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Washington - US stocks slipped as falling crude oil led energy shares lower, amid increased speculation that interest rates may rise this year after Federal Reserve vice chairperson Stanley Fischer said the economy was close to meeting the central bank’s goals.
The S&P 500 Index lost 0.2% to 2 178.61 at 15:32, after closing Friday 0.3% below its all-time high reached a week ago. West Texas Intermediate crude futures headed for their steepest drop in three weeks on concerns of increased supplies from Iraq and Nigeria.
“Stan Fischer’s comments clearly raised the risk of a more hawkish tone from Yellen on Friday, so that’s impacting the dollar, risk assets and commodity prices,” Dennis Debusschere, senior managing director and global portfolio strategist at Evercore ISI, said by phone.
“Offsetting that is the idea that if they raise rates very slowly, they’ll stop at a lower, neutral rate. Any weakness related to the prospects of Fed tightening are going to be short lived.”
A rally that has brought equities to a series of all-time highs since early July lost some momentum last week as investors mulled extended valuations, skepticism over a recovery in corporate profits and mixed signals from policy makers over the timing for higher rates.
The S&P 500 closed Friday down less than a point over the five-day period for just its second weekly decline since June. The gauge’s price relative to future earnings has climbed to 18.6, the highest since 2002.
Speaking in Colorado on Sunday, Fed vice chair Fisher signaled that a 2016 rate hike is still under consideration, and forecast economic growth to pick up in coming quarters as investment recovers. New York Fed President William Dudley warned last week that investors are underestimating the likelihood of an imminent rate increase.
Attention will now turn to Fed chair Janet Yellen’s August 26 address in Jackson Hole, Wyoming, for clues on the timing of potential rate hikes. Traders’ bets on higher borrowing costs have been pushed forward, with December now the first month showing at least even odds of an increase, from June 2017 on August 10.
Readings later this week on home sales, durable goods orders and a revised look at second-quarter growth will also figure into sentiment on future rate moves.
Focus is shifting back to the Fed as the second-quarter earnings season ends. About 96% of S&P 500 companies have now reported, and of these, 79% beat profit forecasts, while 56% exceeded sales expectations. Analysts project third-quarter earnings will fall 0.9%, which would be a sixth consecutive drop, the longest since the financial crisis.
“Clearly there is a battle going on between what seems to be a perfectly reasonable macro environment on the one hand, against the lack of positive earnings growth,” said Daniel Murray, head of research at EFG Asset Management in London. “Although earnings growth is beating expectations, in absolute terms, earnings growth has been quiet muted.”
