Can Janet Yellen turn the Trump rally sour?

It was a strong start to the week for risky assets, as European stocks played catch up, the FTSE 250 in the UK reached a fresh record high, and US stocks extended gains after last week’s surge higher. But equity markets face a key test later today when the Fed’s Janet Yellen appears before the Senate Banking Panel, the first of two appearances on Capitol Hill this week.

Yellen checklist:

Equity futures are pointing to a slightly weaker open for European and US markets today, as exuberance is reigned in ahead of Yellen’s testimony. While we expect the Fed chair to remain tight-lipped about the prospect of when the next rate hike is likely to happen (the market is currently pricing for another hike in June), there are a few important things to watch out for.

1. Will she sound concerned about the weaker wage data in the January payrolls report? If yes, this could push back expectations of a rate increase, which would be good news for stocks, but bad news for the dollar, which is also retreating in early trading on Tuesday.

2. Will she mention anything about the dollar? Donald Trump’s team have appeared to talk down the dollar in recent weeks. The Fed doesn’t directly intervene in the FX market, but if Yellen is asked what she thinks about politicians wading into discussions about the strength of the dollar, her answer is likely to come under scrutiny by the world’s FX traders.

3. Her thoughts on the Trump administration’s economic plan. In truth, detail about Trump’s much-anticipated fiscal plans have been scant so far, we need to wait until 28th February when Trump addresses Congress before we can expect more details. However, the Federal Reserve vice-chair Fischer recently said that there is significant uncertainty about fiscal policy under Trump. If Yellen follows in Fischer’s footsteps and also voices scepticism towards the impact of Trump’s fiscal plans then we could see the US stock market rally wither.

4. Any comments/ tweets from President Trump about Janet Yellen’s testimony. Although we doubt he would make such an unwise move due to sensitivity around the Fed’s independence; with Trump you never know.

Overall, the market is looking for three things: is the Fed still thinking about three rate hikes this year? Has anything occurred that could de-rail this expectation? Will Yellen give the markets a reality check by voicing some scepticism about potential fiscal change under President Trump?

Will US Inc. put its money where its mouth is?

Janet Yellen holds the key to the short-term direction of global risky assets; however, she also holds the key to the next longer-term move in US equity markets. Analysis by Bank of America found that a record 51% of executives described their outlook as “optimistic” during the recent earnings season, according to data that goes back to 2003. There are also signs that optimism at the board level is translating into greater investment spending; some measures of investment intentions for US companies are at their highest levels since 2001. After a stunning rally in US equities since November, the next leg higher in the equity market rally is dependent on the spending and investment plans at boardroom level.

Janet Yellen’s Goldilocks problem

Prospects for interest rate increases this year could also impact corporate investment intensions. If Janet Yellen is too hawkish at this week’s Congressional testimonies then we could see corporates start to worry about the cost of capital. If she is too dovish then some might start to get jitters over the true health of the US economy. Thus, Yellen needs to get the tone just right – not too optimistic or too pessimistic – to help US stocks close higher for the sixth consecutive day.

UK retailers on the line ahead of UK CPI data

Elsewhere, here is a link to our UK CPI preview. Get our take on what an upside surprise could mean for the pound, and why it may be bad news for some of the UK’s largest domestic retailers such as Tesco and M&S. Read more here.

The FTSE 100 was the weakest of the major European indices on Monday. It was led higher by the mining sector, including Glencore and Rio Tinto, other strong performers included Barclays and HSBC. UK banks and miners report earnings next week, it appears that good news is already being priced in. But, any weakness in these sectors later today could trigger a broader weakness for the FTSE 100 as we progress through this week.