Markets Finally Snap Losing Streaks

U.S. equities finished higher, with the S&P 500 notching its first weekly gain Since April 1st, and the Dow recording its first in nine weeks. The personal income and spending report showed that both continued to rise, but it also included some signs of moderation in inflation, which appeared to offer the markets a bit of a reprieve. The string of weekly declines had come amid increased aggressiveness by the Fed to try to combat inflation, which has also fostered recession chatter to ramp up. Meanwhile, the markets continued to grapple with the ongoing war in Ukraine and the disruption from the COVID-induced lockdowns in China. The retail sector continued to put the finishing touches on earnings season, with Costco Wholesale topping revenue forecasts but its profit margins disappointed, and Gap posting a larger-than-expected loss and issuing lackluster guidance, but Ulta Beauty bested expectations and raised its outlook. The markets appeared to shrug off a fresh decade low in consumer sentiment, which was bogged down by a drop in expectations amid inflation worries. Treasuries were higher, pressuring yields, and the U.S. dollar declined, while crude oil prices were higher, and gold gained modest ground. Europe finished higher, with all the major markets posting solid weekly gains, and Asia closed out the week positively as earnings boosted Hong Kong markets.

The Dow Jones Industrial Average rose 576 points (1.8%) to 33,213, the S&P 500 Index gained 100 points (2.5%) to 4,158, and the Nasdaq Composite added 390 points (3.3%) to 12,131. In moderate volume, 4.3 billion shares of NYSE-listed stocks were traded, and 4.7 billion shares changed hands on the Nasdaq. WTI crude oil moved $0.98 higher to $115.07 per barrel. Elsewhere, the gold spot price was up $3.40 to $1,851.00 per ounce, and the Dollar Index lost 0.2% at 101.68. Markets were solidly higher for the week, as the DJIA advanced 6.2%, the S&P 500 increased 6.6%, and the Nasdaq Composite jumped 6.8%.

Costco Wholesale Corporation (COST $471) reported fiscal Q3 earnings-per-share (EPS) of $3.04, including a one-time pretax charge for incremental benefits awarded under the new employee agreement, and that EPS figure matched the FactSet estimate. Revenues rose 16.2% year-over-year (y/y) to $52.6 billion, above the Street's forecast of $51.6 billion. COST's profit margins fell and disappointed the Street due to higher labor and freight costs. Shares traded higher.

Gap Inc. (GPS $12) reported a Q1 loss of $0.44 per share, compared to the forecasted $0.15 per share shortfall, with revenues declining 13.0% y/y to $3.5 billion, below the expected $3.4 billion. The company said its sales growth was negatively impacted by tough comparisons to last year that benefitted from stimulus and divestitures, store closures, and the transition of the company's European business to a partnership model. GPS issued full-year EPS and gross margin guidance that came in well below estimates. The company also said its results and updated outlook primarily reflect industry-wide headwinds as well as challenges at Old Navy that are impacting its near-term performance. Shares were slightly higher.

Ulta Beauty Inc. (ULTA $425) reported Q1 earnings of $6.30 per share, including a $0.02 per share benefit due to income tax accounting for share-based compensation, well above the expected $4.46. Revenues rose 21.0% y/y to $2.4 billion, north of the anticipated $2.1 billion. The company said its better-than-expected results were supported by double-digit same-store sales growth across all major categories which came amid strong guest demand. ULTA raised its full-year profit and revenue guidance. Shares rallied.

The S&P 500 was choppy this week but was able to snap a streak of seven-straight weekly declines that have come as investors continue to grapple with the ultimate implications of persisting inflation pressures and expectations of an aggressive Fed monetary policy tightening campaign. Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Signs Point to Rising Recession Risk, how rising inflation, rate hikes, supply-chain problems, and the Russia-Ukraine war have contributed to growing recession fears. Liz Ann mentions that despite a drop in consumer confidence, spending has held up so far this year, and many indicators remain at solid levels. However, she says that rather than looking at the level of data, sometimes the trend is more important. In other words, "better" or "worse" may matter more than "good" or "bad". You can follow Liz Ann on Twitter: @LizAnnSonders.

Read all our market commentary, including our latest article, Stock Market Volatility: Schwab's Quick Take, on our Insights & Education page, and you can follow us on Twitter at @SchwabResearch.

