U.S. stocks reached new highs last week amid the continued slow process of cabinet appointments in Washington and the heightened noise associated with the new administration. Business optimism was fueled by the announcement that the administration's tax plan will be released in the next few weeks, most likely at the state of the union address on February 28.
On Tuesday and Wednesday, Federal Reserve (Fed) Chair Janet Yellen will give her semi-annual testimony to Congress. The testimony will likely reiterate the improvements in the economy, but I will be listening closely to how the Fed views tax reform and fiscal stimulus. To date, the Fed has taken a “wait and see” approach to the changing landscape in Washington.
This week we also get U.S. inflation readings. I expect inflation pressures to continue to increase. The expectation is for Consumer Price Index (CPI) to increase by 0.3% in January to 2.4%. The uptick in the CPI will start to get more attention in the months ahead and put additional pressure on the Fed to keep normalizing interest rates. If inflation continues to increase and the talk of fiscal stimulus builds, look for bond yield to increase. Keep an eye on the government bond auctions for demand, as foreign buyers have recently been reducing the amount to U.S. holdings.
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