Better than expected Q4 corporate results, positive economic results, healthy signs of inflation, range bound 10-year yields and a promise by President Trump to deliver a long sought after business tax code reform continue to give investors confidence and markets a lift.
The backdrop for US equities, as we begin the week, is decidedly upbeat despite all the political friction that has surfaced in recent weeks. It appears as though investors are not paying much heed to what appears to be a bitterly divided public.
Crude WTI remains range bound - longer term trend - higher
US 10-year yield remains range bound - longer term trend - higher
Last week’s interest rate and equity market landscapes were most directly impacted by two data points: Chair Yellen’s Humphrey Hawkins semi-annual monetary policy testimony before the Senate Banking Committee and the unexpectedly large jump in the Consumer Price Index for the month of January.
In her address on Tuesday, Chair Yellen underscored the commitment the Fed has made to remain data-dependent but did also suggest that gradual rate hikes in the future may well be appropriate if current economic and inflationary trends remain intact. (Hair-trigger traders took this to mean that a move in March by the FOMC was on the table.) Actually, Chair Yellen did not even mention March. However, as I have suggested since the outset of the year, I do think a move by the FOMC is likely in Q2. Her testimony did not change my expectations. Chair Yellen did not touch upon the powder keg of unwinding the Fed’s balance sheet but did underscore the need to focus on further interest rate “normalization” before that challenge is addressed. In summation, her testimony had a decidedly upbeat tone. She broadcast an outlook that falls in line with modest growth, modest inflationary pressure accelerating, and a stable economic US profile.
January’s Consumer Price Index (CPI) data, released on Wednesday, did take traders by surprise in that it came in at 0.6% versus Bloomberg consensus that was calling for 0.3%, matching December. On a year-over-year basis the index has risen 2.5%. Naturally, less food and energy, the reading was a more tame 0.3% for January. If the CPI continues to rise above recent trend, the likelihood of the FOMC moving in Q2 is nearly assured. Continued robust employment growth, as measured by the monthly employment report, near record low weekly unemployment claims and the likelihood of rising crude prices with driving season around the corner will cement that.