If we had to try and summarise the best part of three hours of testimony before Congress by Fed chair Janet Yellen in one sentence, it would be something like “Janet fails to go full dove”. Certainly looking at the performance of US rates markets, that sees 2 year yields about 2bs higher on the day (though some 2.5bs lower than when Yellen commenced her testimony) it is clear that the Fed is not even close to wanting to endorse prevailing pre-testimony market pricing. This still assigns only about a 50% probability to the next quarter-point hike to the fed funds rate by year end, and doesn’t have a full hike priced in before mid-2017.

To be sure, Yellen was quick to acknowledge in her prepared testimony that “financial conditions in the United States have recently become less supportive given equity price falls, higher borrowing rates for riskier borrows (read: the blow out in high-yield credit spreads) and a further appreciation of the dollar”.  She was also up-front about the risked posed to U.S. economic growth, saying “Most notably, although recent economic indicators do not suggest a sharp slowdown in Chinese growth, declines in the foreign exchange value of the renminbi have intensified uncertainty about China’s exchange rate policy and the prospects for its economy” (and, she goes on, related to that the outlook for global growth).

The ‘risk’ sections above were nevertheless prefaced with now the all too familiar positive comments about further progress towards the Fed’s objective of maximum employment, and that despite the likelihood of inflation remaining low for a while, a repetition of FOMC confidence that inflation “will rise to its 2% objective over the medium term”. On the latter though, Yellen does acknowledge that alongside the falls in market based measures of inflation to historically low levels (but which she blames largely on change in risk and liquidity premiums) “some survey measures of longer-run inflation expiations are also at the low end of their recent ranges”.

We’d sum Yellen up – together with the commentary in the days leading up to her testimony including from Bill Dudley and Stan Fischer – as implying that the bar to a next rate rise as early as March is very high indeed but that the Fed is still being careful not to rule anything out beyond that.  Attention now focuses squarely on the forthcoming G20 meeting in Shanghai on Feb 26/27 (where we already have mutterings about discussion of G20 support for fiscal stimulus) and where clarity on China’s currency policy will doubtless be sought, and perhaps too some discussion on whether more forward guidance on future monetary policy intentions of major central banks is once again appropriate.

Incidentally, on the subject of negative Fed rates, Yellen implied the Fed was still looking into the legalities of this and its implications for the ‘plumbing of the payments system’ but was careful to describe these actions as no more than ‘prudent planning’ in light of European (and though she didn’t day it, now of course Japanese) actions.

In other markets, European stocks rallied quite hard (Eurostoxx 50 +1.9%) led by a 10% jump in the shares of Deutsche Bank and following yesterday’s news of its planned bond buy-back. This has proved EUIR/USD negative just as earlier stress had seen the euro supported on capital flight back into the Eurozone.  It has by no means been a ‘risk on’ night though, with USDD/JPY making new post-November 2014 lows now trading bwelow¥114 (¥1133.59).  In FX overall, the G10 leader board has a touch of schizophrenia about it, with the yen firmly at the top (+1.35%) but NZD, NOK and AUD (the latter back just above 0.71) covering the next few places despite generally weaker industrial commodity prices. CAD meanwhile is firmly at the bottom amid divergence between WTI crude (down) and Brent (up).  Go figure.

Coming Up

We don’t have anything major on the calendar either locally or internationally today (save for Fed chair Yellen’s second Congressional testimony, this time in the Senate).  Hong Kong re-opens after its three-day Lunar New Year holiday. The performance of the Hang Seng Index may rate a mention, as too the performance of USD/CNH.

BusinessNZ’s January manufacturing PMI is due at 08:30AEST. Our BNZ colleagues note this index did itself proud in December. At 56.7, from 54.9 in November it was well above its long-term norm of 53.0.s indicative of the economy’s strong momentum late last year.

Other than this, it’s really just weekly US jobless claims (now of more than usual interest insofar as the pick-up in January – whether or not seasonally distorted – was one indication of last week’s relatively soft US payrolls print.

Overnight

On global stock markets, the S&P 500 is currently +0.30%. Bond markets see US 10-years -2bps to 1.7050%. On commodities, Brent crude oil +2.64% to $31.12, gold-0.5% to $1,193, iron ore still closed. AUD is at 0.7105 and the range since yesterday’s local close has been 0.7069 to 0.7125.

For full analysis, download report:

• Markets Today: 11 February 2016 (PDF, 1M)

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