Stocks opened higher and are reacting to every word that proceedeth from the mouth of the Janet Yellen. The Dow and SPX are currently up 68 pts & .18%, respectively. The Dow, SPX, and Nasdaq are all at multi-year highs. Strangely enough, utilities and financials are leading the way in early trading. These sectors have been trading opposite one another because utilities do better with falling interest rates, whereas financials do better in a rising rate environment. Commodities are mostly higher on the day. WTI crude is back up to nearly $50/barrel and Brent crude is trading just south of $60. Bonds are higher as well. The 5-year Treasury yield ticked down to 1.50% and the 10-year is back down to 2.01%.
Federal Reserve Chair Janet Yellen is testifying before congress today. She noted inflation and wage growth are as yet too weak to begin raising interest rates. That’s the bottom line. She stressed the Fed does not have a pre-set timetable for entering the next phase of monetary tightening. But “conditions have improved to the point where it will soon be the case that a change in the target [interest rate] range could be warranted at any meeting.” The Fed remains “patient,” and wants to be “reasonably confident” that inflation is going to move back to the 2% target before acting to raise rates. Bloomberg reports trading in options & futures markets suggests investors believe the first rate hike won’t take place until the second half of the year. In response to the news, rates and the dollar fell a bit.
Economic news has been a bit iffy of late, as you know if you’ve been reading these updates. The Citigroup Economic Surprise Index has plunged since the beginning of the year to about -45 from +30. My opinion is that this tells you what you need to know with regard to the Fed. The Fed simply can’t raise rates until the fundamentals are stronger.
The S&P Case-Shiller Home Price Index rose 4.62% y/y in December, slightly ahead of forecasts. The sub-index for the 20 largest US metro areas rose 4.46%, again modestly ahead of expectations. So this is either good news—property values are still rising at a moderate pace—or it is bad news in that rising prices are largely a result of limited supply of homes on the market. By the way, Dick Bove, famed bank analyst, says we’re headed for another mortgage crisis. The last crisis was brought on by over-investment in housing, and the next one will likely be the result of under-investment. He points out that mortgage lenders are much more tightly regulated now, and this is limiting the extension of credit to would-be home buyers.
MikesMarketUpdate 