Market Update: Friday, September 16, 2016

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  • Inflation data weigh at the open. Higher than expected consumer prices released this morning are weighing on U.S. equities. This comes on the heels of weakness in European markets, spurred by a U.S. Department of Justice proposal that Deutsche Bank pay a $14 billion settlement related to sales of mortgage-backed securities before the 2008 financial crisis. Looking back, yesterday’s session saw the Nasdaq outperform, as equities were led by the tech sector for the third day in a row. In Asia, both the Shanghai Composite and Hang Seng were closed for a holiday; the Nikkei rose 0.7% on increased speculation that the Bank of Japan will cut negative rates further next week. Meanwhile, WTI crude oil is under pressure, slipping nearly 2.5% to $42.85/barrel on reports of increased production in Iran, COMEX gold is down 0.5% to $1312/oz., and the yield on the 10-year Treasury note is little changed at 1.69%.

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  • August CPI ran hot, but likely not hot enough to cause the Fed to raise rates as soon as next week. Headline Consumer Price Index (CPI) rose 1.1% year over year in August, while core CPI rose 2.3%; both readings were higher than expected and an acceleration from July. Beneath the surface, the CPI for services (two-thirds of CPI) posted a 3.0% gain over the past year—the strongest reading in almost eight years—while the CPI for goods (one-third of CPI and largely driven by food and gasoline prices) fell 2.2%. As we approach the anniversary of the worst of the oil price declines in Q3 and Q4, the goods category should turn positive and drive headline inflation close to 2.0% by year-end 2016 and well above 2% in early 2017.
  • FOMC is focus for next week. Although there are key reports due out next week on housing (starts, homebuilder sentiment, and existing home sales) and manufacturing (September Purchasing Managers’ Index), markets will be focused on the Federal Reserve Bank (Fed). The Federal Open Market Committee (FOMC) will release a statement, a new set of “dot plots,” and a new economic forecast at 2 p.m. ET on Wednesday, September 21, and Fed Chair Janet Yellen will hold a press conference at 2:30 p.m. ET. We don’t expect the Fed to raise rates at next week’s meeting, but we do expect them to begin preparing markets for a hike in December. The Bank of Japan (BOJ) also meets next week. Overseas, aside from the BOJ meeting, a speech by European Central Bank (ECB) President Mario Draghi, and China’s property price data for August, it’s shaping up to be a quiet week for data and events.
  • Another big day for tech. Technology has been leading the way higher since the start of Q3 and was the leading group again yesterday, up 1.6%. Since the end of June, tech is up 9.2%, with financials the next closest group at 4.3%. The weakest performer has been utilities, down 7% as the threat of higher yields has put pressure on this group. Remember, tech in general had been a lagging sector much of 2015 and early 2016, but that appears to be changing. Also, with tech being the largest component of the S&P 500, it could be a good sign for the overall market as well.
  • Volatility ticks up again. The S&P 500 is up 1.0% for the week and has now moved 1% or more (up or down) four of the past five days. Remember, it had gone 43 straight days without a 1% move, but the second half of September until late October is historically one of the most volatile times of the year, so this volatility could stick around awhile longer. Last Friday was the day to kickoff the volatility, with a massive 2.5% drop. As we noted on the blog on Monday, the week after a 2% drop in the S&P 500 on Friday has actually been rather strong: up 9 of the past 11 times going back to March 2009. There’s one day to go, but this pattern could play out again this week.

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Friday

  • Household Net Worth/Flow of Funds (Q2)
  • EU Leaders Summit Meeting
  • Russia: Central Bank Meeting (Rate Cut Expected)

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