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More Market Records Fall Even as Yellen Takes a Hawkish Tone To Congress

February 15, 2017

(Wednesday Market Open) How ironic that on the very day Fed Chair Janet Yellen sounded about as hawkish as she ever has in a meeting with Congress, all the major indices rang up new record highs. It appears the markets may be responding to the positive economic picture Yellen painted in her remarks.

Tuesday marked the fourth-straight record session for the S&P 500 Index (SPX), which closed at its high and is now up more than 3.5% year-to-date. A mixed open looks likely on Wednesday.

Investors hoping Yellen would echo some of the more hawkish recent speeches by other Fed officials got their wish Tuesday when she testified before the Senate Banking Committee. Yellen described an improving economy, rising wages, a tightening job market, and healthy consumer spending. Yellen’s congressional testimony continues today in front of the House Financial Services Committee.

The market seems to have interpreted Yellen’s comments as a signal that perhaps the economy is improving faster than we might have thought, so from that point of view, her hawkish tone could be seen as good news. Perhaps the economic story is partially borne out by stronger than expected January retail sales, which rose 0.4%, the government said early Wednesday.

The key takeaway from Yellen’s testimony on Tuesday, and one the media quoted a lot, may have been her statement that, “waiting too long to remove accommodation would be unwise.” Now the fact is, Yellen has said that in the past, and she tempered it by repeating what she’s also said before about any changes to rate policy being “gradual.” But the market appeared to interpret her remark on rates as hawkish, and bond prices fell pretty much in sync. Yields on the 10-year Treasury bond jumped back to recent highs near 2.5%, and are now up nearly 15 basis points from recent lows.

Chances of a March rate hike are now at 18%, and didn’t really change too much based on Yellen’s remarks.

Meanwhile, the U.S. dollar moved higher against other currencies early Wednesday and has been on a roll lately, helped in part by growing odds for Fed rate moves. Several Fed speakers besides Yellen are on the schedule today, so keep an ear open for any remarks they may have on the pace of rate hikes.

On the earnings side, PepsiCo (PEP) beat Wall Street analysts’ consensus with both top- and bottom-line results. And a lot of those strong results were based on healthier drinks and snacks. As anyone who goes to the profile of PEP on the TD Ameritrade thinkorswim® platform can see, snacks are the biggest component of PEP’s revenue.

As we’re finishing earnings season, about 70% of S&P 500 companies have beaten analysts’ consensus estimates on earnings per share, which is better than the historic average in the high 60’s. Revenue beats are at around 50%, which is a little on the low side compared with the historic average of around 55%, and may be cause for concern.

10-Year Yields


Yields on 10-year U.S. Treasury bonds, plotted here through end-of-day Tuesday, have climbed recently amid more hawkish talk from the Fed, and that continued during Yellen’s testimony. Meanwhile VIX (purple line) continues to fall, as the market doesn’t seem convinced of much forward volatility. Source: TD Ameritrade thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

PPI: What Happened? It’s fair to say the 0.6% rise in the producer price index (PPI) reported for January probably raised some eyebrows among investors. Wall Street analysts’ consensus was for a 0.4% rise. And a 0.4% increase in core PPI also was above estimates. A closer look at the data showed January PPI gains driven by a 1% increase in prices for final demand goods, which was paced by a 4.7% increase in the index for final demand energy, said. But remember that any given month of data can vary from expectations, and it’s the longer-term results that really tell the story. From that perspective, PPI looks a bit more benign, rising 1.6% year over year, which is unchanged from December. However, the higher than expected 0.6% rise in the January consumer price index (CPI) reported early Wednesday may again raise eyebrows.

Who Likes Higher Rates? These Stocks Apparently Do: With Yellen’s testimony to Congress on Tuesday widely called hawkish, one particular stock sector responded with glee. The financial sector was up 0.7% soon after Yellen started her remarks and climbed from there, lifted in part by a rally in bond yields. The sector ended up putting in a better than 1.2% gain for the day. But perhaps it wasn’t just the odds of higher interest rates that boosted financials. After all, Yellen also sounded pretty bullish about the economy, noting, among other things, that wage growth has picked up, business sentiment has improved, and car and truck sales hit record levels in 2016. All these things are typically good news for banks, which tend to make more money when there’s healthy economic activity. Even so, financial sector stocks are lagging the S&P 500 Index (SPX) slightly so far this year, but they’re up a huge 50% from a year ago, compared with 27% for the SPX.

Bullish Trading Pattern Noted: Although the bull-run that began after Election Day is more than three months old, it doesn’t show traditional signs of a rally losing steam, analysts say. One sign of that would be the markets rising early in the day and then stabilizing or pulling back from highs. That’s not been the pattern. Buying has lifted the markets early in sessions, but more buying seems to often come late in the day. That was certainly the case Tuesday, as the S&P 500 Index (SPX) was up just about 0.25% midway through the session but closed with gains of 0.4%, perhaps a sign of continued healthy interest from investors since they were willing to buy even as prices rose.

Good Trading,

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