.01 per barrel. Elsewhere, the gold spot price lost $15.50 to $1,791.50 per ounce, and the Dollar Index jumped 0.9% to 106.56. Markets ended mixed for the week, as the DJIA decreased 0.1%, the S&P 500 went up 0.4%, and the Nasdaq Composite jumped 2.2%.

Expedia Group Inc. (EXPE $103) reported adjusted Q2 earnings-per-share (EPS) of $1.96, above the $1.56 FactSet estimate, as revenues grew 51.0% year-over-year (y/y) to $3.2 billion, above the Street's $3.0 billion expectation. The online travel company said lodging bookings reached a record high, and it posted the highest ever Q2 revenue. EXPE added that despite the disruptions during the summer travel season and an uncertain macroeconomic backdrop, travel demand has remained strong. Shares finished slightly lower.

Warner Bros. Discovery Inc. (WBD $15) fell after the company, in its first quarterly report after the merger, reported a net loss and revenues that came in below expectations, mostly related to costs related to the deal. The company also announced a host of measures as it tries to integrate the merger.

Lyft Inc. (LYFT $20) announced adjusted Q2 EPS of $0.13, beating the estimate of a loss of $0.04 per share, as revenues rose 30% y/y to $990.7 million, slightly above the forecasted $988.9 million reading. The rideshare company noted a hefty driver supply as the number of riders rose to the highest levels since before the pandemic. LYFT lowered its FY revenue outlook after citing macro pressures, but the company did issue Q3 guidance that was in line with estimates. Shares traded significantly higher. The markets digested another heavy week of earnings reports and today's key labor report. Q2 earnings season has moved toward the home stretch, and of the 430 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 14.9%, and earnings are 8.8% higher thus far.

Schwab's Chief Investment Strategist, Liz Ann Sonders, discusses the economy in her latest article, The Thrill Is Gone: Earnings Season Kicks Off, how Q2 earnings growth will mark an expected deceleration in profits, but focus will likely continue to shift to the pace at which outlooks are downgraded. 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.July nonfarm payroll report shows job growth trounces expectationsNonfarm payrolls (chart) rose by 528,000 jobs month-over-month (m/m) in July, compared to the Bloomberg consensus estimate of a 250,000 rise, while June's figure was adjusted higher to an increase of 398,000 from the initial reading of a 372,000 gain. Excluding government hiring and firing, private sector payrolls advanced by 471,000, versus the forecasted rise of 230,000, after increasing by 404,000, revised up from the preliminarily reported 381,000 gain in June. However, the labor force participation rate dipped to 62.1% from June's unrevised 62.2% figure, where it was expected to remain.

The Bureau of Labor Statistics (BLS) said job growth was widespread, led by gains in leisure and hospitality, professional and business services, and health care. The BLS added that both total nonfarm employment and the unemployment rate have returned to their February 2020 pre-pandemic levels.

The unemployment rate dipped to 3.5% from June's 3.6% rate, where forecasts called for it to remain. 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—remained at the prior month's 6.7% rate. Average hourly earnings were up 0.5% m/m, above projections of a 0.3% gain and June's upwardly-adjusted 0.4% rise. Compared to last year, wages were 5.2% higher, north of forecasts of a 4.9% gain, and in line with June's upwardly-adjusted rise. Finally, average weekly hours remained at June's 34.6 rates, above forecasts of a reading of 34.5.

Treasuries fell, and yields jumped following the labor report, with inversions in multiple areas of the curve remaining intact. The markets continue to grapple with persisting inflation pressures that prompted last week's Fed monetary policy decision to raise its benchmark interest rate by 75 basis points (bps) for the second-straight meeting, and the markets appeared to take comments from Chairman Jerome Powell as less hawkish. However, Fedspeak this week has suggested that a Fed pivot is not in the offing, and more aggressive rate hikes could continue.

The yield on the 2-year Treasury note increased 17 bps to 3.21%, the yield on the 10-year note was up 16 bps to 2.84%, and the 30-year bond rate rose 11 bps to 3.07%. This week has seen the Treasury yield curve flatten, the U.S. dollar remains elevated, crude oil prices fall, and gold tick higher.

Amid this backdrop, 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. These are likely to remain intact into 2023. You can follow Kathy on Twitter: @KathyJones.

