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Fed Chair Testimony Main Feature Today

STOCK INDEX FUTURES

Stock index futures are higher as bond yields slipped back, with investors awaiting Federal Reserve Chair Jerome Powell’s testimony to the Senate Banking Committee for his second-term nomination hearing at 9:00 central time. His prepared remarks indicate inflation and rate increases will be in focus. Lawmakers will also have the opportunity to ask questions.

The Federal Reserve, as signaled last week, is headed for earlier and faster interest rate increases.  Three rate increases from the Fed are factored in this year, beginning as soon as March.

The consumer price index is scheduled to be released Wednesday and is expected to show a year-over-year increase of 7.1%. The producer price index, which measures wholesale prices, will be reported on Thursday.

The National Federation of Independent Business Small Business Optimism Index for December was 98.9 when 98.8 was expected.

Later this week, fourth-quarter earnings season kicks off with major U.S. financial firms reporting results.

The longer-term fundamentals remain supportive despite the more hawkish Federal Reserve.

CURRENCY FUTURES

The U.S. dollar index and the euro currency remain in broad sideways patterns, and with interest rate differential expectations offering no clear advantage to either currency, the sideways trade will likely continue for the U.S. dollar and the euro currency over the near term.

The British pound advanced to a nine-week high against the U.S dollar.

U.K. retail sales in December grew 2.1% from a year earlier in December 2020 and were 9.9% higher in the year compared with 2019. Also, consumer spending was up 12.2% last month from two years ago.

A hawkish Bank of England will likely continue to support the British pound. The Bank of England surprised traders in December by hiking interest rates from record low levels. The central bank will probably increase interest rates again as early as next month. Financial futures markets have priced in up to four Bank of England interest rate hikes in 2022.

An accommodative Bank of Japan will likely result in long-term pressure on the yen.

INTEREST RATE MARKET FUTURES   

Federal Reserve Bank of Atlanta President Raphael Bostic said Monday he is open to the U.S. central bank raising its fed funds rate as soon as its March policy meeting, adding he expects the Fed will likely hike its interest rate target three times over the course of the year.

A number of other Fed officials have also signaled their openness to raising rates in March. Many private sector forecasters now believe the central bank will lift rates that month, which would coincide with the end of the Fed’s bond purchases.

The Treasury will auction three-year notes today.

Some analysts are pointing out that the FOMC is tightening credit conditions at a time when the rate of growth in the economy may be slowing, citing the flattening yield curve since March 2021.

Also, several large investment banks have reduced their estimates of GDP growth.

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