With Rate Hike Seemingly Baked In, Yellen Remarks Could Take Spotlight

Fed week is here, but one could be forgiven for thinking it seems anti-climactic.

We haven’t spent much time recently talking about odds for a December rate hike, quite simply because it already seems like a fact on the ground. The futures market pegged chances at 97% as of midday Friday, and various Fed governors have telegraphed the expected decision quite clearly. If it happens, the hike would the first in a year and only the second since 2006.

Just because a rate hike seems likely doesn’t mean there’s nothing interesting about the Fed meeting, which takes place Tuesday and Wednesday. Fed Chair Janet Yellen is scheduled to hold a press conference Wednesday afternoon, and at meetings like this one, where a decision seems baked in ahead of time, her words tend to take the spotlight. Investors may want to keep their ears open for anything Yellen says about inflation expectations, future rate hike possibilities, and President-elect Trump’s proposed policies or his appointees. She’s likely to be asked questions about the presidential transition, but it’s uncertain how much she’ll want to talk about Trump’s specific proposals.

Despite the prospect of higher rates, stocks put on an amazing rally last week, with major indices once again scoring new highs Friday. It’s been pretty much the same story every day, with optimism about possible tax cuts, infrastructure spending, and de-regulation under the incoming administration keeping the bulls well fed. While the story remains basically the same, the sectors that benefit tend to change a bit depending on the day. Financials, which led the charge early in the week, retreated slightly on Friday, while health care, which sagged at mid-week, scored gains approaching the weekend.

It’s not all about the Fed this coming week. Retail sales also loom Wednesday morning, along with the Producer Price Index (PPI). The Consumer Price Index (CPI) comes out early Thursday, so by the end of the week we should have better insight into the consumer situation heading into the holiday season. Retail sales rose a hefty 0.8% in October, following a 0.7% increase in September. Core PPI actually fell 0.2% in October.

Over the last month, most sectors are up, led by a double-digit rally in financials. Other sectors storming higher since the election include industrials, materials, energy, and telecom services, while consumer staples, utilities, and health care bring up the rear.

Keep an eye on volatility over the coming days, because it sometimes spikes up around big events like a Fed meeting. The VIX had fallen below $12 at times last week, but climbed back above that by Friday, though it remained relatively low by historic standards.

Also keep watching the bond market, as 10-year Treasury note yields began climbing back up Friday after a brief pause earlier in the week. The 10-year yield rose to 2.44% by midday Friday, about 10 basis points above the weekly lows. It appears bonds may be under pressure from the European Central Bank’s (ECB) announcement Thursday that it would begin to scale back the size of its stimulus program starting next spring. Strong consumer sentiment (see below) may also be playing into bond market weakness.

Crude oil dipped below $50 a barrel at times last week, but held pretty steady above the $50 mark by Thursday and Friday as investors seemed more certain OPEC might stand by its pledge to cut production.

Consumers Express Confidence After Election

Sentiment among consumers climbed sharply in early December, the University of Michigan said Friday, and it seems the presidential transition might be driving that optimism. Consumer sentiment jumped 4.5% to 98.0, well above analysts’ expectations and close to last year’s high. “When asked what news they had heard of recent economic developments, more consumers spontaneously mentioned the expected positive impact of new economic policies than ever before recorded in the long history of the surveys,” wrote survey director Richard Curtin in a statement. Consumer sentiment isn’t a really closely-watched indicator, but Wednesday’s retail sales number, if strong, could help back up ideas that consumers feel confident.

Getting Defensive

Some of the so-called “defensive sectors,” including utilities, consumer staples, and health care, led the way upward as of midday Friday. It could be prudent to watch whether this pattern continues in the new week, as it may reinforce thoughts that some investors are starting to get nervous about how far and fast this rally has come. Financials, materials, and consumer discretionary, some of the sectors that tend to benefit from a stronger economy, were among those posting small losses after major rallies over the last month.

What Might Yellen Say About Tax Cuts?

One of Trump’s proposals is to cut taxes, and the possibility of lower corporate taxes seems to be one factor giving the stock market a boost. Additionally, Republicans have said they want to help companies repatriate profits, but if that happens, where will the profits be spent? Some companies have said they’d put the cash into buybacks and dividends, and more mergers and acquisitions could also be possible. This all sounds bullish, but could it spark inflation fears? Yellen may get asked about that at Wednesday’s press conference. She may also get questions about jobs growth and wages. Her answers could give investors something to chew on as the holiday season approaches and markets presumably enter a more placid period.