U.S. equities are lower as the recent volatility continues despite yesterday's gains. Markets remain wary of persistent inflation, and investors are looking ahead to Friday's read on CPI in hopes for signs inflation may have already peaked. The Fed's recent aggressive tightening moves have caused uneasiness about a slowdown in the economy and possible recession. In addition, markets continue to grapple with the ongoing war in Ukraine. Target is in focus today after lowering its Q2 margin guidance due to a planned reduction in inventory. Meanwhile, Dave & Buster's beat on both earnings and revenue forecasts. In economic news, the trade balance shrunk more than expected, and we will get a read on consumer credit in the final hour of trading. Treasuries are mixed as the curve is flattening slightly. The U.S. dollar is higher, crude oil is losing some ground, and gold is ticking higher. Europe is lower after the U.K. Prime Minister survived a vote of confidence Monday evening. Asia finished mixed following a larger-than-expected rate hike from the Reserve Bank of Australia.
As of 8:55 a.m. ET, the June S&P 500 Index future is 39 points below fair value, the DJIA future is 250 points under fair value, and the Nasdaq Index future is 165 points south of fair value. WTI crude oil is trading $0.24 lower to $118.26 per barrel and Brent crude oil is decreasing $0.26 to $119.25 per barrel. The gold spot price is increasing $2.60 to $1,846.30 per ounce. Elsewhere, the Dollar Index is 0.3% higher to 102.71.
Target Corporation (TGT $160) issued updated guidance for Q2 of a lower operating margin of 2% versus previous guidance centered around Q1's margin of 5.3% as it plans to take action to better manage its inventory. The retailer intends to get rid of unwanted inventory through additional markdowns, removing excess inventory, and canceling orders, hoping to clear room for other merchandise including groceries and back-to-school supplies. Target reaffirmed its full-year revenue growth in the low- to mid-single digit range and said it expects margins to recover in the second half of the year, expecting around 6%.
Dave & Buster's Entertainment Inc (PLAY $37) reported adjusted Q1 earnings-per-share (EPS) of $1.35, above the $1.16 FactSet estimate, as revenues rose 70.0% year-over-year (y/y) to $451.1 million, north of the Street's forecast of $440.6 million. Revenues were up 24.1% compared to the first quarter of 2019, and comparable sales were up 10.9% compared to Q1 2019. The company mentioned that it is benefiting from a higher mix of amusements and a leaner operating model, and it has been able to offset inflationary costs with a more efficient labor model and thoughtful pricing actions.
The S&P 500 volatility has continued this week, getting only a one-week reprieve after seven-straight weeks of declines earlier this quarter 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 Mid-Year Outlook: U.S. Stocks and Economy, how sharp, countertrend rallies may continue this year, but aggressive Fed policy, the turning of the liquidity tide, and slower economic growth will likely keep pressure on stocks.
Trade balance shrinks more than expected
The trade balance (chart) showed that the April deficit shrunk more than expected, falling to $87.1 billion, from March's downwardly-revised deficit of $107.7 billion, and compared to forecasts of a decrease to $89.5 billion. Exports rose 3.5% m/m, and imports decreased 3.4%.
Treasuries are mixed with yields having 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' 2022 Mid-Year Outlook: Fixed Income in which she discusses how returns should be better for fixed income investors in the second half of 2022, now that interest rates have reset higher. However, we still expect volatility to remain high as central banks shift away from easy-money policies. 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 is up 1 basis point (bp) to 2.73%, the yield on the 10-year note is down 2 bps to 3.01%, and the 30-year bond is lowing 3 bps to 3.17%.
In the final hour of trading, the economic calendar will offer consumer credit for April, with economists calling for consumer borrowing of $35.0 billion following the prior month's $52.4 billion gain.
Europe lower as U.K.'s Johnson survives confidence vote
European equities are lower in midday action, reversing yesterday's widespread gains. Markets continue to face a number of headwinds, exacerbated by the decision by the European Union to ban most Russian oil by the end of the year as a result of the ongoing war in Ukraine. Persistent inflation has caused the Bank of England and the Fed to raise rates this year, and there is increasing expectations that the European Central Bank will raise rates later this year. U.K. Prime Minister Boris Johnson faced and survived a vote of confidence on Monday amid increased dissatisfaction in his leadership, but his victory was smaller than expected. All of this comes as investors' worries of slowing economic growth continue to grow along with fears of a possible looming recession. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA 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 economic news, German factory orders surprisingly declined m/m in April but did improve from the last month, while Spanish industrial production rose more than expected m/m in April. Switzerland returned to action after being closed for a holiday yesterday.
The U.K. FTSE 100 Index is down 0.2%, France's CAC-40 Index, Germany's DAX Index, and Italy's FTSE MIB Index are all falling 1.1%, while Spain's IBEX 35 Index and Switzerland's Swiss Market Index are relatively unchanged.
Asia mixed following rate hike in Australia
Stocks in Asia were mixed amid the wide number of headwinds. Inflation remains one of the key concerns across the globe, and as a result, the Reserve Bank of Australia announced a larger than expected 50 bp increase in its cash rate on Tuesday, raising it to 0.85%. Analysts were expecting a 25 to 40 bp move. This follows recent 50 bp rate hikes from the U.S. and rate cuts from China. COVID infections continue to decline in China, allowing restrictions to ease and economic activity to pick back up. 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, Japan's household spending decreased more than expected in April but improved slightly from the previous month, and the leading index preliminarily rose and came in higher than forecasts.
Japan's Nikkei 225 Index rose 0.1%, with the yen weakening some versus the U.S. dollar. China's Shanghai Composite Index advanced 0.2%, and the Hong Kong Hang Seng Index dipped 0.6%. Australia's S&P/ASX 200 Index fell 1.5%, South Korea's Kospi Index traded 1.7% to the downside, and India's S&P BSE Sensex 30 Index was down 1.0%.
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