Stocks closed lower on Wednesday. Federal Reserve chair Janet Yellen gave markets more confidence that interest rates could rise in December, and treasury yields spiked to four-year highs.
First, the scoreboard:
- Dow: 17,865.67, -52.48, (-0.29%)
- S&P 500: 2,101.98, -7.81, (-0.37%)
- Nasdaq: 5,139.65, -5.48, (-0.11%)
And now, Wednesday’s top stories:
- Yellen was testifying to the House Financial Services panel when she repeated, just like the most recent policy statement said, that December is a “live possibility” for an interest rate hike. It hinges on how well the labour market improves, and how much inflation is progressing towards its 2% target. Fed fund futures, which reflect traders’ expectations for interest rates, jumped to a 60% probability for a 25-basis-point increase in December. That’s the highest probability for a hike for any Fed meeting since 2007, according to CMT’s Charlie Bilello.
- US Rep. Brad Sherman (D-California) said Yellen should rather wait because that’s what God wants. He said, “God’s plan is that things rise in the spring. And so if you want to be good with the Almighty, you may want to delay until May.”
- Treasury yields advanced as Yellen spoke. The two-year note’s yield, which is very sensitive to interest-rate expectations, rose to a four-year high of 0.82%. The benchmark 10-year note yield rose to the highest level since mid-September and peaked near 2.24%.
- Cable stocks got wrecked after Time Warner cut its outlook for next year. During the third-quarter-earnings call, the company said it saw 2016 earnings per share near $US5.25 per share, but analysts had estimated EPS near $US5.60. The stock fell by as much as 8% in trading. Shares of Viacom and 21st Century Fox fell by more than 5%, while Comcast fell about 2%. In the summer, analysts warned about declining cable subscriptions, advertising revenues, and television viewers across the industry.
- In economic data, the services sector gave us mixed signals today but proved that it is much stronger than manufacturing. Markit’s services PMI for October was better than expected, at 54.8 (54.5 expected). But the report showed service-sector activity slowed to a four-month low, and weaker client demand reduced expectations for growth in the year ahead.
- But ISM’s PMI was a better-than-expected 59.1 (56.5 forecast), and remained near the highest levels in a decade. ISM said the services sector continued to grow at a faster rate in October, as most indexes expanded, and respondents remained positive about the economy.
- The trade balance shrank more than expected in September. The trade deficit was $US40.81 billion; economists had expected it to reduce to $US41 billion from a revised $US48.33billion). “The bigger story is that the improvement won’t last, wrote Capital Economics’ Steve Murphy to clients. Murphy said the strong dollar would probably widen the trade deficit again over the next 12 months.
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