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Traders Ran Up The Energy Sector, Ignoring Warnings About Further Rate Hikes As Dollar Bulls May Be The Only Ones Listening To Fed Officials Right Now

|Includes: SPY, XES, Energy Select Sector SPDR ETF (XLE)

By Ed Wijaranakula, Ph.D., NMS Investment Research

The S&P 500 gained 0.8% for the week, to close on Friday at 2,362.72, despite a full force of Fed officials that came out and gave speeches to support arguments for further rate hikes. Boston Fed President Eric Rosengren, a non-voting member of the FOMC, said in a speech on Wednesday to the Boston Economic Club that he wants a rate hike at every other meeting this year, meaning three more rate hikes, according to MarketWatch. The best performing S&P 500 sectors for the week were Energy ($SPEN) and Consumer discretionary ($SPCD), up 2.21% and 1.66%, respectively. The worst performing sector for the week was Utilities ($SPU), down 1.24%.

S&P 500

S&P 500 Energy Sector

The S&P 500 Energy sector bounced off its trendline support on Monday, following unsubstantiated news and speculations about the crude oil supply, despite a jump in the U.S. dollar. The U.S. Dollar index, or DXY, essentially the USD/EUR exchange rate, closed at 100.22 on Friday, up 0.78% for the week after the UK Government triggered Article 50 and the Commerce Department revised on Thursday its third estimate of the fourth-quarter 2016 GDP to 2.1% instead of the previously reported 1.9% pace. According to Bloomberg's survey, the pound drop on Wednesday, due to the UK Government triggering Brexit, is seen to be short-lived as negativity is overdone. A bearish lower lows chart pattern has emerged, signaling the DXY could be heading lower.

U.S. Dollar Index

The Federal Reserve Bank of Atlanta revised its U.S. first-quarter 2017 GDP on Friday back to just 0.9% from the previous 1.3%, citing weak real consumer spending growth. The U.S. Bureau of Economic Analysis said Friday that the core PCE rose by 0.2% in month-over-month terms for February, in line with expectations of a 0.2% uptick. On the year-over-year basis, the core PCE, the Federal Reserve's preferred inflation measure, rose by 1.8% and continues running below the Fed's 2% target. Personal income for February inched up 0.4%, but personal spending in the same period rose only 0.1%, missing expectations for 0.2%, and that is not a good thing.

U.S. GDP Forecast

Separately, the Federal Reserve Bank of New York trimmed its U.S. first-quarter GDP forecast 0.1 percentage point on Friday to 2.9%, citing weak consumption data. The average forecast for first-quarter 2017 growth from the Atlanta Fed and New York Fed stands at 1.9%. It could get worse from here, as the "Trump bump" in the U.S. economy is fading fast while political turmoil in Washington D.C. is mounting. The U.S. Department of Commerce will release its advance estimate first-quarter 2017 GDP on April 28.

The yield of 10-year U.S. Treasury Notes ticked down 0.46% this week, to close on Friday at 2.389%, while the yield spread between the 10-year and 2-year U.S. Treasury Notes narrowed to 1.13 percentage points. The spot gold price was up another 0.22% for the week, to close at $1,251.20 per ounce on Friday, while the Japanese yen is flat against the U.S. dollar.

The WTI crude spot price surged 5.27% for the week, closing at $50.50 per barrel on Friday, while the Brent crude spot price jumped 4.89% for the week to close at $53.62 per barrel, despite a bearish EIA weekly report showing the crude oil inventory stood at another record level and U.S. production continued to rise. Traders ran up crude prices anyway after the EIA said that gasoline supplies dropped 3.7 million barrels, while distillate stockpiles fell 2.5 million barrels last week, compared to the S&P Global Platts survey forecast for a fall of 2.1 million barrels of gasoline and decline of 1.1 million barrels for distillates.

Bloomberg reported, from unnamed sources in Libya on Wednesday, that Libya's largest oil field, Sharara, mysteriously stopped producing. Separately, according to Reuters, a joint committee of ministers from OPEC and non-OPEC oil producers agreed to review whether a global pact to limit supplies should be extended by six months. Although the Bloomberg report was unsubstantiated, and the six-month extension of the output cut by OPEC and non-OPEC was just talk, traders were quick to cover their short positions, according to data from the U.S. Commodity Futures Trading Commission, or CFTC.

The EIA weekly U.S. oil inventory report on Wednesday showed that domestic crude supplies increased by 0.867 million barrels to an all-time high of 533.98 million barrels, excluding the Strategic Petroleum Reserve, in the week ending March 24, compared to the S&P Global Platts forecast for a stockpile increase of 0.3 million barrels. The American Petroleum Institute, or API, inventory data on Tuesday showed a U.S. crude inventory increase of 1.9 million barrels.

Separately, the EIA said the weekly U.S. crude oil production increased 18,000 bpd for the week ending March 24, to 9.147 million bpd. U.S. crude oil output increased 121,000 bpd to an average of 9.118 million bpd in March, compared to a February average of 8.997 million bpd. Output has fallen about 5.02% from the peak level of 9.60 million bpd in June 2015. Houston-based oilfield services company Baker Hughes Inc. said on Friday that the U.S. oil rig count rose another 10 to 662, compared to 316, when the rig count hit the low on June 6, 2016.

S&P 500 Summary: +5.53% YTD as of 03/31/17
Barclay Hedge Fund Index: +9.00% YTD

Outperforming Sectors: Information technology +12.16 YTD, Healthcare +7.89% YTD, Utilities +5.44% YTD, Consumer discretionary +8.09% YTD, and Consumer staples +5.64% YTD.

Underperforming Sectors: Materials +5.31% YTD, Industrials +4.01% YTD, Real Estate +0.78% YTD, Financials +2.08% YTD, Telecommunication services -5.06% YTD, and Energy -7.30% YTD.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.