XOM Exxon Mobil Corp

By Ellie Ismailidou and Victor Reklaitis, MarketWatch

Low inflation pushes rate-hike expectations lower

U.S. stocks remained lower Monday afternoon, taking cues from a fresh drop in oil prices and weak U.S. manufacturing data that showed signs of contraction for a fourth straight month.

The S&P 500 was down 13 points, or 0.7%, at 1,926. The Dow Jones Industrial Average was down 114 points, or 0.7%, to 16,352. The Nasdaq Composite was down 26 points, or 0.6%, at 4,586.

Wall Street opened deep in negative territory on Monday, with sentiment hit by fresh drops by oil futures (http://www.marketwatch.com/story/oil-sags-on-china-data-production-cut-doubts-2016-02-01) (http://www.marketwatch.com/story/oil-sags-on-china-data-production-cut-doubts-2016-02-01), following a 4.4% gain last week, amid fresh signs of sluggishness in China's economy (http://www.marketwatch.com/story/china-manufacturing-numbers-indicate-sluggishness-2016-01-31)and dimming prospects of a coordinated oil production cut by key producers.

Stocks have been influenced by a flurry of mixed economic data, which are being interpreted as weak enough to keep the Federal Reserve from raising interest rates later this year.

Fed Vice Chairman Stanley Fischer echoed that sentiment on Monday, suggesting the market's expectations of barely any interest rate hikes this year could turn out to be right (http://www.marketwatch.com/story/feds-fischer-says-markets-might-be-right-after-all-2016-02-01). Last month, Fischer was more hawkish, telling CNBC that the Fed thought the market expectations, at the time, for two rate hikes this year "are too low."

The energy sector was the worst performer on the S&P 500 Monday afternoon, down 3.2% on the day, led by an 8.7% drop for Kinder Morgan Inc (KMI). Energy names were among the worst performers on the Dow industrials, led by Exxon Mobil Corporation (XOM), which was down 2.7%.

Read: A big reason it is too late for OPEC to cut production (http://www.marketwatch.com/story/a-big-reason-its-too-late-for-opec-to-cut-production-2016-02-01)

In other data, U.S. manufacturing activity contracted for the fourth straight month (http://www.marketwatch.com/story/weak-tone-to-manufacturing-report-from-ism-in-january-2016-02-01), albeit at a slower pace in January than economists' expectations. The Institute for Supply Management said its manufacturing index rose to 48.2% in January from 48%, above forecasts but still below the reading of 50% that signals expansion.

The volatility and mixed reactions following the soft data showed that "a lot of investors are confused, and understandably so," said Diane Jaffee, a portfolio manager at TCW.

"We haven't been in a normal-interest-rate environment since the crisis," Jaffee said. She compared the Fed's stance toward market volatility to a parent helping a toddler get on his feet. "As the baby takes steps and stumbles, you don't know whether to rush to hold them up or let them keep walking."

On Monday, the PCE index, the Fed's preferred inflation gauge, fell 0.1% in December and 1.4% over the past 12 months, remaining well below the Fed's 2% target (http://www.marketwatch.com/story/consumer-spending-goes-nowhere-in-december-2016-02-01).

"The lack of inflationary pressure in the PCE deflator measures of prices is another reason why the Fed could stand pat in March," said Paul Ashworth, chief U.S. economist at Capital Economics, in a note.

The market-implied probability of a rate increase in March was at 21% Monday afternoon, according to the CME Group's FedWatch tool (http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html)that tracks Fed-fund futures prices.

Also read:Wall Street sees shrinking likelihood of any rate increase in 2016 (http://www.marketwatch.com/story/wall-street-sees-shrinking-likelihood-of-any-rate-hike-in-2016-2016-01-29)

Investors were also bracing for earnings from Google parent Alphabet Inc. and Mattel Inc., amid another earnings-heavy session.

Read more: Earnings may lift Google parent Alphabet's market value above Apple's (http://www.marketwatch.com/story/alphabet-earnings-could-push-google-parent-past-apple-as-worlds-most-valuable-company-2016-01-29)

Of the 207 companies that have reported, 142 have beat analysts' estimates, which equates to a 69% beat rate, better than the historic average of 66%, according to S&P Capital IQ. But aggregate S&P 500 earnings are estimated to fall 5.87% year-over-year.

On Friday, the S&P 500 gained 2.5% (http://www.marketwatch.com/story/us-stocks-dow-futures-leap-after-surprise-boj-move-joining-in-global-rally-2016-01-29) for its biggest daily gain since September, with credit going to a surprise Bank of Japan stimulus effort. The benchmark added nearly 2% last week, yet finished down 5.1% in January.

Read: Bank of Japan's negative rate decision is a mark of 'desperation' (http://www.marketwatch.com/story/critics-slam-bank-of-japans-negative-interest-rate-move-2016-01-29)

Other markets:Weak Chinese manufacturing data (http://www.marketwatch.com/story/china-manufacturing-numbers-indicate-sluggishness-2016-01-31)drove China's Shanghai Composite down by 1.8% (http://www.marketwatch.com/story/nikkei-soars-for-second-day-following-negative-rate-cut-2016-01-31). But Japan's Nikkei closed 2% higher, adding to its 2.8% surge on Friday when the Bank of Japan surprised investors by pushing interest rates into negative territory (http://www.marketwatch.com/story/japan-follows-europe-into-negative-interest-rates-2016-01-29). The Stoxx Europe 600 (http://www.marketwatch.com/story/european-stocks-start-february-in-the-red-as-manufacturing-data-soften-2016-02-01) and a key dollar index lost ground, while gold futures gained. Treasury yields inched higher, coming off a nine-month low.

Individual movers: Shares of Chipotle Mexican Grill, Inc. (CMG) jumped 5% after the Centers for Disease Control and Prevention said E. coli outbreaks "appear to be over." (http://www.marketwatch.com/story/cdc-says-e-coli-outbreaks-at-chipotle-are-over-2016-02-01)

Aetna (AET) was up 1.5% after the health insurer posted better-than-expected quarterly earnings (http://www.marketwatch.com/story/aetna-profit-jumps-more-than-forecast-in-fourth-quarter-2016-02-01) ahead of the opening bell.

Shares in natural-gas company Questar Corp. (STR) reversed sharp premarket gains to trade down 0.9% following news that utility company Dominion Resources Inc. (D) plans to buy it for $4.4 billion (http://www.marketwatch.com/story/dominion-resources-agrees-to-buy-questar-in-44-billion-deal-2016-02-01). Dominion shares were down 1.2%.

Alphabet (GOOGL) (GOOGL) and toy giant Mattel (MAT) are scheduled to release results after the closing bell.

Economic news: Consumer spending was flat in December as Americans mostly pocketed their income gains, the Commerce Department said Monday. Outlays were unchanged even though incomes rose 0.3%--consumers saved more instead. The savings rate rose to 5.5% from 5.3%, to match a three-year high.

Construction spending rose 0.1% in December (http://www.marketwatch.com/story/construction-spending-edges-up-01-in-december-2016-02-01), below the 0.6% gain forecast.

(END) Dow Jones Newswires

February 01, 2016 13:38 ET (18:38 GMT)

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