Scoreboard: Yellen smooth-talk

Global markets cheered as the Fed chair expressed confidence in the US recovery and stuck to her tapering guns.

I don’t think there were too many surprises in US Fed Chair Janet Yellen’s testimony overnight. The bottom line is that she, and the Fed, reckon the US economy is strong enough for them to keep tapering, and most analysts look for a further $US10 billion in cuts at upcoming meetings. Steady as she goes, as it were.

Moreover, Yellen didn’t seem too alarmed by recent softness in the employment results, noting that these soft outcomes could be weather-induced. Her view was that it was too early to tell, ultimately, and she wanted more time to make an assessment. Having said that, she also emphasised the US economy wasn’t yet strong enough for the Fed to be thinking of rate hikes. In Yellen’s own words: “a highly accommodative policy will remain appropriate for a considerable time after asset purchases end”.

In particular, Yellen said that the economic targets nominated for a move in the Federal Funds rate – an unemployment rate of 6.5 per cent and inflation over 2.5 per cent – were not automatic targets and that “it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5 per cent, especially if projected inflation continues to run below the 2 per cent goal”.

Global equity markets liked the message Yellen sent. Not too hot, not too cold and naturally enough a strong economy and free money only mean one thing. With an hour left to trade, the S&P500 is up 1.1 per cent (1820) and the Dow is 190 points higher (15,992). Gains were broad-based across sectors although energy stocks and basic materials led the charge. Elsewhere, the Nasdaq is 1 per cent higher (4188) and in Europe the Dax was the key outperformer, rising 2 per cent, while the CaC and FTSE100 were up 1.1 and 1.2 per cent respectively.

Forex saw the Australian dollar up nearly 40 pips at 0.9038 from 1630 AEDT yesterday, which is up nearly a cent from yesterday morning. The euro is then down 30 pips to 1.3637, the British pound is up 30 pips to 1.6449 while the yen is at 102.65. It’s important to note there was no sign of panic on the emerging market front either – the US dollar actually appreciated (or held steady) against some of the key emerging market currencies.

Commodities generally had a subdued session, although maybe not gold, which is still reacting to news of Chinese buying. Gold was up $15 to $1289. Elsewhere though price moves were little different from zero. Copper was 0.1 per cent higher, WTI crude was down 0.1 per cent ($99.9) and Brent was up 0.1 per cent ($108.6).

Rates reacted to Yellen's comments by selling off slightly. The yield on the 10-year rose 4 bps to 2.72 per cent, the 5-year is at 1.52 per cent and the 2-year is at 0.33 per cent.

In other news US House of Representatives Speaker John Boehner said the House was prepared to move quickly to extend the nation’s debt limit to March 2015 without conditions. On the data front, US wholesale sales rose 0.5 per cent and inventories were up 0.3 per cent – decent gains on both fronts, with the lift in inventories telling us business expects decent sales going forward. Similarly, small businesses were more optimistic in January, with the NFIB index rising to 94.1 from 93.9.

Finally, there was one more Fed speaker (Charles Plosser, who’s a voter). He said that making an assessment on the US economy was made difficult by unusually bad winter weather. He also reiterated his view that QE should be eased further, arguing it was “neither helpful or essential”. Plosser noted that, for those who thought inflation was too low, “We have done over $US1 trillion of QE since a year ago September and inflation rates have come down. If you are worried about inflation being too low it is not at all obvious the right answer is more QE."

In markets today, the SPI points to a flat outcome on our market. In terms of the data, we see domestic consumer confidence (February) at 1030 AEDT – and that’s it for local data. On the earnings front, Commonwealth Bank of Australia reports today as well. Looking abroad, European industrial production figures are worth watching, as is the Bank of England’s inflation report. Over in the US, St Louis Fed president James Bullard speaks (non-voter).

Have a great day…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.

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