Markets fluctuate after Yellen's testimony about interest rates

Dow was off 10, advancers over decliners 5-4 & NAZ added 15.  The MLP index gained 1+ to the 299s & the REIT index slid back pennies in the 324s.  Junk bond funds rose & Treasuries were sold, taking the yield on the 10 year Treasury up to 2.26%.  Oil was higher in the 46s & gold continued its climb, one $ at a time.

Dow Jones Industrials

CL=F

Light Sweet Crude Oil Futures,J

46.92

0.82

1.8%

GC=F

Gold Feb 17

1,229.20

2.30

0.2%

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Federal Reserve Chair Janet Yellen signaled the entral bank is close to lifting interest rates as the economy continues to create jobs at a healthy clip & inflation inches higher.  A rate hike “could well become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the committee’s objectives,” Yellen said in testimony.  Yellen, who made no mention of the prospective policies of the incoming administration of Trump, reiterated the expectation of Fed officials that future rate increases will be “gradual.”  Yellen's remarks will serve to cement expectations, barring a significant negative shock, for an increase in interest rates when the FMOC meets Dec 13-14.  Pricing in federal funds futures contracts already imply a greater than 95% chance of a qtr-point hike.  The Fed chair warned of the risks attached to waiting too long before raising rates.  “Were the FOMC to delay increases in the federal funds rate for too long, it could end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of the committee’s longer-run policy goals,” she said.  “Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability.”  She suggested the danger of that happening soon was low because current policy is only “moderately accommodative.”  “The risk of falling behind the curve in the near future appears limited,” she said.

Yellen Says Interest Rate Hike Could Come ‘Relatively Soon’

The fewest Americans since 1973 filed for unemployment benefits last week, a sign that the labor market is getting tighter.  Jobless claims dropped 19K to 235K according to the Labor Dept.  The estimate called for an increase to 257K.  Continuing claims fell below 2M to a 16-year low.  The biggest drop in initial claims since Jun suggests employers are loath to dismiss workers as the economy continues its modest expansion & the number of experienced applicants available for hiring remains limited.  Filings for unemployment benefits have stayed below 300K for 89 straight weeks, the longest streak since 1970 & a level typical for a healthy labor market.

The 4-week average of claims declined to 253K from 260K in the prior week.  The number of people continuing to receive jobless benefits dropped 66K to 1.98M & the unemployment rate among people eligible for benefits fell to 1.4% from 1.5%.

• Jobless Claims in U.S. Decline to Lowest Level in Four Decades 

US new-home construction jumped to a 9-year high in Oct as an outsized advance in the number of apartment projects accompanied a strong pickup for single-family housing.  Residential starts surged 25.5% to a 1.32M annualized rate, the fastest since Aug 2007 & exceeding the highest projection, according to the Commerce Dept.  The increase from Sep was the biggest since 1982.  Multifamily-home building was up a whopping 68.8%.  The figures indicate the housing market was making greater progress a month before a jump in mortgage rates.  While increased hiring & healthier finances have been driving demand, a sustained pickup in borrowing costs threatens to discourage first-time buyers & become a hurdle for the industry.

The forecast was for 1.16M.  Single-family house construction rose 10.7% to an 869K rate, the highest since Oct 2007.  Work on multifamily homes, such as townhouses & apartment buildings, jumped to an annual rate of 454K from 269K a month earlier.  All 4 regions posted gains in housing starts.  Permits, a proxy for future construction, increased 0.3% to a 1.23M annualized rate.  They were projected to fall to a 1.19M pace.

• Housing Starts in U.S. Surged to a Nine-Year High in October

Stocks need time to digest the enormous gains in the last 2 weeks.  Talk of interest rates always spooks the stock market.  Economic news sounds better, but high Treasury rates will bring higher mortgage rates, a negative for this strong sector in the economy.  Intl business is still fuzzy.  Europe has modest growth as it prepares for the UK exit from the EU & China will have only a so-so year.  Meanwhile, Dow is at a record high.  The disconnect has not been corrected so far.

Dow Jones Industrials