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After eight years in the role Ben Bernanke stepped aside, but the message coming from the new Fed Chair is exactly the same.
This is a good thing; as much as Yellen could have used last night’s testimony to plot the foundations for her time at the helm, she has pledged to remain focused on the mandated issues at hand – domestic economics.
This may be disappointing from an emerging markets perspective, as some central bankers in the emerging world have ‘asked’ for the Fed to understand the current plight of their currencies and the liquidity issues that are now impacting their balance sheets, but alas that was not to be.
The major point to come from the testimony were: that even after back-to-back disappointing soft employment growth read and the issues facing the emerging markets, nothing is going to stop the ‘gradual and measured unwind’ of the current monetary stimulus program.
When questioned on the state of employment growth she responded with the standard, ‘don’t read too much into any one or two figures; the trend over the past 12 months has seen a broad pick-up and the unemployment rates is not at its lowest level since the GFC’. I wrote on Monday that despite the soft headline read on the non-farm pay rolls, the participation rate moved to 63%; the amount of people not in the work force dropped significantly (suggesting more people are returning to the labour market) and the total people employed also rose.
Her testimony also illustrates that the Board is unwilling to find loopholes to move target points; the Fed’s 6.5% unemployment rate, while now within 10 basis points of the official read, there was no suggesting that interest rates will change if this figure being reached. It is more likely that the Fed will just shift language and emphasis towards the other mandated point of inflation, and therefore rely on interest rate projections to hammer down market positions.
So, just as Ben Bernanke did at his maiden testimony after Alan Greenspan, Janet Yellen has illustrated that current policy will continue under her leadership.
This did make trading across the market very interesting. Bond markets saw the testimony as hawkish, with bond yields heading higher as QE is unwinding, which follows theory. Gold market saw it as dovish, with the precious metal heading higher, while currency markets took it with indifference, as risk pairs rose against the USD; theory would suggest however, that in the medium term the USD is on a hawkish bias with taper confirmed.
The final conclusion to be drawn is that US economic strength remains and US investment will continue to see the sustained momentum of the past year, and this is what will settle in the equity markets as seen by another 1% rise in the US markets.
Ahead of the Australian open
There is a plethora of earnings reports on the wires today with the majors being CBA, CSL and Stockland. CBA will be the biggest determinate of how positive the market is. If the beats are good, the ASX will test 5300 points.
Currently we are calling the market up forty points on the 10am bell (AEDT) to 5291- 0.76% as CBA approaches. The other major determinate will be China, with its trade balance due for release; after having seen the largest nominal export number last month a good read again will only help the current recovery.