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U.S. stocks fluctuate with bonds on Yellen remarks

Yellen said in her semi-annual testimony to Congress that “significant slack” remains in labor markets.
Yellen said in her semi-annual testimony to Congress that “significant slack” remains in labor markets.

(Bloomberg) -- U.S. stocks fluctuated while Treasuries fell as Federal Reserve Chair Janet Yellen told lawmakers the central bank must press on with stimulus. The pound gained, oil slid and corn dropped to near a four-year low.

The Standard & Poor’s 500 Index fell less than 0.1 percent at 10:31 a.m. in New York. The Russell 2000 Index of small companies sank 0.6 percent after a Fed report said valuations of some biotechnology and social media stocks may be “stretched.” JPMorgan Chase & Co. and Goldman Sachs Group Inc. rose at least 0.8 percent after the banks reported better-than-estimated earnings. U.S. crude fell below $100 a barrel for the first time since May. The yield on 10-year Treasury notes fell to near the lowest in six weeks. Corn fell 0.8 percent.

Yellen said in her semi-annual testimony to Congress that “significant slack” remains in labor markets and inflation is still below the Fed’s goal. Retail sales data today showed a broad-based increase in June, which probably helped the U.S. economy rebound in the second quarter. JPMorgan Chase said second-quarter profit beat estimates and Goldman Sachs reported a surprise increase in earnings.

“A tremendous amount of labor slack as well as a below-trend economy equates to a dovish Fed,” Chad Morganlander, a money manager at St. Louis-based Stifel, Nicolaus & Co., which oversees about $160 billion, said in a phone interview. “She’s already given out the playbook that her economic dashboard isn’t lighting up all green. The economy still has a ways to go.”

Senate Address

Yellen repeated her comments from last month that the Fed will keep interest rates low for a considerable time after ending its asset-purchase program, even as it saw improvements in the economy and labor market.

“A high degree of monetary policy accommodation remains appropriate,” Yellen said today in testimony prepared for delivery to the Senate Banking Committee. ‘‘Although the economy continues to improve, the recovery is not yet complete.’’

Economic Data

U.S. retail sales rose 0.2 percent in June after a 0.5 percent advance in May that was larger than previously reported, Commerce Department figures showed today in Washington. The New York Fed’s Empire manufacturing report unexpectedly rose to 25.6 for this month from 19.28 last month.

The S&P 500 climbed 0.5 percent yesterday, the most since July 3, to rebound from its worst week since April. Profit at S&P 500 companies probably rose 4.5 percent in the three months through June while sales advanced 3.1 percent, analyst estimates compiled by Bloomberg show.

JPMorgan Chase climbed 3.9 percent and Goldman Sachs rose 0.8 percent to lead an index of banks to the biggest advance in the S&P 500. Both firms reported fixed-income revenue that topped estimates. Banks have seen profits hurt in recent quarters as the Fed slows its bond buying and fixed-income clients make fewer bets amid low volatility.

Bank Profits

Wells Fargo & Co., the most valuable U.S. bank, posted second-quarter profit last week that rose 3.8 percent on lower credit costs, while Citigroup Inc. said yesterday that net income fell 96 percent as the company agreed to pay $7 billion to resolve a mortgage-related probe. Bank of America Corp., the second-biggest U.S. lender by assets, is scheduled to report results tomorrow.

Lorillard Inc. dropped 7.3 percent after Reynolds American Inc. reached an agreement to buy its rival for $27.4 billion including debt. Reynolds lost 3.4 percent.

The Stoxx Europe 600 Index was little changed after yesterday rallying the most in a week. Software AG declined 17 percent after the German company lowered its operating-margin forecast, dragging technology companies down for the second- biggest decline among 19 industry groups. Draegerwerk AG slumped 18 percent after the German maker of medical equipment cut its projection for sales growth.

Banco Espirito

Banco Espirito Santo SA’s subordinated bonds and stock tumbled as 847 million euros ($1.15 billion) of short-term debt sold by a company linked to the Portuguese lender falls due today. Rioforte Investments SA, a holding company of the troubled Espirito Santo group, owes the money to Portugal Telecom SGPS SA, according to a June 30 regulatory filing by the nation’s biggest phone company.

The lender’s 7.125 percent notes due November 2023 dropped 7.8 cents on the euro to a record 72 cents, with the yield rising to 12.1 percent, according to data compiled by Bloomberg. Banco Espirito Santo’s shares slumped 20 percent to 35.5 euro cents, a record low for data going back to 1993.

Pound, Dollar

Britain’s pound advanced 0.5 percent to $1.7163 and added 0.6 percent to 79.26 pence per euro. The Office for National Statistics said annualized U.K. inflation was at 1.9 percent in June from 1.5 percent the prior month. That compares with 1.6 percent forecast by analysts in a Bloomberg survey.

The dollar strengthened 0.1 percent to 101.63 yen from 101.54 yesterday.

A gauge of U.S. inflation expectations climbed to a five- month high before Yellen speaks amid signs her efforts to spur prices and growth are bearing fruit.

The five-year, five-year forward break-even rate climbed to 2.51 percentage points the most recent reading from July 10, the highest level since Feb. 12. The index measures inflation expectations for the five years starting in 2019.

The shekel gained 0.5 percent to 3.4039 per dollar. Israel has accepted Egypt’s proposal to end a week of fighting with Gaza militants, ordering its military to cease fire, according to Prime Minister Benjamin Netanyahu’s office.

The MSCI Emerging Markets Index rose 0.4 percent, heading for the highest close since February 2013. South Korea’s Kospi index jumped 0.9 percent, advancing for a second day, as exporters gained.

China’s Economy

China reports second-quarter gross-domestic product tomorrow, with analysts expecting a 7.4 percent expansion from a year earlier. June retail sales and industrial production are also due.

The won slid 0.9 percent versus the dollar. Incoming Finance Minister Choi Kyung Hwan said in a July 8 nomination hearing that exchange-rate stability is important, raising the prospect of intervention after the won gained the most among major currencies in the second quarter.

Corn dropped after rebounding from a four-year low yesterday and wheat declined 0.5 percent. Seventy-six percent of corn and 72 percent of soybeans were in good or excellent condition as of July 13, the best shape for that time of year since 1994, U.S. Department of Agriculture data released yesterday show.

West Texas Intermediate oil fell 1.2 percent to $99.68 a barrel in New York. Futures slid amid signs of a recovery in Libyan exports, stable output in Iraq and the highest U.S. crude production in almost three decades.

--With assistance from Shelley Smith, Paul Dobson, Stephen Kirkland, Cecile Vannucci and Namitha Jagadeesh in London and Nick Gentle in Hong Kong.

 

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