The Week In Review

9/9/16

The stock market ended an otherwise flat week on a sharply lower note as increasing interest rates spurred selling interest in the broader market. The Nasdaq Composite (-2.5%) settled in-line with the S&P 500 (-2.5%) and behind the Dow Jones Industrial Average (-2.1%). The three indices ended the week with losses between 2.2% and 2.4%.

Global markets tilted to the downside as participants responded to a negative set of economic data and news that North Korea carried out another nuclear test. However, the negative headlines failed to elicit a bid in the bond market. The counterintuitive move in bonds incited further angst regarding yesterday's policy statement from the European Central Bank and rising fed funds rate hike expectations.

The ECB released its September policy statement yesterday, holding its monetary policy stance steady. The central bank opted to keep its key interest rates at record lows while maintaining the size and scope of its asset purchases. Furthermore, ECB President Mario Draghi struck a hawkish tone, indicating that the Governing Council didn't discuss extending the asset purchase program at the latest meeting.

DoubleLine's Jeffrey Gundlach added to rate angst, stating after yesterday's close that it's time to get defensive on bonds. The bond fund manager argued that a shift in longer-term inflation risk will drive monetary policy going forward. On that note, Boston Fed President, and FOMC voter, Eric Rosengren struck a somewhat hawkish tone today, stating that there is a reasonable case for continuing on the gradual path towards interest rate normalization. Furthermore, Fed Governor Daniel Tarullo said that he wouldn't foreclose the possibility of a rate hike this year.

The benchmark index remained under heavy pressure throughout today's session, carving out a session low in the final hour of trade. All ten sectors ended with sharp losses as energy (-2.8%), materials (-2.9%), telecom services (-3.4%), and utilities (-3.8%) finished on the bottom of the leaderboard. Conversely, financials (-1.9%) and health care (-2.0%) ended with the narrowest losses.

The PHLX Semiconductor Index (-3.7%) finished well behind the benchmark index, retracing its August gain. The index rallied 4.5% in August, but has declined 4.1% thus far in September. Skyworks (SWKS 66.76, -4.67) finished at the bottom of the index. The iPhone supplier declined 8.6% since Apple (AAPL 103.13, -2.39) unveiled the iPhone 7 on September 7.

The commodity-sensitive energy (-2.8%) space finished in the red as crude oil ended its day lower by 3.7% ($45.88/bbl; -$1.78). However, WTI crude finished the week higher by 3.4%. The energy component was under pressure as participants dialed back the potential impact of yesterday's inventory report from the Department of Energy. In the sector, Williams Cos (WMB 30.04, -1.11) lost 3.6% after Enterprise Products (EPD 26.81, -0.44) announced that it is no longer pursuing a combination with the company.

Biotechnology displayed relative weakness in the health care sector (-2.0%), evidenced by the 3.3% loss in the iShares Nasdaq Biotechnology ETF (IBB 278.63, -9.40). Biogen (BIIB 296.10, -11.63) underperformed in the ETF after the stock was removed from the focus list at Goldman Sachs. Conversely, Gilead Science (GILD 78.08, -0.90) fell 1.2% after Gabelli issued a bullish note on the name.

The economically-sensitive financial sector (-1.9%) finished ahead of the broader market, benefiting from rising rate hike expectations and some steepening in the yield curve. The fed funds futures market indicates that the odds of a rate hike at the September meeting have increased to 24.0% from 18.0% in the prior session.

Treasuries ended sharply lower with the long end of the curve demonstrating relative weakness. The yield on the 10-yr note rose seven basis points (1.67%) while the yield on the 2-yr note ticked higher by one basis point (0.78%).

Today's participation was above the recent average as more than one billion shares changed hands on the NYSE floor.

Today's economic data was limited to Wholesale Inventories for July:

Wholesale inventories were unchanged in July, as expected, following an unrevised 0.3% increase in June.

The report won't have any material sway on economists' third quarter GDP forecasts since the reading was in-line with the consensus estimate.

For more on this economic release, be sure to visit Briefing.com's Economic Calendar page.

There is no domestic economic data of note scheduled for Monday.

Russell 2000: +7.7% YTD

S&P 500: +4.1% YTD

Dow Jones: +3.8% YTD

Nasdaq Composite: +2.4% YTD

Week in Review: Stocks and Bonds Retreat

The S&P 500 spent the first four days of the week inside a 14-point range, but a Friday sell off pressured the index below its 50-day moving average (2164.0) for the first time since early July. The benchmark index lost 2.4% for the week, narrowing its third-quarter gain to 1.4%.

The first four days of the week were fairly quiet, but Thursday evening featured comments from DoubleLine Capital's Jeffrey Gundlach, who said, "this is a big, big moment," sharing his belief that interest rates have bottomed.

Mr. Gundlach's thesis was put to a test almost immediately as North Korea conducted its fifth and largest nuclear test on Friday. The development was met with condemnation from North Korea's neighbors, but surprisingly, global bonds did not benefit from a risk-off bid. Instead, selling in the Japanese, Italian, and German 10-yr notes drove their respective yields up to -0.03%, 1.25%, and 0.01%. For its part, the U.S. 10-yr yield rose eight basis points to 1.67% on Friday, adding six basis points for the week.

In addition to the comments from Mr. Gundlach, investors digested remarks from Boston Fed President Eric Rosengren, who said that a reasonable case can be made for continuing gradual tightening of policy. Mr. Rosengren, who is an FOMC voter, also said the labor market could exceed full employment next year.

Rate hike expectations edged up when compared to last Friday. The implied likelihood of a rate hike in September inched up to 24.0% from last week's 21.0% while the implied probability of a December hike climbed to 58.4% from 54.2%.