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Treasuries Spike on Yellen Testimony and CPI

Janet Yellen’s first congressional testimony during the new administration was highly anticipated.  She defended regulations and Fed independence, as expected. She also dropped a minor bombshell when she said “waiting too long to remove accommodation would be unwise” and that the committee will evaluate employment and inflation against expectations to see whether “a further adjustment of the Federal funds rate would be appropriate.” In addition, a recent CPI report showed US consumer prices increased in January by 0.6% (markets expected 0.3%) making it the highest since February 2013. The 12 months ending in January showed an annual increase of 2.5%, the highest since March 2012 and well above the Fed’s stated target of 2.0% (note that the Fed’s preferred indicator, PCE, has not yet hit 2.0%, but this is a strong indication that it will soon). This is definitely a sign that inflation is firming up, both including and excluding energy costs. The 10 year Treasury yield crossed above 2.50%, which could be a key technical level. Other wild cards: (1) Congress and the administration are set to roll back some or most of Dodd-Frank regulations in order to spur more bank lending, etc. This may reduce capital requirements for the money center banks. Much of the capital held by banks is in the form of Treasuries. This may trigger a major selloff.  (2) China:  The administration is singling out China for currency manipulation and trade practices. If sanctions and/or tariffs are invoked, China may retaliate by selling a good portion of the $1 trillion of US Treasuries it is holding. stay tuned.    David R. Pascale, Jr.