Personal income and spending data remains positive, consumer sentiment continues to drop

Personal income (chart) rose 0.4% month-over-month (m/m) in April, slightly below the Bloomberg consensus forecast calling for it to match March's unrevised 0.5% increase. Personal spending grew 0.9%, north of expectations of a 0.8% increase, and compared to the prior month's upwardly-adjusted 1.4% gain. The April savings rate as a percentage of disposable income was 4.4%, down from March's negatively-revised 5.0% rate.

The PCE Deflator was up 0.2% m/m, matching expectations, and following March's unadjusted 0.9% rise. Compared to last year, the deflator was 6.3% higher, above estimates of a 6.2% increase, but below the prior month's unadjusted 6.6% gain. Excluding food and energy, the PCE Core Price Index rose 0.3% m/m, in line with expectations and March's unrevised gain. The index was 4.9% higher y/y, matching estimates and down from March's unrevised 5.2% rise.

The May final University of Michigan Consumer Sentiment Index (chart) was revised unexpectedly to 58.4, from the preliminary 59.1 figure, where it was expected to remain. The downward revision came as both the expectations and current conditions portions of the survey were adjusted to the downside, with the former dropping solidly. The overall index was below April's 65.2 level and hit the lowest level since August 2011 as both current conditions and expectations were down sharply m/m. The 1-year inflation forecast was revised lower to 5.3% from the preliminary estimate which had it matching the prior month's 5.4% rate, while the 5-10 year inflation forecast remained at 3.0% for the fourth-straight month.

The disappointing report came as consumers continued to have a negative view on current buying conditions for houses and durable goods, along with their outlook for the economy, primarily driven by concerns about inflation.

The advance goods trade balance showed that the April deficit narrowed more than expected to $105.9 billion, versus estimates calling for it to contract to $114.9 billion from March's upwardly-revised shortfall of $125.9 billion.

Preliminary wholesale inventories rose 2.1% m/m for April, compared to expectations of a 2.0% gain, and versus March's upwardly-revised 2.7% increase.

Treasuries were higher, and yields have been choppy as of late as markets anticipate tighter Fed monetary policy amid the backdrop of persistent inflation and signs of slowing economic growth.

As the Fed launches a series of rate hikes to try to cool off inflation, check out Schwab's Chief Fixed Income Strategist Kathy Jones' latest article, Bond Market Reset: What's Next? in which she discusses how major central banks are hiking interest rates rapidly and shrinking their balance sheets in an effort to "normalize" policy. Kathy addresses the question hanging over the market: What is a normal policy rate? Be sure to follow Kathy on Twitter: @KathyJones. Amid this backdrop also check out the latest offering from Schwab's Director of Fixed Income Collin Martin and Director of Fixed Income Strategy Cooper Howard titled 8 Questions on the Bond Market and Rate Hikes.

The yield on the 2-year Treasury note was down 1 basis point (bp) at 2.46%, while the yields on the 10-year note and the 30-year bond rate lost 2 bps to 2.73% and 2.97%, respectively.

Please note: all U.S. markets will be closed on Monday in observance of the Memorial Day holiday.

Europe higher as markets try to extend the week's gains

European equities finished higher, extending this week's solid gains despite the markets continuing to face a flurry of headwinds. Persisting inflation concerns have prompted tighter monetary policies out of the Fed and the Bank of England, while boosting expectations that the European Central Bank will raise rates later this year. Also, global recession worries have ramped up amid the tightening monetary policies and signs of slowing economic growth out of the world's two largest economies of the U.S. and China. The uneasiness continues to be exacerbated by the ongoing war in Ukraine and the ensuing energy crisis in Europe. Some signs of a potential peak in inflation in the U.S. today may be offering a reprieve to sentiment. Jeffrey Kleintop offers his latest commentary, The Three Bears?, discussing how stocks, bonds, and cash are all in a bear market or teetering on the edge of one—a very rare event. He points out how over the past 72 years, there have only been two prior periods with a triple bear. Jeff adds that a bull market is likely to return, as it typically has, but the timing is in question. He notes how every period is different and there can be no guarantees, but it is worth noting that the prior periods featuring any of these three bears were often very brief. You can follow Jeff on Twitter: @JeffreyKleintop. In light economic news, Spanish retail sales rebounded in April, and the Eurozone money supply unexpectedly decelerated for April. The euro was slightly lower versus the U.S. dollar, while the British pound nudged to the upside. Bond yields in the Eurozone and the U.K. were lower.

The U.K. FTSE 100 Index was up 0.3%, France's CAC-40 Index and Germany's DAX Index advanced 1.6%, Spain's IBEX 35 Index rose 0.5%, Italy's FTSE MIB Index increased 0.4%, and Switzerland's Swiss Market Index traded 1.4% higher.

