Below trend growth to continue
In her much awaited Harvard University appearance, Fed Chair Yellen endorsed recent Fed rhetoric, noting that it would be “appropriate” for the Fed to raise the Funds rate if economic growth picked up as expected and the labour market continued to improve.
Ahead of a long weekend in the UK and the US, risk assets enjoyed a mildly positive Friday night session, the USD was stronger across the board and US Treasury yields ended the day higher along the curve.
In her much awaited Harvard University appearance, Fed Chair Yellen endorsed recent Fed rhetoric, noting that it would be “appropriate” for the Fed to raise the Funds rate if economic growth picked up as expected and the labour market continued to improve. US data releases were also risk supportive. Revision to the US Q1 GDP number came just under expectations (0.8% vs 0.9% exp), but encouragingly corporate profits showed signs of stabilizing and the final May reading of the University of Michigan consumer confidence index posted its highest level since Jan 2007 (94.7, up 5.7 from April).
The Euro Stoxx index ended 0.24% higher while in the US the S&P500 closed +0.43%, DJ climbed 0.25% and NASDAQ was +0.65%. Ahead of Yellen’s appearance oil prices drifted lower, but post Yellen they staged a mini rally, ending the day practically unchanged. WTI closed at $49.4 and Brent at $49.33. Other commodities had a mixed night; gold was -0.61% and iron ore gained 3.4% (ending the week at $51.15).
Initially, Yellen sounded dovish noting that the US economy has been in a slow recovery while metrics suggest there is still slack in the labour market. Following these opening remarks, the USD was weaker across the board with the USD index (BBDXY) dropping 20 pips or so, however when she was specifically asked about the cash rate outlook, Yellen noted that a Fed rate hike in coming months ‘may be appropriate’ if the economy and labour market continue to strengthen. This comment triggered a USD rally across the board, USDJPY traded up to 110.45, EURUSD dropped to 1.1111 and the AUDUSD traded down to 0.7175. The USD ended the day stronger across the board and near to the upper end of its intraday ranges against most crosses.
Looking at the price action across markets over the past week, it’s probably fair to say that not much is different. Pricing expectations for Fed hikes for this year are little changed, a week ago the OIS market had 6bps of hikes priced for June and now the market is at 5.7bps. July is up a little at 15bps from 14bps, but December is a bit lower at 27bps compared to 29bps. The USD is also little changed with the BBDXY index up 0.3% for the week while ADXY is basically at the same level where it started.
In equities, while the Shanghai Composite and Nikkei were little changed, European and US indices posted gains between 2% and 3% for the week. One could argue that the positive tone to US equities over the past week appears to be reflecting a growing perception that the US economy can cope with a gradual rise in the Fed’s funds rate.
So with a Fed still very much data dependent, this week will be important. Ahead of US May payrolls report on Friday, we also have ISM activity readings and April’s core PCE. Solid numbers could pave the way for Yellen’s speech next week Monday where she could put the market on notice for a 15 June rate hike or set the scene for a move in late July given the risk of moving ahead of the UK referendum.
Looking at other data news, Sunday’s CoreLogic RP Data shows that last weekend we had a substantial increase in auction activity across the combined capital cities, up 26% compared to the number of auctions in the previous week. Melbourne cleared a preliminary 70.8% of auctions (70% prev.) and Sydney cleared 75% up from 73.2% previously.
CFTC data for the w/e 24 May shows overall net USD speculative trading moved into a net long position for the first time in 7 weeks (+19.9k from -56.3k previously). The biggest change of the week came from a reduction in JPY longs (59.9k to 22k ). AUD longs were practically eliminated (24.9k to 0.1k) and shorts in EUR increased to 37.9k from -22.6k.
This morning in Australia we get Q1 inventory and company operating profit figures along with new home sales numbers for April. Japan retail sales (April) are also due this morning and Fed Bullard speaks in Seoul at 10:20 AEST. The OEDC releases its economic outlook and Canada gets Q1 current a/c figures and April industrial production. The UK is enjoying a bank holiday and the US is observing Memorial Day.
On global stock markets, the S&P 500 was +0.41%. Bond markets saw US 10-years +2.28bp to 1.85%. In commodities, Brent crude oil -0.64% to $49.46, gold-1.0% to $1,212, iron ore +1.5% to $51.15. AUD is at 0.7178 and the range since Friday 5pm Sydney time is 0.7175 to 0.7228.
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