Fed Chair Janet Yellen has reiterated her views that it is appropriate for the Fed to “proceed cautiously” in raising interest rates given the current uncertain global economic and financial environment. In a speech to the economic club of New York, Yellen argued that the need for caution was “especially warranted because, with the federal funds rate so low, the FOMC’s ability to use conventional monetary policy to respond to economic disturbances is asymmetric.”

Yellen, also said that the Fed needed to take into account the “the potential fallout from recent global economic and financial developments, which have been marked by bouts of turbulence since the turn of the year”. On this point she noted that the recent decline in market expectations for interest rate increases effectively worked as an “automatic stabilizer”, cushioning the US economy from these turbulences. As for risks to the outlook, the Fed Chair highlighted China’s slowing growth and commodity prices, particularly oil. Noting that further declines in oil could have “adverse” effects on the global economy.

Yellen’s cautious approach has practically dwarfed the recent hawkish message from other Fed speakers. The Fed Chair has now made it clear that she is happy to take the risk of higher inflation in exchange for a more certain growth outlook.

Yellen’s dovish remarks have yielded a positive reaction from risk assets. Overnight, US Treasury yields were already moving lower in line with the decline in oil prices, but the expectation of lower rates for longer provided an added boost to the rally. US equity indices erased earlier losses and ended the day up between 0.5% and 1.4%.The US Treasury curve bull steepened with 2y and 5y US treasury yields rallying between 7 and 9bps.

In currencies, the USD dollar is weaker across the board. The DXY index is down just under 1% on the day and month to date is -3.1%. The NZD is the G10 outperformer up 2.04% followed by the AUD +1.33%.The JPY is +0.73%, partly boosted by yesterday’s news that the Abe government has confirmed the consumption tax rise to 10% will go ahead as planned in 2017 barring a Lehman style shock or major earthquake. NOK is at the bottom of the G10 pack, up 0.63%.

In commodities, the Yellen effect has helped oil prices recovered some loss ground, but they are still down around 2% on the day. Iron ore ended the day -1.2%, not a bad outcome considering the Dalian iron ore futures was down around 4.5% when we left work yesterday.

In terms of data releases, US consumer confidence came in better than expected at 96.2 (94e, 94p) and the Case Shiller house prices rose marginally more than anticipated.

Coming Up

Ahead of super Friday, it’s a quiet day of data releases both domestically and in offshore markets. In Australia we have the weekly consumer confidence reading and NAB releases its online retail sales index.

This morning we also get Japan’s preliminary industrial production figures (Feb). The fall in the new orders and new export orders PMI sub-indices as well as survey data suggest companies have been producing fewer goods than initially planned. Against this backdrop, industrial production in February is expected to drop 5.9% on a seasonally adjusted basis compared to a 3.7% rise in January.

In the US, the ADP report is slotted for release and the usual caveats apply to the report given its lagged relationship the payrolls report. Bloomberg is currently showing consensus at 195k.

Overnight

On global stock markets, the S&P 500 was +0.90%. Bond markets saw US 10-years -8.60bp to 1.80%. On commodity markets, Brent crude oil -2.28% to $39.35, gold+1.8% to $1,242, iron ore -1.2% to $55.11. AUD is at 0.7638 and the range was 0.751 to 0.7645.

Good luck,

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• Markets Today: 30 March 2016 (PPDF 1MB)

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