The big event of the day was this morning’s semi-annual monetary policy testimony from Fed Chair Yellen. While Yellen’s prepared remarks and Q&A did not break any meaningful new ground, takeaways were still seen as slightly more hawkish than expected. The fallout for bonds was fairly minimal, though gold came under pressure. For equities, the big issue seemed to be the statements in the Fed’s Monetary Policy Report about stretched valuations in the momentum space. Biotech, social media and Internet ETFs all underperformed. Telecom and Utilities attracted some defensive interest. The Financials sector was a standout on better earnings out of the banking group. o No surprises from Yellen, but still deemed slightly more hawkish: § The highlight of the day was the semi-annual monetary policy testimony from Fed Chair Yellen. There did not seem to be any notable surprises in her prepared testimony or Q&A, though takeaways were still deemed a bit more hawkish. Yellen reiterated the need for monetary policy to remain highly accommodative. She highlighted the recent improvement in the labor market data and reiterated that if this trend continues to gain momentum, the Fed could tighten sooner and more rapidly than currently envisaged. However, she also stressed that slack remains elevated, while participation and wage growth are still depressed. § As expected, she was vague on the timing between the end of QE and liftoff. However, Goldman Sachs did point out that during her Q&A, she noted that “almost all” participants expected the first tightening some time in 2015. It noted that this was slightly different than testimony back in May, when she said that "most members believe that in 2015 or 2016 normalization would begin under their baseline outlook." The other area of concern revolved around valuation. Yellen said prices for most assets are generally in line with historical norms. However, she noted stretched valuations in certain pockets, including leveraged loans. In addition, the Fed’s Monetary Policy Report said valuations in social media and biotech "appear substantially stretched". o Positive takeaways from corporate calendar: § Some favorable takeaways from the corporate calendar were overshadowed by monetary policy dynamics today. Much of the focus was on the Financials, where negative sentiment surrounding the earnings backdrop for the banking group has been an overhang. While on Monday the sector was forecast to drag down overall S&P 500 EPS earnings growth by 86 bp in Q2, today’s results helped reduce the hit to 42 bp. § Investment banking and fixed-income trading came in ahead of expectations at both JPM +3.5% and GS +1.3%. The former also benefited from better F14 expense guidance. Credit was another widely cited positive despite some worries about a waning tailwind this quarter. Macro commentary was also fairly upbeat with the bank noting broad-based improvement late in Q2, including an uptick in wholesale utilization and stronger pipelines in its commercial and business banking segments. Loan growth was the widely positive for CMA +2.6%, with the bank raising its full-year guidance. o Core retail sales, regional manufacturing data better: § The economic calendar also provided some early support for the market before the volatility surrounding Fed Chair Yellen’s testimony. Headline retail sales rose 0.2% m/m in June, below consensus expectations for a 0.6% increase. However, the miss was partly due to a 0.3% decline in autos, which contrasted with the continued strength in vehicle sales last month. In addition, core retail sales, which are used in GDP, rose 0.6%, ahead of consensus expectations for a 0.5% increase. Core retail sales for May were revised up two-tenths to reflect a 0.2% increase, while the figure for April improved three-tenths to reflect a 0.5% gain. § The market also got its first look at July regional manufacturing data. The empire manufacturing index rose to +25.6 in July from +19.3 in June, ahead of the +16.8 consensus and the highest reading in more than four years. New orders, shipments and employment all showed sequential improvement in June. The former two components both hit their highest levels since early 2010. The report noted that while many indexes for the six-month outlook were significantly lower, conditions are expected to continue improving. o Momentum under scrutiny: § Several momentum groups underperformed today on the back of the Fed comments. Biotech came under outsized pressure with IBB (2.2%) driving the pullback in the healthcare sector. Internet and social media also lagged with QNET (0.6%) and SOCL (1.1%). A number of the high-beta software names were some of the other notable decliners in tech with DATA (4.3%) and WDAY (2.5%). § While Consumer Discretionary ended lower, there were a few pockets of strength and it actually held up better than the staples. The latter sector was hit by the sell-the-news reaction to the widely anticipated consolidation in the tobacco space between LO (10.5%) and RAI (6.9%). The packaged foods group also underperformed with Goldman reiterating its cautious view and downgrading CPB (2.5%) and K (1%). § Energy seemed to be bogged down by another selloff in oil with the favorable production headlines out of Libya overshadowing the recent violence there. § The precious metals group was an overhang on materials with GDX (3.1%). However, some support came from the M&A in specialty chemicals with ROC +9.8% agreeing to be acquired by ALB (3.6%). Some of the industrial metals stocks were helped by the better China sentiment. § Financials outperformed with bank earnings driving the rally in BKX +1.4%