Two key reports — retail sales and the Consumer Price Index — may provide more clues Wednesday than Janet Yellen about how soon the Fed could raise interest rates.
The Fed Chair testifies for a second day, this time before the House Financial Services Committee, on the economy and policy. Her comments before the Senate Banking Committee on Tuesday triggered a bond market rout and helped drive stocks to new highs.
Stock futures were mixed, the dollar was firmer and Treasury yields were slightly higher ahead of the testimony. Besides Yellen, traders will keep watch on the drama surrounding former national security adviser Michael Flynn and reports about Trump campaign contacts with Russian intelligence.
Traders are watching to see whether Yellen retains her hawkish tone or even is more aggressive in comments Wednesday. Yellen said Tuesday that the Fed will likely need to raise rates at an upcoming meeting and that "waiting too long for accommodation would be unwise."
During the testimony, she was pressed on rate hike timing. "I can't tell you exactly which meeting it would be. I would say every meeting would be live," said Yellen.
Leading up to the testimony, markets were ruling out a March hike but the odds moved up slightly after she spoke. Goldman Sachs economists, for instance, raised their rate hike odds for March to 20 percent from 15 percent.
"She certainly wanted to give herself the option of going in March if the data does reflect that. I think she might be thinking that the market was a little too pessimistic on that potential," said Mark Cabana, Bank of America Merrill Lynch head of U.S. short rate strategy.
Consumer inflation, measured by CPI, has been picking up, and while it's not the preferred Fed inflation gauge, a jump in inflation could give the market more reason to speculate on an earlier rate hike. Fed watchers currently expect the next hike in June, and many see just two hikes this year, while the Fed forecasts three.
CPI is expected at 8:30 a.m. ET and is expected to be up 2.4 percent in January, over last year. It rose above 2 percent in December for the first time in two years. The Fed has targeted a 2 percent inflation rate.
The month-over-month gain in CPI is expected to be 0.3 percent and core CPI is expected to be up 0.2 percent, according to Thomson Reuters.
Another 8:30 a.m. report, retail sales for January, is expected to be up 0.1 percent, compared to a 0.6 percent gain in December. Excluding autos, January sales should be up 0.4 percent, according to Thomson Reuters. There is also the Empire State manufacturing survey, also at 8:30 a.m. ET, industrial production at 9:15 a.m. and business inventories at 10 a.m. The National Association of Home Builders survey is also released at 10 a.m.
The Energy Department releases oil and gas inventory data at 10:30 a.m. ET, and the Treasury's international capital flows data is released at 4 p.m. ET.
President Donald Trump will also be in the spotlight as he meets with Israeli Prime Minister Benjamin Netanyahu. He also is expected to meet with retailers, who oppose the House's border-adjusted tax.
New York Fed President William Dudley also speaks Wednesday night at 7:30 p.m.
With Yellen's testimony, bank stocks took off and the broader market moved higher Tuesday. The Fed chair was seen as much more upbeat about the economic outlook and more convincing that rate hikes are in the offing.
"It's hard to be long, but it's even harder to be short. Today was a really good setup. Banks got a little stronger late last week, and traders like me were on the alert for a hawkish Fed and that gave you a little more juice on the bank trade," said Scott Redler, partner with T3Live.com. Financial stocks were up 1.2 percent. The S&P 500 rose 9 to 2,337, its 15th record close since the election, and the Dow was up 92 at 20,504. The Nasdaq was up 18 at 5,782.
"This is a tough spot. Last week was a great setup. Now it's harder to sink your teeth into longs," said Redler, who said sector rotation has been healthy and breakouts have been positive.
"You have big names like Apple helping fuel breakouts. … You have stocks like Goldman Sachs going to all-time high and stocks like Bank of America at multiyear highs. But traders don't want to feel like they're chasing price up here. … Even if you think it's going to go higher, it's hard to think about initiating new longs. Individual names still have room to go. It's harder to be in the indices," said Redler, who follows the market's short-term technical.
As stocks surged to new highs after initially floundering Tuesday, bond yields rose, while prices slumped. The 10-year Treasury yield at one point jumped to 2.50 percent, and the Fed-sensitive two-year yield was at 1.23 percent late in the day.
"That probably achieved what she was thinking in trying to get the market a little more cognizant. It doesn't seem like she was pushing so hard on that notion and would rather wait to see how incoming data looks and see if that's something the Fed needs to do," said Cabana.
Companies reporting earnings Wednesday include PepsiCo, Entergy, Bunge, Cedar Fair, Och-Ziff Capital and Groupon, ahead of the open. Cisco, Applied Materials, Kraft Heinz, Marriott, Avis Budget and CBS report after the closing bell.