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No early Hawkish signs from Yellen

Judging by the strong buying seen in the US bond market overnight, one would interpret Janet Yellen’s testimony to the Senate as dovish.

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Source: Bloomberg

In the FX space, the USD followed bond yields lower, with USD/JPY dropping just over 50 pips. In the equity space the NASDAQ composite rallied for a 10th day, which is the longest rally since 2009. The S&P 500 and Dow Jones Industrial Average both closed at new all-time highs.

Expectations around the speech were elevated and the fact we have recently seen a number of key Federal Reserve officials expressing a view that rates should be raised in June had got the market quite excited about the content of Yellen’s speech. The moves in markets were clearly a reflection of traders expressing a view that they thought she would give a far clearer indication of when a normalisation in monetary policy would commence. However, I am unsure the market got the trade absolutely correct and in fact, I think a hike in the June to September window - as mentioned in ‘The Next Trade’ - still looks achievable.

Reading the pre-released statement, it appears that the Fed are preparing the market for a change in its so-called forward guidance. This will require a change in its view that they can be ‘patient’ with regards to lifting rates. However, when we do see this change, we know its game on and that the Fed could raise rates at any meeting, although this will be June at the earliest.

It is important to stress that a move in the funds rate is purely data dependant and with that in mind, the central bank are still ‘reasonably confident’ that inflation will move back over the medium term towards their 2% objective.

With US monetary policy at the heart of capital markets, traders need to watch the key US economic data releases and listen to the rhetoric from central banks more than ever. Specifically, the upcoming payrolls report (00:30 AEDT on 7 March) will be closely watched, with consensus that we will see 250,000 jobs created, while average hourly earnings are expected to increase 2.1%. Then, all eyes focus on the 19 March FOMC meeting (05:00 AEDT). The removal of one word (‘patient’) is all it takes and the market knows the fed could lift rates at any one of its monthly meetings.

Janet Yellen speaks again tonight (02:00 AEDT), this time to the House Financial Services Committee. Will the Fed chairman give any clearer signal tonight?

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