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Stocks Close Firmly Negative On Renewed Interest Rate Concerns - U.S. Commentary


Following the mixed performance seen in the previous session, stocks moved mostly lower during the trading day on Friday. With the drop on the day, the Dow pulled back off its best closing level in a month.

The major averages climbed well off their worst levels of the day but remained firmly in negative territory. The Dow fell 201.92 points or 0.8 percent to 25,989.30, the Nasdaq tumbled 123.98 points or 1.7 percent to 7,406.90 and the S&P 500 slid 25.82 points or 0.9 percent to 2,781.01.

Despite the pullback on the day, the major averages all moved higher for the week. The Dow surged up by 2.8 percent, the S&P 500 jumped by 2.1 percent and the Nasdaq climbed by 0.7 percent.

The weakness on Wall Street partly reflected renewed concerns about the outlook for interest rates on the heels of the Federal Reserve's monetary policy announcement on Thursday.

The Fed left interest rates unchanged as widely expected but indicated it remains on track to gradually raise rates despite signs of a slowdown in the pace of growth in business investment.

Adding to the concerns about interest rates, the Labor Department released a report showing a much bigger than expected increase in producer prices in the month of October.

The Labor Department said its producer price index for final demand climbed by 0.6 percent in October after rising by 0.2 percent in September. Economists had been expecting another 0.2 percent uptick.

Excluding food and energy prices, core producer prices still rose by 0.5 percent in October after edging up by 0.2 percent in September. Core prices had been expected to rise by another 0.2 percent.

Compared to the same month a year ago, producer prices in October were up by 2.9 percent, reflecting an acceleration from the 2.6 percent increase in September.

The annual rate of growth in core consumer prices also accelerated modestly to 2.6 percent in October from 2.5 percent in September.

"Overall, the producer prices data show that inflationary pressures remain fairly strong, which will keep the Fed hiking rates once a quarter in the near term," said Andrew Hunter, U.S. Economist at Capital Economics.

A separate report from the University of Michigan showed a slight deterioration in consumer sentiment in the month of November.

The report said the consumer sentiment index edged down to 98.3 in November from the final October reading of 98.6. Economists had expected the index to dip to 98.0.

Sector News

Extending a recent sell-off, tobacco stocks moved sharply lower over the course of the session, dragging the NYSE Arca Tobacco Index down by 3.5 percent. The index tumbled to its lowest closing level in well over two months.

The steep drop by tobacco stocks was partly due to a report from the Wall Street Journal indicating FDA Commissioner Scott Gottlieb plans to pursue a ban on menthol cigarettes.

Substantial weakness was also visible among biotechnology stocks, as reflected by the 2.8 percent slump by the NYSE Arca Biotechnology Index.

Steel stocks also saw considerable weakness amid concerns about the outlook for global demand, with the NYSE Arca Steel Index plunging by 2.5 percent.

Technology, gold, retail and brokerage stocks also showed notable moves to the downside, reflecting broad based weakness on Wall Street.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region moved notably lower during trading on Friday. Japan's Nikkei 225 Index slumped by 1.1 percent, while Hong Kong's Hang Seng Index plunged by 2.4 percent.

European stocks also moved mostly lower on the day. While the German DAX Index bucked the downtrend and closed just above the unchanged line, the French CAC 40 Index and the U.K.'s FTSE 100 Index both fell by 0.5 percent.

In the bond market, treasuries rebounded following the drop seen over the course of the previous session. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, dropped by 4.5 basis points to 3.189 percent.

Looking Ahead

The economic calendar for next week starts off relatively quiet, although reports on consumer prices, retail sales, and industrial production are likely to attract attention.

On the earnings front, Walmart (WMT), Home Depot (HD), Tyson Foods (TSN), Macy's (M), Cisco Systems (CSCO), NetApp (NTAP), J.C. Penney (JCP), and Nvidia (NVDA) are among the companies due to report their quarterly results next week.

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