Closing Market Summary: Stocks Slump as Taper Talk Returns
The major averages ended on their lows after early gains turned into afternoon losses. The late decline occurred in reaction to the October FOMC minutes, which mentioned the possibility of tapering in the ‘coming months.' It should be noted that despite today's 0.4% decline, the S&P 500 remains higher by 7.5% since October 9. Stocks held modest gains through the bulk of the session after a better-than-expected October retail sales report set the stage for an upbeat open. The report pointed to an increase of 0.4% while the consensus expected a more modest uptick of 0.1%. More importantly, the report indicated the government shutdown had essentially no effect on consumer spending. The above-consensus data helped retailers outperform the broader market as the SPDR S&P Retail ETF (XRT 86.87, +0.03) ended flat. Among individual names of note, J.C. Penney (JCP 9.44, +0.73) surged 8.4% after its upbeat-sounding guidance overshadowed its bottom-line miss. As the opening hour drew to its close, stocks spiked amid reports the European Central Bank will weigh implementing negative deposit rates if more easing is needed. The euro weakened on the news, falling below 1.3500 against the dollar. It is worth mentioning that negative rates have been discussed in recent weeks. In fact, just yesterday, ECB Executive Board member Joerg Asmussen said the central bank could implement negative deposit rates if the 2.0% inflation target remains elusive. However, Mr. Asmussen added he would be ‘very, very careful' with regards to deploying the policy tool.
Equity indices then returned to their earlier levels after St. Louis Fed President James Bullard said that a strong November jobs report would increase the chances of tapering in December. Taper talk resurfaced this afternoon when the minutes from the October FOMC meeting indicated tapering is ‘likely in the coming months.' The rest of the statement struck a familiar tone as the FOMC said the economy is expanding at a moderate pace while some downside risks remain. The market's reaction was consistent with what transpired after previous mentions of tapering by the Fed. Equities, Treasuries (10-yr yield +8 bps to 2.79%), and gold futures (-2.3% to $1245.50/ozt) sold off while the Dollar Index (+0.4% to 81.02) rallied. Even though the market received tapering hints from Mr. Bullard and the October minutes, it should be noted the labor situation represents just one half of the picture. The Federal Reserve has also committed to maintaining annual inflation close to 2.0%, but has struggled in achieving this target. Today's CPI report spoke to that point as October prices slipped 0.1% while the consensus expected no change. Core prices increased 0.1%, below the 0.2% expected by the consensus. On an annualized basis, CPI came in at 1.0% while core CPI was reported at 1.7%.
When the dust settled, the health care sector (+0.3%) was the only group left in positive territory while the other sectors ended with losses between 0.3% and 1.2%. Rate-sensitive utilities (-1.1%) and telecom services (-0.8%) ended at the bottom of the leaderboard as elevated rates weighed.
Participation was on the light side as only 622 million shares changed hands on the floor of the New York Stock Exchange.
Looking back at today's remaining economic data, business inventories rose 0.6% in September after increasing 0.4% in August. The consensus expected inventory levels to increase 0.4%.
Separately, existing home sales fell 3.2% to 5.12 million in October from an unrevised 5.29 million in September. The consensus expected home sales to fall to 5.20 million. Surprisingly, the National Association of Realtors did not blame the government shutdown for the drop in sales. The shutdown left many banks unable to verify income through the IRS before closing. That was one of the main reasons why mortgage purchase applications fell during the month. We expected the delays in the mortgage approval process to push a number of home purchases that would have occurred in October into November. Tomorrow, weekly initial claims and October PPI will be reported at 8:30 ET while the November Philadelphia Fed survey will be released at 10:00 ET.
o Nasdaq +29.9% YTD o Russell 2000 +29.5% YTD o S&P 500 +24.9% YTD o DJIA +21.3% YTD