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World Week Ahead: Yellen testifies

Monday 13th February 2017

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Investors will eye US Federal Reserve Chair Janet Yellen's semi-annual testimony to Congress days after President Donald Trump’s promises on taxes sent Wall Street to fresh record highs.

Yellen will testify before the Senate Banking Committee on Tuesday and before the House Financial Services Committee on Wednesday. The Fed has signalled it plans to raise interest rates three times this year, though some analysts say the central bank might not follow through on all of them.

“I actually think Trump and Yellen are on the same page,” Jack Ablin, CIO of BMO Private Bank, told CNBC. “I think they want the same thing. 'Let the economy run hot and drag your feet raising rates’."

Last Thursday Trump said he would make an announcement “that will be phenomenal in terms of tax” in two or three weeks, remarks that sent the three US benchmark stock indexes to all-time highs. Also underpinning optimism were Trump’s cordial interactions with Japan’s Prime Minister Shinzo Abe and China’s President Xi Jinping.

Meanwhile, former Goldman Sachs Group president Gary Cohn is leading the effort to craft Trump’s tax reform plan, Bloomberg reported, citing a White House official requesting anonymity because the plan is still under development. Unnamed congressional leaders have been consulted on the blueprint, the official said. It’s separate from Trump’s proposed budget.

Some are sceptical that Wall Street will continue its rally without concrete details.

“For the markets, the honeymoon is starting to end with Trump,” Thomas Simons, senior economist at Jefferies in New York, told Bloomberg. “We need to see something real—we can’t just continue to base current pricing on some nebulous fiscal policy we don’t have any details on.”

Over the weekend Fed Vice Chair Stanley Fischer said there was significant uncertainty about US fiscal policy under the Trump administration, but that the Fed would be strict in meeting targets of creating full employment and getting inflation to 2 percent, according to Reuters.

"At the moment we're going strictly according to what we see as our responsibility according to the law, which is maintaining full employment and getting inflation to 2 percent," Fischer said in response to a question at the Warwick Economics Summit on Saturday, according to Reuters.

Other Fed officials scheduled to speak in the coming days include Jeffrey Lacker, Dennis Lockhart and Robert Kaplan on Tuesday, Eric Rosengren and Patrick Harker on Wednesday, and Loretta Mester on Sunday.

The flurry of economic reports slated for release this week include the NFIB small business optimism index and  producer price index, due Tuesday; consumer price index, retail sales, Empire State manufacturing survey, and industrial production, due Wednesday; housing starts, weekly jobless claims, and the Philadelphia Fed outlook survey, due Thursday; as well as leading indicators, due Friday.

Last week the Dow Jones Industrial Average gained 1 percent, while the Standard & Poor’s 500 Index added 0.8 percent and the Nasdaq Composite Index added 1.2 percent.

The US dollar also strengthened, and some see further gains ahead.

“We expect the dollar’s rise to continue,” Capital Economics analysts said in a note. “After all, we think that monetary policy will be tightened by much more than investors are anticipating in the US, but generally remain at least as loose as they are expecting elsewhere.” 

On Friday Europe’s Stoxx 600 Index finished the day with a 0.2 percent gain from the previous close. The index ended the week just shy of its highest level in one year, according to Bloomberg.

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