Markets tumble on hawkish comments by Fed officials

Dow dropped all day & gave back 343 at day's end, decliners over advancers a staggering 16-1 & NAZ lost 116.  The MLP index sank 6+ to the 312s & the REIT index plunged 12+ to the 352s.  Junk bond funds were sold & Treasuries were lower.  Oil dropped (see  below) & gold was also sold.

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Crude Oil Nov 16

46.47

-1.79

-3.7%

Tranquility that has enveloped global markets for more than 2 months is being upended as central banks start to question the benefits of further monetary easing, sending gov debt, stocks & emerging-market assets to the biggest declines since Jun.  The S&P 500 tumbled 2%, its biggest drop since the Brexit vote.  Emerging-market assets & global equities fell the most since Britain voted to secede from the EU.  The yield on the 10-year Treasury jumped to the highest since Jun & the $ almost erased a weekly slide as a Federal Reserve official warned waiting too long to raise rates threatened to overheat the economy.  German 10-year yields rose to zero for the first time since Jul after the ECB downplayed the need for more stimulus.

Markets Tumble Around the World

Fed Governor Daniel Tarullo said he isn't ruling out the possibility of raising interest rates this year, but declined to say how he believed the Fed should act at its next meeting on monetary policy later this month.  Tarullo said mixed economic data will make the Fed's next meeting a "robust discussion."  He said some indicators of inflation have ticked up recently, but there isn't sustained evidence that inflation is near the Fed's target.  "We have an opportunity to continue to get employment gains in this country," he added.

Fed's Tarullo Not Ruling Out Rate Increases This Year

Federal Reserve Bank of Boston pres Eric Rosengren said that "a reasonable case can be made" for tightening interest rates to avoid overheating the economy.  Holding rates at their current low level for much longer risks making labor markets too tight, forcing the Fed to raise interest rates sharply, which could result in another recession, he warned.  "If we want to ensure that we remain at full employment, gradual tightening is likely to be appropriate," he said.  "A failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery."  Rosengren didn't specifically say whether he supports raising interest rates at the Sep meeting.  But his remarks, which echoed a speech last month, serve as a warning against becoming too complacent.  The speech puts to rest any thought that a disappointing Aug employment report might dim his support for higher interest rates.  Although he has previously been an outspoken advocate for holding interest rates low, the strength of the labor market & a steep rise in asset prices have caused the Boston chief to support tighter monetary policy.   The unemployment rate stands at 4.9%, right around policy makers' estimate of the lowest sustainable rate.  He said continuing tightness in the labor market could push the unemployment rate below full employment in the next year, which would result in labor shortages.  Rosengren pointed to rising commercial real estate costs as an indication the economy may be reaching the point where low rates may be doing more harm than good.  And even though the Fed has yet to reach its 2% inflation target, Rosengren suggested the strong labor market would nudge up consumer prices, citing "modest evidence of the upward pressure on wages & salaries that would support inflation reaching the Federal Reserve's 2% goal."   He is among several Fed officials who say the time is coming to raise interest rates.  In his speech, he said the economy has performed well despite the weak global environment, citing the strong stock market & low volatility measures.  He added that disappointing economic growth numbers in H1 are likely to rebound in H2.  And Rosengren suggested the risks of running the economy too hot outweigh the risks of stifling inflation growth.

Fed's Rosengren Sees 'Reasonable Case' for Gradual Rate Increases

Oil fell, giving up much of what was gained a day earlier.  Analysts warned that US supplies are likely to rebound from a surprise drop as the Gulf of Mexico returns to normal operations in the wake of storm that disrupted output & transportation activities in the region last week.  Oil prices, however, still gained 3.2% for the week as some traders held out hope that producers will agree to curb production at a meeting later this month.  Oct WTI crude fell $1.74 (3.7%) to settle at $45.88 a barrel.

Oil Futures Fall For The Session, But Gain For The Week

This was one ugly day for stocks.  But stock have had an outstanding run since 2009, almost tripling from the low.  This year Jan was a bad month, but that was followed by pretty much a straight up market with the last 2 months of sideways trading while gains were digested.  As said so many time, the fundamental economic data behind this rise was minimal & that's being kind.  The bull market is based on low interest rates which have lasted for a DECADE.  At the beginning, they were put in place to help the economy recover from a difficult recession.  Traders have become addicted to low rates & fear the thought of having to deal with higher rates.  However when there are rate increases, Janet will not allow rapid increases.

Dow Jones Industrials