Tuesday produced more highs for the major indices as investors didn’t shy away from Fed Chair Yellen’s less dovish testimony before the Senate Banking Committee. On the contrary, they seemed to embrace it, emboldened by the understanding that if the fed funds rate goes up again in March, or any other month, it will be going up for the right reasons.
Specifically, another rate hike would be forged on the back of a strengthening economy, which would be supportive of increased earnings growth. That was the takeaway from the stock market performance on Tuesday, as it recouped some modest losses and advanced in the wake of Ms. Yellen’s testimony.
The Fed Chair acknowledged that since the financial crisis, “economic growth has been quite disappointing.” But went on to say, “The economy is recovering from a very severe crisis. We’ve put in place stronger financial regulation that has forced our banks to build up their capital buffers to deal with problem loans and to strengthen themselves to the point where they have been to support economic growth and recovery in our economy.”
On the economic front, the early batch of data surprised to the upside on all fronts.
- The Consumer Price Index for January increased 0.6%, marking the largest increase since February 2013. Core CPI, which excludes food and energy, increased 0.3%. Total CPI is up 2.5% year-over-year, the largest 12-month increase since March 2012, while core CPI is up 2.3%.
- While the Fed’s preferred inflation gauge is the PCE Price Index, the key takeaway from the report is that consumer inflation pressures are rising, which in turn should increase the potential for a rate hike at the March meeting.
- Retail sales for January increased 0.4% on top of an upwardly revised 1.0% increase (from +0.6%) for December. Excluding autos, retail sales increased 0.8% on top of an upwardly revised 0.4% increase (from +0.2% for December).
- Motor vehicle sales were down 1.4%, but otherwise, there were no glaring points of weakness in January retail sales, which got a nice boost from a 2.3% increase in gasoline station sales and a 1.4% increase in food services and drinking place sales.
- The key takeaway from the report is that discretionary spending on goods picked up in January, which will compute into a positive input for first quarter GDP forecasts.
- The Empire State Manufacturing Survey for February surged to 18.7 from 6.5 in January, riding the strength of a pickup in all categories and especially the new orders index (from 3.1 to 13.5). Notably, the unfilled orders index (8.2) rose above zero for the first time in more than five years.
All in all, this is mostly positive news for the economy and job growth.