Expectations for Fed funds rate hike in March climbed higher in the aftermath of Chair Janet Yellen's testimony. Reactions in the financial markets were further strength in Treasury yields and US dollar. Treasury prices fell, sending yields higher. 2-year yields climbed +2 bps higher to 1.23% and while 10-year yields gained +3 bps to 2.47%. USD extended gains against major currencies with exception of AUD and CAD. Wall Street also gained as led by financial stocks (the S&P financial sector index added +0.8%). Both the benchmark DJIA and S&P 500 indices added +0.3% for the day. In the commodity sector, crude oil prices waxed and wane amidst a confluence of factors including concerns over US shale investment, USD strength and OPEC output cut. The front-month WTI crude oil contract added +0.51% while the Brent contract was up +0.68%.
As she testified before the Senate Banking Committee, Yellen reiterated the stance that "waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession". Again, she noted the improvement in inflation and the employment market, the twin pillars of the Fed's dual mandate. According to Yellen, "incoming data suggest that labor market conditions continue to strengthen and inflation is moving up to +2%, consistent with the Committee's expectations. At our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate". Yellen also discussed about the fiscal policy under Trump's administration, noting that "it is too early to know what policy changes will be put in place or how their economic effects will unfold". She added that "while it is not my intention to opine on specific tax or spending proposals, I would point to the importance of improving the pace of longer-run economic growth and raising American living standards with policies aimed at improving productivity".
On oil inventory, the industry-sponsored API estimated that US crude oil inventory soared 9.94 mmb in the week ended February 10. For refined oil products, gasoline and distillate stockpiles gained +0.72 mmb and +1.5 mmb respectively. The DOE/EIA report today probably shows a +3.51 mmb increase in crude oil inventory. Yet, gasoline and distillate stockpiles might have dropped -0.75 mmb and -0.7 mmb respectively.
On the dataflow, US final PPI rose to +0.6% m/m in January, from +0.3% a month ago. This was partly driven by a +4.7% increase in energy prices. From a year ago, PPI inflation rate stayed unchanged at +1.6%. Excluding food and energy, core PPI doubled to +0.4% m/m in January. However, the year-ago reading showed moderation to +1.2%, from December's +1.6%. Today, US would release its inflation report. Headline CPI probably accelerated to +2.4% y/y, while the core reading slipped -0.1 percentage point to 2.1%, in January. Retail sales might have gained only +0.1% m/m in January, decelerating from a +0.6% growth a month ago. Excluding auto, retail sales probably grew +0.4% m/m in January, from +0.2% in December. Industrial production might have stayed flat in January, after gaining +0.8% last December. Separately, the empire state manufacturing index might have climbed +0.5 point higher to 7 in February.
In the Eurozone, GDP expanded +0.4% q/q in 4Q16, compared with +0.5% previously. The bloc's industrial production contracted -1.6% m/m in December. In the sentiment-front, the ZEW survey shows that economic sentiment for the Eurozone fell to 17.1 in February, missing expectations of 22.3 and January's +23.2. For Germany, the economic sentiment index plunged -6.2 points to 10.4, compared with consensus of 15.1. The current situation index also slipped -1.1 points to 76.4, compared with consensus of 77. In the UK, headline CPI rose 1.8% y/y in January, up from 1.6% in the prior month. Yet, this came in worse than expectations of +1.9%. Core CPI steadied at +1.6% y/y. A series of employment date would be released in Britain. The number of jobless claims probably increased +1K in January, following a -10.1K decline a month ago. Claimant's count rate probably stayed unchanged at 2.3% in January. Meanwhile, ILO's unemployment rate for the 3 months ending December probably stayed unchanged at 4.8%, whilst the growth of average weekly earnings for the period steadied at +2.8%.