Jam Packed: Yellen, Wal-Mart And Inflation Data Take Center Stage

There’s excitement and intrigue today as investors digest the latest economic prognosis from Fed Chair Janet Yellen, along with Wal-Mart earnings and inflation data. Stock futures tipped around unchanged in pre-market trading ahead of Thursday’s packed agenda.

Yellen, who’s scheduled to testify before Congress later this morning, issued a written copy of her testimony early in the day, saying a rate hike is “appropriate relatively soon.” She cited progress in the labor market, signs of increased inflation, and a pick-up in economic activity. Yellen added that waiting too long to raise rates could encourage “excessive risk taking,” but also noted that “gradual increases in the federal funds rate” could be enough to return interest rate policy to a “neutral policy stance” over the next few years. As Yellen spoke, CME futures forecast a 90% chance of a rate hike next month.

The focus as Yellen testifies likely will be on the approaching December meeting and anything she has to say about rate policy. She may also be asked about Donald Trump’s proposals for the economy, notably his infrastructure and tax plans. What tone will Yellen strike, and does she think the President-elect’s policies could stimulate the economy enough to get Gross Domestic Product (GDP) growing above 3% again?

Yellen may be at the top of the list today, but that’s far from all. Wal-Mart Stores, Inc. WMT reported early Thursday, posting Q3 earnings of 98 cents a share, 2 cents ahead of estimates, but revenue of $118.2 billion fell short of expectations. The company cited lower grocery prices as a pressure point. However, there were positive takeaways as well, notably strength in North American stores. Despite WMT’s revenue miss, there’s starting to be some optimism around retailers as we head into the holidays.

More inflation data helps round out today’s agenda, with the Consumer Price Index (CPI) for October registering at 0.4%, in line with consensus expectations and reflecting higher gasoline costs. Core CPI, which strips out volatile food and energy prices, rose 0.1%, a little below analysts’ forecasts.

CPI isn’t the only data coming out Thursday. Housing starts and the Philadelphia Fed Index also got posted prior to the open, with housing starts beating expectations. In sum, there’s a lot of news to work through today, and it might pay for investors to stay on their toes for possible intraday volatility.

Crude oil rose again early Thursday, holding above the $46 level. We’ll see if it can test $50 again.

FIGURE 1: AS THE DOLLAR GOES. The S&P 500 (SPX), plotted through Wednesday on the TD Ameritrade thinkorswim® platform, has marched higher over the last week hand-in-hand with a sharp U.S. dollar rally. In this chart, the purple line tracks the British pound, which languishes near three-decade lows vs. the dollar. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Gasoline Costs Seen Falling in Coming Months: The cost of that gallon of gas, which recently fell to multi-month lows, could decline further in coming months, according to the Energy Information Administration (EIA). Consumers now pay about $2.18 a gallon, on average, but that could fall to $1.97 a gallon by January due to cheaper winter gasoline blends and seasonal weakness in consumption, the EIA said. Prices could rise after that, however, in part due to slightly lower daily U.S. crude production and increased prices for Brent crude oil. The EIA sees gas prices averaging $2.27 for all of 2017, still not expensive historically with inflation factored in. Could there be a stock market impact? Remember, low gas prices can sometimes help fuel consumer spending, and we’re heading into the holidays.

About Those Inflation Signals: After a week of solid economic data that helped send bond yields higher on inflationary expectations, things turned 180 degrees on Wednesday. First, the October Producer Price Index (PPI) showed no inflation growth when consensus had been for 0.3%. Core PPI actually fell 0.2%, definitely not what most would see as a sign of inflationary pressures. And industrial production was flat as well, compared with Wall Street consensus for 0.2%, with lower capacity utilization than analysts had expected. Wednesday’s weak numbers could serve as a reminder that the economy never moves in a straight line, and perhaps might help underpin the slumping bond market. “There may be some bargain hunters who are looking to allocate money to U.S. fixed income, and the market is deeply oversold,” Briefing.com said.

Dollar Revisits 2003 Highs: One of the big stories this week is U.S. dollar strength. The U.S. Dollar Index (USDX) touched levels not seen since 2003 on Wednesday, and the euro sank below 1.07 for the first time in nearly a year. In the meantime, there’s nothing too cheery to report about the British pound, which has been depressed since falling below 1.30 after Brexit and remains near three-decade lows. Improved odds for a December rate hike seem to have helped fuel the dollar’s steep climb.