Wednesday in financial markets will be all about Federal Reserve Chair Janet Yellen.
After a busy Tuesday in which news out of Washington, D.C. once again dominated the narrative but only briefly impacted price action, markets will again turn their focus to the Capitol but this time to Fed Chair Yellen, who will deliver the first of two days of semi-annual testimony before lawmakers.
Yellen will begin prepared remarks before the House Financial Services Committee at 10 a.m. ET.
On Friday, the Fed released the full text of its latest monetary policy report to Congress, which noted, among other things, increasing valuation measures “across a range of assets.”
“Term premiums on Treasury securities continue to be in the lower part of their historical distribution,” the report said.
“A sudden rise in term premiums to more normal levels poses a downside risk to long-maturity Treasury prices, which could in turn affect the prices of other assets. Forward equity price-to-earnings ratios rose a bit further and are now at their highest levels since the early 2000s, while a measure of the risk premium embedded in high-yield corporate bond spreads declined a touch from an already low level, implying high asset valuations in this market as well.”
Expect Yellen to be asked about this, and more, during several hours of questioning.
Also on the economic calendar on Wednesday, at 2:00 p.m. ET, the latest Beige Book from the Fed will be released. This collection of economic anecdotes from each of the Fed’s twelve regions helps form the basis of the economic discussion which takes place at FOMC meetings, the next of which is set to begins on July 25.
Trump, Russia, markets
On Tuesday morning, Donald Trump Jr. released emails detailing how he apparently welcomed damaging information on then-Democratic presidential candidate Hillary Clinton from an intermediary said to be speaking on behalf of the Russian government.
Stocks fell — the Dow was off as much as 129 points at one point — and then recovered and closed as if nothing happened. Because, as far as markets are concerned and have been concerned, nothing did.
In a note to clients published during the day Tuesday analysts at Citi said this revelation, “will further undermine the Administration’s ability to get key elements of its legislative agenda passed this year.”
The problem is that this also presumes there still was anything like a pathway towards any legislation getting passed this year at all.
Senate majority leader Mitch McConnell on Tuesday said the month-long recess lawmakers get in August would be cut by two weeks.
“In order to provide more time to complete action on important legislative items and process nominees that have been stalled by a lack of cooperation from our friends across the aisle, the Senate will delay the start of the August recess until the third week of August,” McConnell said in a statement.
If markets really cared about stuff getting done in D.C. then perhaps it ought to have been the McConnell news, not the Trump Jr. news, that moved markets. Alas, it came and went with nary a peep from markets.
But as we’ve written time and again, markets have already moved on from pricing in any action from Washington this year. Bets on tax reform and infrastructure spending doing anything to boost markets are dead.
The hot new trend, in fact, among Wall Street analysts is that now gridlock in DC is good.
“Wall Street tends to prefer gridlock so long as policy is not necessary for companies to meet the growth expectations set forth,” analysts at Morgan Stanley wrote recently.
“Similarly, just the removal of risk for greater regulation and taxes is a net positive for equity valuations — a change that is here to stay regardless of what actually happens in Washington DC this year.”
And so Wednesday might bring us new headlines about some controversy roiling the Trump administration.
It just won’t matter for markets.
Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
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