After Setting New Highs, Markets Prepare For A Date With Janet Yellen

The “Trump bump” continues, with all major indices setting new record highs Monday and the S&P 500’s market value topping $20 trillion for the first time.

How does the market follow that up? By going on a date with Fed Chair Janet Yellen.

Yellen’s “Humphrey-Hawkins” monetary policy testimony to Congress begins at 10 a.m. ET today in front of the Senate Banking Committee, followed tomorrow by an appearance at the House Financial Services Committee.

This is Yellen’s first time speaking during the Trump administration, and many investors want to know what Yellen might have to say about factors such as inflation, economic stimulus, and tax policy. They’ll also likely be on the lookout to see whether Yellen contradicts the administration on any economic matters. But it’s fair to say she’ll probably stick to the script, as she usually does.

Speaking of inflation, the producer price index (PPI) for January rose 0.6%, the government said early Tuesday. Core PPI was up 0.4%. Both gains were bigger than analysts had expected, so it’s possible Yellen might be asked to weigh in on this development.

Timing of rate hikes remains a big issue from a market perspective. After falling sharply last week, expectations for a March rate hike have crept back up to around 13%, Fed funds futures indicate, with chances for a hike in May now above 30%. But June is still the month that a hike seems most likely, judging from futures action. It should be interesting to watch how Fed funds futures and the bond market react to Yellen’s testimony, particularly with the background of some more hawkish-sounding talk from other Fed officials recently. Ten-year Treasury yields rose slightly to 2.44% early Tuesday, but remain roughly in the middle of their recent range.

And when Yellen speaks, it could be helpful to watch volatility, as well. The VIX is barely above 11, indicating little chance of near-term volatility, but that could change depending on Yellen’s comments.

Yellen isn’t the only Fed official in the news. Richmond Fed President Jeffrey Lacker, Atlanta Fed President Dennis Lockhart and Dallas Fed President Robert Kaplan all speak in public forums Tuesday.

Financial sector stocks took the lead Monday, led by big banks, as the markets continued to seem buoyed by talk of tax reform under President Trump. Trump’s remarks last week helped the major indices climb to new records Monday, with the S&P 500 Index (SPX) ripping easily through resistance around 2320. Industrials, materials, and info tech were the other big performers, but even some more defensive sectors joined the party. The one holdout was telecom services, which fell again and now trails the overall market pretty dramatically year-to-date. In fact, energy and telecom services are the only sectors down so far in 2017.

Energy lagged a bit Monday, but crude oil bounced back early Tuesday, which could give the energy sector some support.

Earnings aren’t over yet, but the higher-profile names come a bit later this week. Those include  PepsiCo, Inc. PEP, Kraft Heinz Co KHC, Cisco Systems, Inc. CSCO, MGM Resorts International MGM, and Deere & Company DE. Wal-Mart Stores Inc WMT reports next Tuesday.

Entering the week, approximately 65% of companies that reported had beaten consensus earnings per share estimates from analysts, and 57% had beaten top-line estimates.

What Will Retail Sales Show?

Tomorrow morning brings retail sales data, often a helpful way to monitor consumer health. Generally, this indicator has shown strength over recent months, climbing 0.6% in December. But some analysts called the December data a bit disappointing, considering that sales only rose 0.2% with the automobile sector factored out. And hourly earnings went up just 0.1% in January, according to the latest jobs data, so if wages didn’t grow by much, could that have cut into consumer demand for various items? The Wall Street analyst consensus for January retail sales growth is just 0.1%, Briefing.com said. But that number takes into account auto and truck sales, which disappointed. Strip out vehicle sales and the average estimate rises to 0.4%, Briefing.com said, which would be an improvement from December.

Is It the iPhones; Or Something Else?

If someone could have been teleported directly from Nov. 8—Election Day—to the present, one of the biggest surprises might have been the performance of Apple Inc. AAPL shares. Going into the election, many analysts thought AAPL would slump under Trump, hurt by protectionist trade talk. Instead, AAPL posted a new all-time closing high Monday, and is up about 20% since the election. Part of that reflects a robust holiday quarter, with iPhone sales topping estimates and average iPhone sales prices climbing. But the other factor is possible tax reform that could allow AAPL to bring more of its overseas profits back home without having to pay such a huge bill, analysts say. The company had $246.09 billion in cash overseas in the fiscal first quarter, up $8.49 billion from the previous quarter.

Japan Marks Another Quarter of Growth

Last week, we talked a bit about China’s economy looking like less of a burden on stock markets than it did a year ago. But Japan is also doing a little better. Japan, the world’s third-largest economy, grew an annualized 1% in the final three months of 2016, following a revised 1.4% expansion in the July through September period, Bloomberg reported. Those numbers may not sound too striking, but consider that it’s the fourth-straight quarter of expansion, and compares with falling GDP at times during 2014 and 2015. That’s not to say Japan’s economy is out of the woods. In fact, GDP rose just 0.2% from the previous quarter, a little lower than expected. And domestic consumption remains weak.