"Remember not only to say the right thing in the right place, but far more difficult still, to leave unsaid the wrong thing at the tempting moment." -- Benjamin Franklin

The Doctor Has Spoken

Federal Reserve Chair Janet Yellen spoke on Wednesday afternoon, and she'll speak again tonight. The good doctor sounded quite hawkish, as have other Fed officials who have spoken this week, such as San Francisco Fed President John Williams, and (former perma-dove) Governor Lael Brainard. In yesterday's address, the Fed Chair said that she, and most other officials at the central bank expected to "raise short term interest rates a few times a year through 2019".

Gang, you've got to understand that the recent December rate hike brought the fed funds rate to a range that spans from 0.50% to 0.75%. That hike was indeed appropriate, if not two to three years late, even if the U.S. economy appeared to slow significantly in November. The projections made by the Fed at the December policy meeting leave the fed funds rate at 2.9% late in 2019. Yellen did not offer any timing of when the next increase may come, but did warn of "a nasty surprise" if the FOMC waited too long to act... a nasty surprise being something like "too much inflation, financial instability or both".

The ECB

Treasury yields have reacted to these comments. In fact, yields are also higher across Europe this morning as well ahead of the ECB's policy announcement at 07:45 ET. No one expects the ECB to make adjustments to its current program today, but headline inflation did gap higher in December after steadily rising over the second half of the year. There will be those at the ECB who would like to announce a further tapering to their monthly quantitative easing purchases, and then there will be others who want to "let it fly" until inflation targets are reached. How ECB President Mario Draghi handles the press conference at 08:30 ET will be what matters as far as these yields and euro exchange rate are concerned for today.

On Inflation

Inflation? OK, let's talk about inflation. The surge seen in December's headline CPI was the big macro story yesterday. For those who merely look at headlines and listen to reckless words spoken by Fed officials every day, one would think that the economy was on fire. I am not in denial. There is evidence of growing strength in many places, but let's not kill this baby in the cradle. Headline CPI surged to 2.1% y/y from1.7% in November. That much is true, but the gain was strictly energy focused. In fact, fuel oil increased 6.0% m/m all by itself. Fuel oil prices increased ... wait for it ... 12.7% on a year-over-year basis.

Just for giggles, if you check back, fuel oil prices were -2.0% y/y as recently as last month. Sound sustainable? I guess anything can happen, but I wouldn't stake my reputation on it if I were representing the Fed. Then again, I have never been as consistently erroneous in my expectations for the economy as this group has been over recent years. Core inflation (just might be a better way to look at this) remained in its 2.0% to 2.3% year over year range for a fourteenth consecutive month. By the way, December's increases for industrial production and capacity utilization were due almost entirely to the utilities sub-component. Not that this is not real production. It's just that sustainability is an issue here as well.

Macro

08:30 - Housing Starts (December):Expecting 1.2 million, November 1.09 million SAAR.

08:30 - Building Permits (December):Expecting 1.22 million, November 1.2 million SAAR. Permits are a leading indicator, and growth in one usually does lead to the other, but permits do not always pan out. I like housing starts. I like when a shovel hits the dirt and when a hammer strikes a nail. That's when somebody has paid for something, somebody has borrowed, some body has been hired, and, last but not least, somebody else is going to sell a washing machine. Two of the last three months have seen the two weakest prints in this space for all of 2016. That's despite rising homebuilder sentiment, which peaked in December. I think a return to mid-trend for the last monthly 2016 number is more than likely. Some folks may have also been pushed to act by a sudden fear of rising interest rates due to economic growth brought on by the election.

08:30 - Initial Jobless Claims (Weekly):Expecting 254,000, Last Week 247,000. This incredibly shrinking data-point has printed well below its four-week moving average (256,000) in each of the last two weeks. Already running at consistently low levels for the better part of two years, layoffs have tailed off even further in 2017. This probably has more than something to do with the strong prints that we have seen for Small Business Optimism of late. As a futures trader, you will not notice this one pass by, given the competition for market attention that 8:30 will bring.

08:30 - Philadelphia Fed Manufacturing Index (January): Expecting 16.1, December 21.5. Manufacturing in the Philadelphia region has printed in headline expansion for five months running now, with the December release coming in especially strong. Still, there are a couple of prints within the print to keep an eye on today. For December, the employment sub-component collapsed, and we do not need to see another month of that. Now, new orders (the life blood) of any manufacturing survey have been very strong in this district. That said, in Tuesday's mildly disappointing Empire State release, growth for new orders slowed considerably. Philadelphia is a bigger fish than New York in this regard, and this will be closely watched by the markets.

10:00 - Fed Speaker:San Francisco Fed Pres. John Williams will make his second of three public speaking appearances this week, this time from Fairfield, California. In his speech Tuesday evening, Williams seemed to warn that the economy was now at full employment (I still disagree), and showed concern that adding fiscal stimulus could cause the economy to grow faster than expected. (Thanks for the tip, John.) Williams, who is not a voting member of the FOMC this year, expressed a preference for a gradually increasing the fed funds rate. He did not predict a number of hikes for 2017, nor the timing of the next hike.

10:30 - Natural Gas Inventories (Weekly):Expecting -230 billion, Last Week -151 billion cubic feet. Supplies of Natural Gas appear to be headed for their ninth consecutive weekly draw, which may be the reason why this commodity has found recent support here toward the upper bound of its year-long range. On top of that, these draws continue to be quite sizable.

11:00 - Oil Inventories (Weekly):Expecting -900,000, Last Week +4.1 million barrels.

11:00 - Gasoline Stocks (Weekly):Expecting +2.2 million, Last Week +5.0 million barrels. Crude prices have more or less gone sideways for about a month now. Every rumor regarding OPEC's compliance to their deal or lack thereof seems to be more of a driver than the actual supply side of late. Domestic U.S. production is increasingly becoming a player once again as well. Crude prices worked their way slightly higher last night in response to the American Petroleum Institution's (API) reported headline draw of 5.0 million barrels for Crude. This came despite a reportedly massive build in the gasoline space of 9.75 million barrels.

20:00 - Fed Speaker:Federal Reserve Chair Janet Yellen will speak for the second time this week. She'll be in Stanford, California to discuss her outlook for both our economy and the implementation of monetary policy. In Yellen's speech yesterday, she indicated that she felt the economy was nearing "maximum employment", which I think (to be fair) describes the situation better than the term "full employment". Full employment in labor would imply that all who are willing or able to work are employed at appropriate wages. In general economics, the term can also mean that economy is operating at its highest possible potential for output, or GDP. To believe this to be the case would be foolish (my opinion), or agenda-driven (again, my opinion). Maximum employment, at least for me, would mean that the Fed Chair believes that under current conditions, the economy has produced as many jobs as it can, though on a personal level many individuals remain under-employed. That's believable. That's also probably why there has been a national rejection of "current conditions".

Sarge's Trading Levels

These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.

SPX: 2293, 2282, 2273, 2266, 2261, 2254
RUT: 1370, 1364, 1358, 1352, 1345, 1339

Thursday's Earnings Highlights

Before the Open:(ALK) - Get Report ($1.34), (BK) - Get Report ($0.79), (JBHT) - Get Report ($1.01), (KEY) - Get Report ($0.29), (SBNY) - Get Report ($2.09), (UNP) - Get Report ($1.32), (UAL) - Get Report ($1.39)

After the Close:(AXP) - Get Report ($1.00), (ETFC) - Get Report ($0.42), (IBM) - Get Report ($4.89)

At the time of publication, Stephen Guilfoyle was long KEY, although positions may change at any time.