The S&P 500 sold off 2.45% on Friday to close at 2,127.8, after the markets were caught by surprise with the Fed's hawkish tone, despite weak U.S. economic data, after a number of officials came out during the week and expressed their opinions about the case for a rate hike before the Fed's blackout period begins on Tuesday. An additional surprise came on Friday when it was announced that the Fed's Brainard would speak on Monday, in a speech which was previously unscheduled. For the week, the S&P 500 index was down 2.39% as traders moved out of equity, bonds and commodities and into cash.
The markets were already antsy on Thursday when the European Central Bank
(ECB) stated that it kept key interest rates unchanged at 0%. The ECB move, by not announcing additional stimulus measures as growth and inflation in the eurozone continue to remain sluggish, appeared to disappoint financial markets. To make matters worse, DoubleLine Capital Chief Investment Officer Jeffrey Gundlach told the audience during his quarterly Webcast on Thursday that it was time for fixed-income investors to prepare for rising interest rates and higher inflation by reducing the duration of their positions, move money into cash and protect against volatility, according to Bloomberg.
Overall, U.S. economic growth remains tepid, as the Institute of Supply Management (ISM) said on Tuesday that its non-manufacturing index declined sharply to 51.4 for August from 55.5 the previous month, the lowest reading since February 2010. The Job Openings and Labor Turnover Summary (JOLTS) report, released by the Department of Labor on Wednesday, showed that employers posted a record 5.9 million job openings in July, compared to 5.62 million job openings in June. Nonetheless, job openings growth has been decelerating since the first-quarter 2015, from 25.44% on the year-on-year basis to 5.37% in the second-quarter 2016.
The U.S. Dollar index inched down 0.43% for the week, to close on Friday at 95.253, despite a more hawkish tone from some Fed officials, while the yield of the 10-year U.S. Treasury Note surged 4.38% to close at 1.67% on Friday, as investors moved money into cash. The yield spread between the 10-year and 2-year U.S. Treasury Notes widened to 0.88 percentage points at the close on Friday.
The probability of a 25 basis point rate hike at the next FOMC
meeting on September 21, surged 6 percentage points from the
previous day to 24.0% on Friday, while the probability of a no
change in monetary policy dropped to 76.0%, based on the CME
Group 30-day Fed Fund futures prices as of September 9.
The WTI crude spot price surged 3.24% for the week, to close on Friday at $45.88 per barrel, while Brent crude futures for November 16 jumped 2.52% to close at $48.01 per barrel, after the state-owned Russian news agency TASS reported on Monday that Saudi Arabia and Russia signed an agreement aimed at stabilizing the oil market.
A bullish weekly report from the Energy Information Administration (EIA) on Thursday, showing the second largest drop in U.S. crude oil inventory on record, sent the WTI crude price shooting up over 4%. The oil rally, however, faded on Friday after traders realized that the much larger-than-expected decline was probably a one-time event due to bad weather.
The EIA weekly U.S. oil inventory report on Thursday showed a decrease of 14.5 million barrels to 511.4 million barrels, excluding the Strategic Petroleum Reserve, in the week ending September 2, compared to S&P Global Platts analysts’ expectations for a rise of 425,000 barrels. The American Petroleum Institute (API) inventory data on Wednesday showed a U.S. crude inventory drawdown of 12.1 million.
Oil analysts attributed the big decline in crude inventory to Hurricane Hermine, that impacted operations along the U.S. Gulf Coast. The storm caused production to be taken offline and also contributed to Gulf Coast crude imports to drop as ships delayed offloading cargo in Texas and Louisiana.
Separately, the EIA said the weekly U.S. crude oil production decreased by 30,000 barrels per day (bpd) for the week ending September 2, 2016, to 8.458 million bpd. Weekly U.S. crude oil output has fallen about 11.99% from the peak level of 9.61 million bpd during the week ending June 5, 2015. Houston-based oilfield services company Baker Hughes Inc. said on Friday that the U.S. oil rig count rose by 7 to 414, compared to 316, when the rig count hit the low on June 6, 2016.
The best performing S&P 500 sectors for the week were Energy and Healthcare, up 0.66% and down 1.62%, respectively. The worst performing sectors for the week were Consumer staples and Materials, down 3.87% and 3.59%, respectively.
S&P 500 Summary: +4.10% YTD as of 09/09/16
Barclay Hedge Fund Index: +3.25% YTD
Outperforming Sectors: Energy +14.10% YTD, Telecommunication services +12.65% YTD, Utilities +11.09% YTD, Materials +8.48% YTD, Information technology +6.55% YTD, and Industrials +6.41% YTD.
Underperforming Sectors: Consumer staples +3.88% YTD, Financials +0.45% YTD, Consumer discretionary +0.01% YTD, and Healthcare –1.06%