Stocks Post New Record Highs Despite Yellen’s Hawkish Tone

U.S. equity markets posted strong gains on Tuesday, driven to new record highs, as investors pored over the testimony from Fed Chair Janet Yellen.

Entering the last half of the trading session, the benchmark S&P 500 was trading 2336.82, up 8.57 or +0.37%. The blue chip Dow Jones Industrial Average was at 20496.77, up 84.61 or 0.41% and the tech-based NASDAQ Composite was up 17.80 or +0.31% at 5781.76.

Goldman Sachs was the best performer in the Dow. Financials helped push the S&P 500 higher and the NASDAQ was supported by Apple, which reached an all-time intraday high.

In prepared remarks, Fed Chair Janet Yellen said that waiting too long to raise rates would be “unwise,” given the rise in inflation and economic growth. Some traders read this as hawkish, but the price action in the stock market indicated otherwise.

U.S. Treasury yields rose which indicates fixed income traders thought she sounded hawkish. The benchmark 10-year note yield rose to 2.4725 percent and the short-term two-year note advanced to 1.1283 percent.

The U.S. Dollar also rose against a basket of currencies, erasing earlier losses.

Reaction to Yellen’s comments were mixed, but the majority of them leaned to the hawkish side. Some said the probability of two rate hikes is pretty good. A third will depend on what the dollar does. An expensive dollar could hurt the economy so the Fed will be monitoring the impact of two rate hikes on its value. Some investors felt that Yellen paved the way for three rate hikes this year, which means she sent a message that rates are on their way toward normalization.

There was also a group of investors who felt the next rate hike is pinned on the hopes of lower corporate taxes, increased fiscal spending and deregulation especially in the financial industry.

Near the end of the session, market expectations for a rate hike next month rose to 23 percent. A week ago, the chance for a March rate hike was about 9 percent.

In economic news, the NFIB small business index, which measures small-business confidence, hit 105.9, the best read since December 2004. U.S. producer prices rose more than expected in January, recording their largest gain in four years amid increases in the cost of energy products and some services.

According to the Labor Department, the producer price index for final demand jumped 0.6 percent last month. This was the largest increase since September 2012 and followed a 0.2 percent rise in December. Annually, however, the increase wasn’t that impressive. The PPI only increased 1.6 percent in the 12 months through January, basically unchanged in the 12 months through December.

Traders and analysts were looking for the PPI to rise 0.3 percent month-on-month and 1.5 percent year-on-year.