The Week In Review

9/16/16

The stock market ended a volatile week on a lower note as participants responded to a downturn in European banking names and a hotter-than-expected reading of the Consumer Price Index (CPI) for August. The Dow Jones Industrial Average (-0.5%) settled behind the S&P 500 (-0.4%) and the Nasdaq Composite (-0.1%). For the week, the S&P 500 gained 0.5% while the Nasdaq surged 2.3%.

European markets led to the downside as financials paced the retreat. Deutsche Bank (DB 13.37, -1.39) was under pressure after the U.S. Department of Justice proposed that the bank pay $14 billion in order to settle civil claims associated with the residential mortgage-backed securities crisis. Deutsche Bank has since announced that it is negotiating with the Justice Department to have the penalty reduced.

The future path of interest rate normalization was also in focus as investors assessed another round of inflation data for August. Total CPI increased 0.2% (Briefing.com consensus +0.1%) in August while core CPI, which excludes food and energy, jumped 0.3% (Briefing.com consensus +0.2%). On a year-over-year basis, CPI has increased 1.1% while core CPI is up 2.3%. The report signaled that inflation is firming, which underpinned a similar observation in yesterday's in-line core PPI reading.

Fed funds futures ticked higher following the inflation data, however, rate hike expectations remain tempered for next week's policy meeting. The implied probability of an interest rate hike at the September meeting increased to 15.0% from 12.0% in the prior session. Meanwhile, the implied probability of an interest rate hike at the December meeting rose to 52.9% from yesterday's 47.4% likelihood. The U.S. Dollar Index (96.06, +0.77, +0.81%) and short term Treasury yields also gained on the news.

The S&P 500 (-0.4%) remained pressured throughout the session as participants continued to assess a resurgence in volatility ahead of central bank policy meetings next week. Other factors impacting today's trade included a downturn in crude oil futures and another mixed performance from the Treasury complex. The energy (-0.9%) and financial (-0.9%) sectors ended with the largest losses while health care (+0.1%) and utilities (+0.9%) finished with the only gains.

In the financial sector (-0.9%), money center banks underperformed as Citigroup (C 46.41, -0.67) and Wells Fargo (WFC 45.43, -0.72) declined 1.4% and 1.6%, respectively. Wells Fargo was under pressure after being downgraded to "Underweight" from "Neutral" at Atlantic Equities. The stock declined 6.8% this week amid concerns regarding its sales practices. The broader space fell 1.3% this week, leading only energy (-0.9%; week-to-date: -2.9%) over that time.

The commodity-sensitive energy sector (-0.9%) was under pressure as crude oil extended its recent losing streak. The energy component ended the day lower by 1.9% ($43.04/bbl; -$0.81), extending its weekly loss to 6.2%. In the sector, Dow components Exxon Mobil (XOM 84.03, -1.05) and Chevron (CVX 97.84, -1.66) each finished behind the price-weighted index. The broader sector has declined 1.7% so far in September.

The technology sector (-0.3%) finished ahead of the broader market as the group pulled back from a larger weekly gain. Apple (AAPL 114.92, -0.65) finished lower by 0.6%, narrowing its weekly gain to 11.4%. Meanwhile, Oracle (ORCL 38.92, -1.94) fell 4.8% after missing bottom-line estimates for the quarter and issuing disappointing second-quarter guidance.

In the health care space (+0.1%), health care plan providers outperformed as Anthem (ANTM 125.52, +1.18) and CIGNA (CI 131.99, +3.35) gained 1.0% and 2.6%, respectively. The names outperformed following reports that the Department of Justice has dropped a claim in the lawsuit to block their potential merger. Separately, Abbott Labs (ABT 41.87, +0.75) gained 1.8% after Johnson & Johnson (JNJ 118.25, -0.38) agreed to acquire Abbott's Medical Optics division for $4.325 billion in cash.

Treasuries ended on a mixed note with the short end of the curve demonstrating relative weakness. The yield on the 2-yr note rose four basis points to 0.77% while the yield on the 10-yr note finished flat at 1.69%. The spread between the 2-yr and 10-yr note expanded to 92 basis points from 89 basis points last Friday.

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

Today's economic data included CPI for August and the Michigan Sentiment Index for September:

Total CPI increased 0.2% in August (Briefing.com consensus +0.1%) while core CPI, which excludes food and energy, increased 0.3% (Briefing.com consensus +0.2%).

On a year-over-year basis, CPI is up 1.1% (vs. +0.8% in July), while core CPI is up 2.3% (vs. +2.2% in July).

Consumer inflation is firming (as is producer price inflation) and there is some data-based rationalization in the core CPI rate for the Fed to raise the fed funds rate.

However, the Fed keys in on the PCE Price Index as its primary inflation gauge and that index -- both total and core -- still shows consumer inflation below the Fed's 2 percent objective.

The preliminary reading of the University of Michigan Consumer Sentiment Survey for September was unchanged from the final August reading, holding at 89.8.

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

Monday's economic data will be limited to the NAHB Housing Market Index (Briefing.com consensus 59), which will cross the wires at 10:00 ET.

Russell 2000: +7.8% YTD

S&P 500: +4.7% YTD

Nasdaq: +4.7% YTD

Dow Jones: +4.0% YTD

Week in Review: Nasdaq Leads Stocks Higher

The stock market endured a volatile week, but was able to settle above last Friday's levels. The Nasdaq Composite was a clear outperformer, climbing 2.3%, while the S&P 500 added 0.5% after testing its 100-day moving average (2122.5) on several occasions.

The rate hike conversation remained top of mind throughout the week, but fears of a September hike were stomped out by the weekend. A disappointing August Retail Sales report (-0.3%; Briefing.com consensus -0.1%) contributed to the change in expectations, but somewhat surprisingly, Treasuries still sold off. Weakness in the 10-yr note drove its yield to a brief test of 1.75% before ending the week at 1.69% (+1 bp). The retreat in Treasuries suggest the bond market may be sniffing out some inflation down the road.

Taking a glance at the fed funds futures market, the implied likelihood of a September hike declined to 15.0% from last week's 24.0% while the implied odds of a hike in December slipped to 55.5% from 58.4% last week.

The technology sector (+3.0%) was a clear outperformed during the week, largely thanks to an 11.4% surge in the shares of Apple (AAPL). The top-weighted stock rallied on reports of strong iPhone 7 sales, ending the week near levels not seen since the end of 2015.