Yellen says press on with stimulus

U.S. stocks fluctuated with Treasuries and the dollar rose, as the Federal Reserve told lawmakers the central bank must press on with stimulus even as it sees some sectors with excessive valuations. Oil slid.

The Standard & Poor’s 500 Index fell 0.1 percent at 11:26 a.m. in New York, trimming earlier losses. The Russell 2000 Index of small companies sank 0.7 percent after a Fed report said valuations of some biotechnology and social media stocks may be “substantially 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 rose one basis points to 2.56 after earlier falling to near the lowest in six weeks. The dollar (NYBOT:DX) gained as Fed Chair Janet Yellen testified before Congress.

The central bank must press on with stimulus as “significant slack” remains in labor markets and inflation is still below the Fed’s goal, Yellen said in semi-annual remarks before Congress. 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.

“The Fed wants to pay attention to valuations given that they might have to change the interest rate backdrop that has been a strong catalyst for the market,” Eric Teal, who helps oversee about $3.6 billion as the chief investment officer at First Citizens BancShares Inc. in Raleigh, North Carolina, said by phone. "The small cap area is going to be much more interest rate sensitive.’’

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. “Although the economy continues to improve, the recovery is not yet complete.”

Minutes from the Fed’s June meeting, released last week, showed some policy makers were concerned investors may be growing too complacent about the economic outlook and the central bank should be on the lookout for excessive risk-taking.

“Valuation metrics in some sectors do appear substantially stretched, particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year,” the Fed said today in a separate report.

The Dow Jones Internet Composite Index slumped 0.6 percent and the Nasdaq Biotechnology Index lost 1.5 percent.

Economic data

The Fed report overshadowed data today showing U.S. retail sales rose 0.2 percent in June after a 0.5 percent advance in May that was larger than previously reported. 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.

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