June’s consumer credit, released in the final hour of trading, showed consumer borrowing surged by $40.2 billion, almost 50% higher than the $27.0 billion forecast from economists polled by Bloomberg. Consumer credit has now risen 10.5% y/y to $4.6 trillion. Additionally, May’s figure was upwardly revised to an increase of $23.8 billion from the originally reported $22.3 billion uptick. Non-revolving debt—including student loans and loans for vehicles and mobile homes—came in at a reading of $25.4 billion, denoting a 5.8% increase y/y when seasonally adjusted (SA). On the other hand, revolving debt, which includes credit cards, came in at $14.8 billion, which is a 13.8% SA y/y jump.

Next week, the economic calendar will be heavily focused on the July inflation picture and will likely command the most attention, given the hyper-sensitivity on Fed expectations. We will get the Consumer Price Index (CPI), Producer Price Index (PPI), and the Import Price Index. Also, the preliminary Q2 nonfarm productivity and unit labor costs report could also garner attention amid this backdrop. The all-important U.S. consumer will also be in focus with the release of the preliminary August University of Michigan Consumer Sentiment Index, while labor will remain a key focal point with the timely release of initial jobless claims for the week ended August 6.


Europe closed mostly lower after U.S. jobs report


European equities finished mostly lower as the markets digested today's much stronger-than-expected U.S. July nonfarm payroll report that showed job growth easily topped forecasts. The data seemed to foster concerns about more aggressive monetary policies while also easing concerns about a recession. The euro and British pound finished lower versus the U.S. dollar, and bond yields in the Eurozone and the U.K. traded higher. The grappling with monetary policies came as the Fed raised rates by 75 bps for the second-straight meeting, and this week, the Bank of England raised its benchmark interest rate by 50 bps, which was the highest in 27 years, while the European Central Bank has also started tightening policy. In economic news on this side of the pond, German and French industrial production both came in above expectations for June, while Italian industrial production came in well below estimates. Inflation has driven the tightening of monetary policies, but Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his 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 U.K. FTSE 100 Index was down 0.1%, France's CAC-40 Index decreased 0.6%, both Germany's DAX Index and Switzerland's Swiss Market Index traded 0.7% lower, Italy's FTSE MIB Index dipped 0.3%, while Spain's IBEX 35 Index closed 0.1% to the upside.


Asia mostly higher despite festering geopolitical tensions


Stocks in Asia finished higher to close out the week, with the markets shrugging off lingering geopolitical tensions between China and the U.S. following this week's Taiwan visit from U.S. Speaker of the House Nancy Pelosi. Taiwan is a democratic self-ruled island that China sees as part of its own territory. China said that the visit was a "major political provocation," potentially undermining the relationship between China and the U.S. Meanwhile, the markets awaited today's key July U.S. labor report as it could sway how aggressive the Fed will be with its monetary policy. Monetary policies outside China and Japan have been tightening to combat persisting inflation pressures, and today the Reserve Bank of India raised its benchmark interest rate by a larger amount than expected, hiking rates by 50 bps. In other economic news, Japan's household spending rose more than estimated in June, and the Reserve Bank of Australia raised its inflation forecast and warned that the economy could slow.

Economic concerns have ramped up, exacerbated by China's 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 rose 0.9%, with the yen firming a bit after a couple of days of weakness. The yen had trimmed some of a recent drop versus the greenback to multi-decade lows since March that came as the Fed and Bank of Japan diverge with their monetary policies. China's Shanghai Composite Index increased 1.2%, the Hong Kong Hang Seng Index ticked 0.1% higher after yesterday's rally, and South Korea's Kospi Index finished 0.7% higher. Australia's S&P/ASX 200 Index gained 0.6%, and India's S&P BSE Sensex 30 Index edged 0.2% higher.

Next week's international calendar will feature lending statistics out of China, which will accompany the country's PPI and CPI reports. India will release its trade figures, industrial production, and CPI data. Additionally, Japan will report its preliminary machine tool orders and PPI. In the Eurozone, we will get investor confidence and industrial production reports, along with German consumer price inflation figures. Rounding out the week, the U.K. will deliver its preliminary Q2 GDP report, as well as industrial and manufacturing production data.

 

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