Daily Market Color February 15, 2017Treasurys Resume Decline, Stocks Rally After Robust Inflation, Retail Sales Data A flurry of economic data crossed the wires today, beginning with the consumer-price index which revealed the steepest monthly increase since February 2013. The Labor Department reported a 0.6% jump (+0.3% expected) in consumer prices during January, driven largely by a 7.6% surge in the cost of gasoline. Rises in clothing and vehicle prices also contributed to the CPI growth, as costs of men’s apparel advanced the most on record while automobile prices posted their biggest monthly climb since November 2009 at 0.9%. Core CPI, which excludes food and energy prices, rose 0.3%, exceeding median forecasts of 0.2% and displaying its highest level since August 2016. With the labor market approaching full employment, last month’s steady increase in consumer prices gives strength to the argument for a tightening of monetary policy sooner rather than later, as fed funds futures now imply a 44% probability of a rate hike at the March FOMC meeting, up 14% from yesterday. Retail sales similarly outpaced expectations for January with a 0.4% monthly advance, as per a report from the Commerce Department this morning. Consumer purchases were robust across nearly all categories except for motor vehicles, where sales declined 1.4% last month. Excluding autos, retail sales rose 0.8% from December, highlighted by purchases of electronics and appliances (+1.6%), sporting goods (+1.8%), and clothing retailers (+1%). Total retail sales were up 5.6% in January compared to the previous year’s level. The readings correspond with yesterday’s rhetoric from Fed Chair Janet Yellen who stated that “consumer spending has continued to rise at a healthy pace, supported by steady income gains, increases in the value of households’ financial assets and homes, favorable levels of consumer sentiment and low interest rates.” Industrial production stood as a weak spot in today’s data releases after unseasonably warm temperatures last month led to a decline in demand for utilities. Output at factories, mines and utilities declined 0.3% in January, representing the largest drop since September 2016 and 0.9% below the previous month’s revised level. The manufacturing component of the report displayed a 0.2% rise which matched expectations, while mining surged 2.8%. Industrial capacity dropped with overall output, down 0.3% to 75.1% for the month and 4.6% below its long run average. Investors will expect improvement in the headline figure next month after the Empire State Manufacturing Survey, a report often used as an advanced indicator, exhibited its strongest readings in 2.5 years this morning at 18.7. In addition to the robust economic data, investors listened in to hawkish commentary from two Fed officials this afternoon. Philadelphia Federal Reserve Bank President Patrick Harker (voter) presented his view that three increases to the benchmark interest rate would be appropriate for 2017, and “with employment generally at our goal and inflation on track to meet it, the issue now is growth.” He further argued that the catalysts for growth do not reside within monetary policy and need to be addressed by developments in fiscal policies. Boston Fed President Eric Rosengren (non-voter) added an even more hawkish tone in his speech to the New York Association for Business Economics, where he stated the Fed may need to raise interest rates at an even faster pace than currently forecasted (three in 2017). Rosengren warned that “If GDP is growing faster than potential and we reach both elements of the dual mandate, the Federal Reserve risks overshooting,” its target employment and inflation levels. All three major US stock indices continue to rally, reaching new all-time highs yet again today up 0.5%-0.65%. Treasurys sold off immediately following the inflation data, with yields/swap rates rising 3-5 bps across the curve. The yield on the 10-year note topped 2.5%, a level not seen since the end of January. The US dollar traded sideways for the majority of the session before falling 0.1%, ending a four-day streak of gains. Crude oil similarly settled marginally below even for the day, with WTI crude pricing at $53.10/barrel and Brent near $55.75/barrel.