U.S. stocks ended a volatile session lower

Investors grapple with the prospect of a faster pace of rate increases in 2017

U.S. stocks ended a volatile session lower on Wednesday, 15 December 2016 as investors grappled with the prospect of a faster pace of rate increases in 2017 than had been previously forecast. All three major indexes briefly traded higher after the announcement, but they turned lower as Yellen began her news conference.

The Dow Jones Industrial Average fell 118.5 points, or 0.6%, to 19,792.66. The S&P 500 index lost 18.44 points, or 0.8%, to trade at 2,253.28. The Nasdaq Composite Index lost 27.16 points, or 0.5%, to 5,436.67.

 

All 11 of the S&P 500's primary sectors ended lower, but so-called defensive names were among the weakest of the day. The utilities, real estate, and consumer-staples sectors all fell more than 1%. Energy stocks also dropped, tracking a decline in the price of crude oil. Financial stocks slumped erasing an initial move higher. Banks tend to be sensitive to rate increases due to the impact it has on their business models.

The Federal Reserve raised its key short-term rate on Wednesday, as had been universally expected, but it also forecast three rate increases in 2017, compared with the two that had been anticipated at its previous meeting in September. While the revised outlook could be taken as a positive signthe Fed has said it would only raise rates when it deems the economy strong enough to withstand such a moveit added an element of uncertainty to the market. In raising rates, the Fed moved its key short-term rate to a range of 0.5%-0.75% from 0.25% to 0.5%. The Fed decision marks the central bank's first increase in rates since last December, which itself was the first in about a decade.

During her press conference, Fed Chair Janet Yellen was asked if fiscal policies that fail to boost productivity could prompt the Fed to be more aggressive when it comes to hiking rates, but Ms. Yellen's response only acknowledged the presence of considerable uncertainty on the fiscal front.

Treasuries retreated in reaction to the rate increase while the U.S. Dollar Index jumped 1% to mark a fresh high for the year.

In the latest round of economic data, retail sales rose 0.1% in November, a slower pace of growth than had been expected. Elsewhere, the producer-price index jumped 0.4% in November, largely because of higher wholesale margins in the extremely volatile retail category.

Ahead of oil's settlement on Wednesday, the U.S. Federal Reserve announced the first interest-rate increase in a year, which caused the dollar to strengthen, putting further pressure on dollar-denominated prices of crude.

Bullion prices ended higher at Comex on Wednesday, 15 December 2016 at Comex. Gold futures settled higher on Wednesday, then retreated in electronic trading as the dollar strengthened on the heels of the U.S. Federal Reserve's decision to raise interest rates for the first time in 12 months.

Gold for February delivery was at $1,156.20 an ounce in electronic trading shortly after the Fed announcement, down from Wednesday's settlement of $1,163.70. Wednesday's finish marked a rebound of $4.70, or 0.4% from Tuesday's settlement, at a roughly 10-month low. March silver rose 24.4 cents, or 1.4%, to $17.221 an ounce.

Crude oil futures settled lower on Wednesday, 15 December 2016 for the first time in five sessions, pressured as a monthly report from OPEC showed that member output rose in November, fueling doubts over a recent agreement to curb production. The Organization of the Petroleum Exporting Countries also said it would need help from non-cartel producers to reduce a supply glut in the market.

January West Texas Intermediate crude fell $1.94 cents, or 3.7%, to settle at $51.04 a barrel on the New York Mercantile Exchange. February Brent crude shed $1.82, or 3.3%, to $53.90 a barrel on the ICE Futures exchange in London. Both crude grades settled Tuesday at their highest levels since July 2015.

Treasury yields shot higher after the announcement, with the yield on the U.S. two-year Treasury touching its highest level since August 2009.

Among stocks under focus, Johnson & Johnson said late Tuesday that it has dropped talks to buy Swiss drug company Actelion Pharmaceuticals because the deal price had gotten too high. French drug giant Sanofi SA is now in talks for a deal with Actelion. Shares of J&J fell 0.8%.

Investor participation was ahead of average with more than 1.2 billion shares changing hands at the NYSE floor.

Tomorrow will also be pretty busy on the economic front with weekly initial claims (consensus 256K), November CPI (consensus 0.2%), December Philadelphia Fed (consensus 9.0), December Empire Manufacturing (consensus 3.0), and Q3 Current Account Balance (consensus -$111.60 billion) all set to be released at 8:30 ET. The December NAHB Housing Market Index (consensus 63) will be reported at 10:00 ET.

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