Asia closes the week out in the green

Stocks in Asia finished higher in the final session of the week, getting a solid lead-in from yesterday's rally in the U.S. and as stronger-than-expected earnings results from Alibaba Group Holding Ltd. (BABA $94) boosted Hong Kong markets. However, this week has remained choppy as the global markets grapple with persistent inflation pressures that has some key central banks tightening monetary policies and raising the risk of a recession. However, China's government is going the opposite direction, announcing some stimulus efforts as of late, aimed at helping support a slowing economy that has been hampered by COVID-induced lockdowns. Meanwhile, geopolitical tensions remain between the U.S. and China, while the ongoing war in Ukraine continues to cloud the global outlook. Schwab's Jeffrey Kleintop discusses in his article, Recession in China?, how China's economy and consumer market has likely slipped into a recession, at least by China's standards. Jeff takes a look at the short-term and long-term impacts of any extended disruption of the lockdowns on consumer spending and business output. In economic news, China's industrial profits fell 8.5% y/y in April, Tokyo inflation held steady at a 2.4% y/y increase, versus estimates of a 2.5% gain, and Australia's retail sales slowed more than expected in April but remained positive.

Japan's Nikkei 225 Index advanced 0.7%, with the yen continuing to recover from its tumble versus the U.S. dollar seen in March and April. China's Shanghai Composite Index rose 0.2%, and the Hong Kong Hang Seng Index rallied 2.9%. Australia's S&P/ASX 200 Index advanced 1.1%, South Korea's Kospi Index traded 1.0% to the upside, and India's S&P BSE Sensex 30 Index was up 1.2%.

Stocks snap string of weekly declines

U.S. stocks finished broadly higher with the S&P 500 snapping a string of seven-straight weekly declines and the Dow finishing higher for the first time in nine weeks. The markets rebounded even as the retail sector put the finishing touches on earnings season, which showed inflationary pressures, supply chain and labor costs, and excess inventory levels hampered results. Treasuries finished higher, cooling off the recent spike in bond yields and likely offering a reprieve and help the markets, which have been choppy as the Fed embarks on its aggressive monetary policy tightening campaign, sparking a rise in recession chatter. Stocks delivered some resiliency in the face of signs economic growth continues to slow, with S&P Global's preliminary Manufacturing and Services PMIsdecelerating more than expected, new and pending home sales tumbling, durable goods orders coming in softer than expected, and Q1 GDP being revised to a larger contraction than initially estimated. All S&P 500 sectors finished higher, led by Consumer Discretionary, Energy, and Information Technology, and Financials as the markets tried to determine if the myriad headwinds—Fed, inflation, geopolitics, China's lockdowns, and slowing economic and earnings growth—have been priced into the markets. Friday's personal income and spending data seemed to the help solidify the weekly gains as they both continued to grow and the Fed's favored gauge of inflation—the PCE Price Index—slowed m/m on both the headline and core figures. The U.S. dollar continued to cool off from a recent rally to 20-year highs, crude oil prices resumed its charge higher, and gold moved to the upside.

Although next week will be shortened by the Memorial Day holiday break, the economic calendar will be robust. The Conference Board's Consumer Confidence Index will get the ball rolling, and as the calendar shifts to June the ISM's Manufacturing and Services Indexes will likely garner heavy scrutiny. The Fed will release it Beige Book, offering a look at business activity across the nation ahead of the Central Bank's June 15monetary policy decision. The labor market will be in focus, with the release of the job openings and labor turnover survey (JOLTS), as well as initial jobless claims for the week ended May 28, and the revisions to Q1 nonfarm productivity and unit labor costs. However, the headlining economic data point may be Friday's nonfarm payroll report, with wage growth and labor-force participation being the key components the markets are likely to key off of. The data will be accompanied by a host of Fedspeak, headlined by notorious hawk St. Louis Fed President James Bullard and Fed Vice Chair Lael Brainar

d. Next week's international economic calendar will also yield some key releases that could move the markets with reports on the docket including; Australia—Q1 GDP and trade balance. China—Manufacturing and Services PMIs. India—Q1 GDP and Manufacturing and Services PMIs. Japan—preliminary industrial production, and retail sales. Eurozone—consumer price inflation estimate, producer price inflation statistics, and retail sales, along with the German unemployment change, retail sales, and trade balance. U.K.—consumer credit.

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