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October 10, 2018

Stocks Plummet as Higher Rates Scare Investors

 

The Good, the Bad and the (very) Ugly

This morning financial markets received a positive inflation print via the Labor Department’s report on U.S. business prices.  After failing to increase in both July and August, the producer-price index rose a seasonally adjusted 0.2% in September, matching expectations.  Excluding food, energy, and trade services, producer prices climbed a more robust 0.4% - the largest monthly rise in core prices since January of this year.  Compared to a year earlier, the overall PPI index recorded a 2.6% gain (with the core at +2.9% y-o-y).  Overall, today’s data provides a steady picture of rising prices in the US (at the producer level), helping to counteract much of the recent weaker inflation data.

 

 

In commodity markets, WTI crude futures tumbled 2.4% to roughly $73/barrel as the category 4 storm Hurricane Michael wreaked havoc on both the supply and demand side of the energy sector.  Within the Gulf of Mexico, US production was cut by 40 percent after 75 platforms were forced to be closed and evacuated in anticipation of the potentially catastrophic weather.  On the other hand, the storm is expected to dramatically reduce demand by ~1 million barrels per day, which net/net has put significant downward pressure on prices and driven futures near their lowest levels of the past two weeks.

 

 

It was a very, very ugly day in equity markets (except for short sellers of course)-

  • Nasdaq declined 4.08%, its largest daily loss since June 2016 as technology stocks experienced their worst trading session since Brexit

  • DJIA fell by 831 points (-3.15%), it’s worst one-day drop in the past eight months

  • S&P 500 posted its fifth consecutive day of losses (-3.29%), matching its longest losing streak since November 2016

  • CBOE Volatility Index (VIX) surged more than 40% to a six-month high of 22.96

 

 

The stock market losses provided an opportunity for President Trump to again express his dissatisfaction with the Fed’s continual interest rate hikes.  "Actually, it's a correction that we've been waiting for for a long time, but I really disagree with what the Fed is doing," he stated in reaction to the pronounced equity market decline.  US Treasurys sold off in the morning before giving way to a sharp safety rally in the afternoon which saw yields/swap rates gap lower into the close.  Across the curve, rates finished 2-6 bps below their opening levels, with the 10-year note yield settling down to 3.16% (-4 bps).   

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