US close: Yellen testimony gees up stocks

Stocks on Wall Street set new record closing highs on Wednesday thanks to further indications from Federal Reserve Chair Janet Yellen that monetary policy will be brought back to normal at a gradual pace.

The Dow Jones index added 123 points or almost 0.6% to close at 21,532.14 with only one stock registering a fall, while the S&P 500 closed up more than 0.7% at 2,443.25 and the Nasdaq swelled 1.1% to 6,261.17.

Giving the central bank chairman's semi-annual testimony to the Congress House Financial Services Committee, Yellen stuck pretty close to the recent line of Fed policy statements, with some added dovish additions, including revealing that the Fed feels the natural rate of interest is likely to remain low, which suggests rates will only be hiked a small amount.

Yellen said that rates likely will not "have to rise much further to get to a neutral policy stance", while also revealing more caution about low inflation may lead the Fed to hesitate in its normalising process and leading some economists to rule out a further rate hike this year.

The unwinding of the balance sheet will also be very gradual and it will keep a substantial amount of excess reserves in the banking system.

Traders and analysts were left somewhat divided over their interpretation of Yellen's testimony, but the stock market reaction was clear.

Commenting on the Fed chief's remarks, Chris Beauchamp and Joshua Mahony at IG said: "To some extent Yellen provided a relatively hawkish statement given her declaration that rate hikes should continue despite falling inflation.

"However, in speculating that it would not take many more hikes for the Fed funds rate to be neutral, Yellen has essentially signalled that there will be a finite amount of rate rises around the corner. Markets are now looking for a December rate hike at the earliest, and crucially just one rate rise in 2018."

Ian Shepherdson, chief economist at Pantheon Macroeconomics had a different take on matters: "The Fed Chair remains a committed believer in the Phillips Curve, and she will be pushing for higher rates unless core inflation keeps falling. "We think that's unlikely; most of the forces pushing core inflation down in recent months have run their course, with the exception of the technical problems plaguing the owners' equivalent rent component.

"Investors are now convinced that a September rate hike is off the table, but we remain of the view that a run of strong data between now and then — especially robust payroll reports for June and July and a stabilisation in core inflation—will change that judgment dramatically," he said.

The dollar was down after northern neighbour Canada raised interest rates for the first time in seven years. The Bank of Canada upped rates to 0.75%, knocking the greenback nearly $2 lower against the loonie and the dollar index facing June’s 10-month lows again with a fall of 0.1%.

Oil prices also provided a boost to stock indices, with West Texas Intermediate crude adding almost 1% to $45.46.

The Energy Information Administration revealed US oil stockpiles saw a large drawdown during the latest week, even as domestic US oil production rose. Commercial crude oil inventories in the States shrank by 7.6m barrels over the week ending on 7 July.

Among individual stocks, only JPMorgan Chase on the Dow index saw its shares fall, with investors cautious ahead of its second quarter earnings. The bank will kick off bank earnings season on Friday, with the consensus of analyst forecasts pointing to earnings of $1.57 per share, up two cents from the same quarter last year, on revenue down 1.5% year-on-year to $24.8bn.

American Airlines flew higher after the carrier lifted its outlook for total revenues per available seat mile in the second quarter.

Wholesale power company NRG Energy rocketed 29% after it bowed to pressure from activist investors and agreed to sell most of its renewable energy assets and dramatically lower costs as it tries to remove $13b of debt from its swollen balance sheet.

Cara Therapeutics jumped after the firm announced positive results in an early-stage trial of a treatment for chronic kidney disease-associated pruritus sufferers.

Construction supplies outfit Fastenal posted second quarter earnings per share of 52 cents (consensus: 50 cents) on sales of $1.12bn (consensus: $1.1bn) but saw its shares fall.

Dow Jones - Top

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