Fed Chair Janet Yellen woke up the bond market late Wednesday with a surprisingly hawkish stance, and now markets look forward to testimony Thursday from Donald Trump's Treasury nominee, with one day left before the inauguration.
Congress may ask Steven Mnuchin a lot of questions about his role in his former firm's foreclosures on homeowners, but markets are also going to watch for the former Goldman Sachs partner's comments about the dollar, tax proposals and Treasury supply. Comments about China and its currency will also be of big interest.
"We're going to hang on every word," said Jim Caron, fixed income portfolio manager at Morgan Stanley Investment Management. Caron said that Mnuchin, in an interview on CNBC when he was nominated in November, suggested that the Treasury could issue longer term debt. If he suggests that again, Caron said rates could rise.
Earlier this week, Trump himself said he believes the dollar is too strong. It's the Treasury secretary who typically comments on the currency, so Mnuchin's words on the topic could also be powerful after Trump sent the dollar lower. Strategists noted that Mnuchin stopped short of mentioning the currency in the CNBC interview and said a strong economy is important to the U.S.
Mnuchin, a former Goldman Sachs partner, founded Dune Capital Management and bought failed housing lender Indymac in 2009. He rebuilt it under the name OneWest and sold it to CIT in 2015. The Wall Street Journal reported Wednesday that the New York attorney general's investigation into reverse mortgages includes a firm that Mnuchin had owned as part of OneWest. The newspaper quoted an unnamed source on the investigation, and Mnuchin's lawyer called it "politics."
Mnuchin has also tried his hand at film finance, producing such films as "Sully" and "The Legend of Tarzan."
Jack Ablin, CIO of BMO Private Bank, said Mnuchin's hearing will be important. "I think it could help set the tone in how cooperative the Congress will be with the new president," he said.
Stocks were mixed Wednesday, but financial stocks and bond yields moved higher after Yellen said there could be a couple of rate hikes this year. The 10-year Treasury yield jumped to a one-week high of 2.43 percent. The edged up 4 points to 2,271, while rate-sensitive financial stocks gained 0.8 percent.
"It seems like there's potentially three rate hikes in the cards for 2017. Our thinking was there were two for 2017. This certainly came as a little bit of a surprise to the markets," said Caron. "She said she expects a few rate hikes this year. I don't know what that exactly meant, but I would say three is now more a probability."
Many economists had expected two rate hikes this year even though the Fed's own forecast is for three. Also helping sentiment toward more rate hikes was a jump in CPI inflation to 2.1 percent, the biggest year on year increase since 2014.
Yellen speaks again Thursday evening at 8 p.m. ET on the economic outlook and monetary policy at Stanford University. Earlier in the day, San Francisco Fed President John Williams speaks at 3:45 p.m. and Boston Fed President Eric Rosengren speaks on the economic outlook at 4 p.m.
Data Thursday include weekly jobless claims, housing starts and the Philadelphia Fed survey, all at 8:30 a.m. ET.
Ablin said there could be room for disappointment in earnings, since the market is expecting a 13.5 percent jump in profits this year. He also said therefore the stock market could be overvalued by as much as 5 to 10 percent.
"Companies and President Trump will have to pull a rabbit out of their hats," he wrote in a note.