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Janet Yellen Gives Her Irrational Exuberance Speech


Today's financial recap and tomorrow's financial outlook.

Janet Yellen's semi-annual Humphrey Hawkins testimony to the Senate Banking Committee was the main event for today's trading session. Fed Chair Yellen noted that there was still a considerable amount of slack in the labor market which warranted a high degree of accommodation now and in the future. However, the market keyed in on her comments about how improved economic activity would trigger a faster pace of rate hikes, with the inverse being true as well. This kept shorter-duration Treasuries under pressure.

In the Fed's Monetary Policy Report, staff noted that the equity valuations of small-cap firms, as well as those of social media and biotech firms, appear to be stretched, based on price-to-forward earnings relative to historical norms. Of course, in this author's opinion, it's hard to determine what a fair valuation of a social media stock is considering the sector is less than two years old. Additionally, reach for yield behavior was noted in leveraged loans and lower-rated, speculative-grade bonds. Lastly, according to our estimation, it was the first time since 2000 that the Fed's Monetary Policy Report commented on a specific sector of the stock market. Fourteen years ago, the report noted excessive valuations in the tech category.

Small cap stocks were notably weak after Yellen's comments, as were social media and biotech stocks. The Russell 2000 (INDEXRUSSELL:RUT) underperformed the S&P 500 (INDEXSP:.INX) by 0.78% on a beta-adjusted basis. Gold and oil prices remained under pressure for a second straight day with West-Texas intermediate crude falling below $100. JPMorgan (NYSE:JPM) and Goldman Sachs (NYSE:GS) both beat earnings in the pre-market. Intel's (NASDAQ:INTC) report after the close matched what it pre-reported a few weeks ago. The company continued to show strong growth with EPS at $0.55 versus $0.52 estimates. Revenues were also ahead at $13.8 billion versus the $13.71 billion expected. Guidance for the coming quarter and year were both raised.

Retail sales rose 0.2% month-on-month in June, worse than the +0.6% that was expected. The prior month's sales were revised up to +0.5% from +0.3%. The topline sales figure miss was due to a surprising 0.3% decline in the dollar level of auto sales in June. Reported earlier this month, June unit auto sales from manufacturers to dealers were at 16.92 million SAAR, the highest level in nine years. Because the final sales level recognized a drop, auto manufacturers began "channel stuffing" by either forcing more auto inventory to dealers than they needed, or by forcing dealers to make a significant cut to prices. The single month of the regional NY manufacturing survey was the third highest on record, although the index of forward expectations posted a very large drop.

Tomorrow's Financial Outlook

Tomorrow morning the level of producer prices for June will be released. Economists are expecting a 1.8% gain against the same month a year ago in the recently-revamped index. However, economists have been increasingly frustrated by wild fluctuations in the new index due to obscure levels of services prices, indicating the dataset may be completely worthless. Also scheduled for release is June industrial production, a July survey of real-estate broker and builder sentiment, and the Fed's Beige Book of economic conditions in its 12 districts. At 10:00 a.m. EDT, Fed Chair Janet Yellen will stand before the House Committee of Financial Services to give a testimony similar to the one she gave today.

A catalyst for risk assets is scheduled to be released overnight: China will report on its second-quarter GDP. Economists expect the growth level to remain unchanged at 7.4% year-on-year, the same growth rate seen in the first quarter and close to the government's official target of 7.5%. The UK's 3-month average unemployment rate for May and the Bank of Canada's monetary policy decision are also scheduled.

More financial earnings are scheduled for tomorrow. Notable reports include US Bancorp (NYSE:USB), Blackrock (NYSE:BLK), Bank of America (NYSE:BAC), PNC Financial (NYSE:PNC), and Charles Schwab (NYSE:SCHW). Also on deck are Sandisk (NASDAQ:SNDK), eBay (NASDAQ:EBAY), Abbott Labs (NYSE:ABT), Las Vegas Sands (NYSE:LVS), and Yum Brands (NYSE:YUM).

Twitter: @Minyanville

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