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Yellen Testimony Headlines Lively US Session

Focus will be very much on the US on Wednesday as we await Janet Yellen’s second day of testimony, this time before the House Financial Services Committee, and prepare for an onslaught of economic data including the latest retail sales and inflation numbers.

Yellen’s appearance before the Senate Banking Committee on Tuesday was quite a dull affair from a markets perspective, with much of the questions quite understandably focusing on the hot topic of deregulation, or more specifically Donald Trump’s determination to dismantle Dodd-Frank. Not much time was actually devoted to the Fed’s monetary policy plans for this year and when it was brought up, it was like trying to get blood from a stone.

While Yellen was in no mood to give anything away that had not already been disclosed in previous statements or minutes, traders did get excited by the disclosure that a rate hike will likely be appropriate at one of its upcoming meetings if employment and inflation evolve in line with expectations. You don’t have to be Sherlock Holmes to come to the same conclusion given the Fed’s intention to raise rates on three occasions this year but perhaps the simple act of leaving a March hike on the table, given that it had been all but written off by investors, is what triggered such a reaction.

That said, the statement only pushed up the probability of a rate hike in March from 13% to 18% so if Yellen is serious about sending a signal to investors that March is an option, she’ll have to try much harder during today’s testimony and even mention March specifically as being possible. I doubt she’ll be so bold though given her reluctance since taking over as Chair to disclose anything significant that isn’t already known or assumed. Still, as we saw yesterday, markets remain sensitive to what Yellen says and are likely to be so again today.

Following a period of relative calm the economic data side, we’ll be treated to a whole host of reports today, starting with CPI inflation, retail sales and the empire state manufacturing index before the opening bell. Inflation, or a lack thereof, has long been a problem for the Fed with policy makers clearly wanting to begin and then speed up the tightening process but it seems, gradually, pressures are building. The annual CPI reading is expected to rise to 2.4% today, above the Fed’s 2% target – although CPI is not the Fed’s preferred measure of inflation – while core CPI is expected to fall slightly to 2.1%. Meanwhile, retail sales – an important measure of consumer confidence and activity – are expected to have risen by only 0.1% last month, following a 0.6% spike in December.

Also on the agenda today, we’ve got industrial production and capacity utilisation figures for January, oil inventory data from EIA after API reported another large build on Tuesday, as well as appearances from three Fed officials, Patrick Harker, William Dudley (both voters on the FOMC) and Eric Rosengren. Needless to say, it should be quite an eventful session.

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