Scoreboard: Fed praise

Wall Street rallied on dovish commentary from Fed chair Janet Yellen and strong industrial production and housing starts data.

Stocks and commodities were bid overnight on a combination of very positive economic data and dovish comments from Federal Reserve chair Janet Yellen. Yellen said she was more worried by low inflation than by QE’s inflationary thrust and noted that the labour market still had considerable slack. Quite dovish comments really, especially as she noted at the start of the speech that the Fed doesn’t expect to meet its dual mandate for two to three years.

On the data font, the apparent ‘slowing’ in China’s economy wasn’t really bothering anyone. In the US, industrial production shot up 0.7 per cent in March, which was stronger than the expectation for 0.5 per cent -- by itself a good thing, and that it follows a strong 1.2 per cent gain the month prior tells you there is considerable momentum in this space and it’s something that’s no doubt raising eyebrows. This wasn’t the only release to boost the market though. Housing starts surged in March, rising 2.8 per cent -- not quite the 7 per cent expected, but it does follow a decent 1.9 per cent gain the month prior.

Equities saw strong gains on both sides of the pond. In the US, the S&P500 closed 1.1 per cent higher at 1862, the Dow put on 162 points (16,242) and the Nasdaq surged 1.3 per cent. Gains were broad based across sectors with energy, basic materials and industrials outperforming. Some of the European bourses bettered that, especially the Dax, and that’s a great performance given concerns over Ukraine. Russia suggests that unless the US and Ukraine wake up to themselves, civil war is likely. Anyway, the German index shot up 1.6 per cent, with France’s CaC not too far behind that, gaining 1.4 per cent. The FTSE100 underperformed, despite very positive data, rising only 0.7 per cent.

Commodities generally got a boost as well, although gains weren’t necessarily as spectacular as in the equity space. Indeed gold was only up smalls to $1302, silver in contrast rose 0.8 per cent, while copper was up 1.2 per cent. Crude was up smalls -- 0.1 to 0.2 per cent on WTI and Brent ($103.8 and $109.5 respectively).

Rates ended mixed in the US, largely due to those dovish comments from Fed chair Janet Yellen. At the shorter end of the curve, rates ended a little higher on stronger economic data, but the Fed’s excessively dovish commentary weighed on the long-end. The US 10-year yield traded on a 4 bps range, ending at 2.63 per cent or down about 0.75 bps. The 5-year yield ended a touch higher at 1.65 per cent, while the 2-year is at 0.37 per cent. Aussie futures were down 1 tick on the 3s (97.000) and 1.5 on the 10s (96.005).

Forex markets didn’t pay much attention to Yellen in the end, and seemed more interested in pushing the British pound higher overnight. Indeed, despite the UK equity market underperforming, the pound was the star performer in the FX space following positive employment data. It rose nearly 70 pips after the data to 1.6797. In contrast the euro did little, down smalls at 1.2816, while the yen is at 102.23, virtually unchanged. As for the Australian dollar, it pushed a little higher and sits at 0.9372 as I write.

Elsewhere, Britain saw strong employment growth, with 239,000 jobs created in the three months to February. The unemployment rate then fell to 6.9 per cent from 7.2 per cent. The Fed’s Beige Book was positive and noted that “Reports from the 12 Federal Reserve districts suggest economic activity increased in most regions of the country since the previous report”. The Beige Book indicated that growth had either rebounded from a weather-induced lull or just picked up in many regions. Labour conditions were reported as mixed, with many districts reporting difficultly finding enough skilled workers.

In markets today, the SPI suggests Aussie stocks will be up around 0.3 per cent. In terms of data, there are one or two minor pieces for Australia. The National Australia Bank’s quarterly estimate of business confidence is at 1130 AEST, and comes out alongside motor vehicle sales. Tonight we see the eurozone current account figures and German producer prices, while for the US we get new jobless claims and the Philly Fed index.

Wishing you and safe and contemplative Easter -- do your bit to make the world a better place.

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.

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