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We seemed to have started the week right, that is, until the Fed had to stir the pot this morning. The major equity indices initially opened higher following positive earnings results from two major Dow Jones Industrial Average components: JPMorgan Chase & Co. (JPM) and Goldman Sachs (GS). Both of the financial giants reported better than expected earnings results, with the volume of loans and stock underwritings pointing toward a healthy economy in the second quarter. However, by noon, comments before the US Senate by Federal Reserve Chair Janet Yellen caused the markets to drop to new session lows.

We actually do not find anything that Yellen mentioned to be particularly shocking or dramatic. Apparently, neither does the market; if concerns were higher, the market would be trading far lower than its current levels. One of the most bizarre things she chose to comment on were social media and biotechnology stocks, which began to suffer shortly thereafter. Yellen noted that firms appear to be stretched, causing social media names like Facebook (FB), Twitter (TWTR), and Yelp (YELP) to decline off morning highs. In her Senate Testimony, she noted that the first quarter GDP decline was largely due to transitory factors (primarily Obamacare) and that the negative number understates momentum in the economy which should be more positive. As noted last week, Yellen said that the Federal Open Market Committee (FOMC) will only consider increasing the Fed Funds Rate if employment and economic data slide from their current pace before the October meeting. Ultimately, it will all depend on the data: she claims that there is no formula or mechanical answer to the timing of when rates will increase. In the end though, not much has changed and Yellen's dovish approach to quantitative easing (QE) still has many investors doubtful as to where we go from here... or at least beyond October. Below is a 20-year chart of the US unemployment rate relative to the interest rate:

Aside from the Fed comments, there was plenty of economic data released this morning that should have had a bigger impact on the market today. The import & export numbers demonstrated that cross-border inflationary pressures are not likely to be a concern of the Federal Reserve going forward. Import prices increased only 0.1% in June, while export prices fell 0.4%. Details on the import side showed rather wide declines, including a 1.7% decline in food/feeds/beverages prices and similar declines for coal and natural gas. However, prices of imported petroleum products were under some pressure and increased 1.4% in June. The decline in export prices was primarily centered on agricultural, which fell 1.8% in the month, but all other categories showed slight declines as well. We note that this report is not raising any danger signals with prices for finished goods being flat and the year-on-year rates rather benign. Year-over-year import prices increased 1.2%, while export prices increased 0.2%.

In addition, the Bureau of the Census noted that May's Business Inventories increased by 0.5% which was slightly less than the consensus estimate and April's reading - both at +0.6%. Looking at sectors, the inventory build relative to sales is steady with retailers and wholesalers which show no change in their inventory-to-sales ratios. Though not by much, inventories-to-sales increased for manufacturers to 1.31 from 1.30. We note that this build is really no threat given the leading strength of the manufacturing sector. In fact, we would expect that an inventory build would give a desirable and much-needed lift to GDP in the second quarter.