Dig if you will the picture
Of you and I engaged in a kiss

-Prince

Yesterday, Federal Reserve Chair Janet Yellen engaged in a kiss with Wall Street. She answered one question about the Fed “never” hiking rates and replied that she couldn’t make an “ironclad promise.” However, she referred to the committee’s work that assumes that the economy will be robust enough to handle a twenty-five basis point hike sometime this year. In fact, the committee recast the dots and it’s clear we’ll get one, and it will be done this year, maybe finishing 2016 with a Federal funds rate of 1.75%.

Of course, these dots are an odd way of communicating, although it might give Fed space from the Street.

This might explain why the Federal Open Market Committee (FOMC) statement keeps getting shorter and shorter.

Yesterday, there was a lot of sobering news about the economy and that put a cap on rally efforts.  FedEx missed on revenue and earnings while lowering its domestic economic outlook.

The gross domestic product (GDP) was 3.1% and is now 2.3%, and industrial production is now at 2.2% from 3.8% prior.

The news was actually less optimistic from the Federal Reserve that sees this year’s GDP at 2.0% from a previous estimate of 2.7%.

The market still finished higher, but you get the sense that a lot hinges on a dramatic improvement in the economy. There’s anecdotal evidence, but the past few years have seen a lot of head-fakes with early-year strength fading into a soggy limp-noodle into the end of the year.

When Doves Cry

Janet Yellen drove home two points- one, they understand how hiking rates could shake the markets and two, investors should understand that the “entire trajectory” is more important instead of fearing the first hike. So, in the end, I think doves are in control and have cried just enough to get a calm knee-jerk reaction. It remains to be seen how a good night’s sleep changes the equation. For now, this was the best kiss Wall Street could expect.

Today’s Session

There was plenty of economic data released this morning between the consumer price index (CPI), initial jobless claims and word on the Q1-2015 US trade deficit. Though expanding, the US trade deficit came in better than expected at -$113.3 billion from a revised estimate of -$103.1 billion (from -$113.5 billion). It was expected that the trade deficit would come in at $116.5 billion for the quarter. When compared to GDP, the current gap has become very manageable at 2.6%. During the quarter, the US saw strength in its exports which are now valued at $58.7 billion versus $57.6 billion in the fourth quarter.

As for the CPI report, the year-over-year core headline was among one of the biggest since February 2013. During the month of May, on a monthly basis, CPI rose 0.4%, just shy of the consensus estimate of 0.5%, but much larger than the unrevised +0.1% in April. On an annual basis, CPI improved from a -0.2% reading in April to a 0.0% reading in May. The monthly core reading, which subtracts food and energy rose by a meager 0.1% compared to the prior 0.3% gain and the +0.2% consensus. Now, the real impressive figure is the annual core CPI growth. Over the past twelve months, core CPI rose 1.7%, very close to the 1.8% gain in April.

So far, the market seems to be digesting the news well, but there is a lot of data still to be released that could shake things up.