November 18, 2016

Markets Today: Yellen Stayin’ Alive and on track for December

For those who thought there was a chance Yellen may depart the Fed early, those notions were cast aside with Yellen indicating she was very much Stayin’ Alive and was intending on serving out her full four year term.

The boost to equities and to the US dollar continued overnight driven by comments from US Fed Chair Yellen and supported by strong US economic data. Chair Yellen indicated that a December rate hike was a base case, noting “such an increase could well become appropriate relatively soon”. The OIS market agrees and currently prices in a 96% chance of the Fed hiking in December. For those who thought there was a chance Yellen may depart the Fed early, those notions were cast aside with Yellen indicating she was very much Stayin’ Alive and was intending on serving out her full four year term.

As for future policy, Yellen was wary about being drawn into discussions about the outlook under a Trump Presidency. In an oblique reference to how the Fed is likely to see it, she noted that markets saw inflationary consequences from an expected US fiscal expansion under a Trump Administration (note breakeven inflation rates in the US are now at 1.9% up from the 1.7% level prior to the election – but still only 20bps higher). And in response to a question about the economic outlook, Yellen said that “perhaps [there would be a need to] adjust our outlook”. Nevertheless, Yellen continued to temper expectations for Fed policy into next year (likely in case markets were getting ahead of themselves) stating risks “were roughly balanced” and the economy only warrants “gradual increases”.

As Yellen’s comments hit the wires, the US dollar rose across the board by around 0.5%. It’s also worth noting here that Yellen made no comment on whether the recent rise in the dollar was leading to tighter US financial conditions (it’s up 3.2% since just before the US election) so perhaps a green light for the US dollar to rise further – at least that’s how the market is likely to interpret it. The Aussie was the underperformer overnight, down 1.0%. Much of the weakness in the Aussie came after Yellen’s testimony so does not appear to reflect the soft labour market figures released yesterday. The UK Pound was the outperformer, down only 0.2% after a stellar retail sales number which say sales up 1.9% in the month and an incredible 7.4% in the year – the fastest annual pace since 2002! The Stats office suggests colder weather and Halloween were the drivers, but it’s also possible UK residents are spending more at home given the lower pound since Brexit.

US economic data was very positive overnight with US Jobless Claims coming in better than expected and now at a 42-year low at 235k. While election hiring may have helped, it also suggests the labour market is close to its full employment levels. The US CPI for October was broadly in line with consensus, with the Headline at 0.4% m/m and 1.6% y/y, and the Core Measure at 0.149% and 2.1% y/y.  US Housing starts were also strong, up an incredible 25.5%.

With positive data and Yellen, US equities rose with the S&P500 up 0.4% and within a hairsbreadth of its all-time high. Again financial stocks seem to be the main drivers with the financials sub-index up 1.1% with prospects of less financial regulation under a Trump administration continuing to buoy financials. European equities were also higher with the Dax up 0.2% and the FTSE up 0.7%.

US Treasury yields resumed their upward moves, up 5.0 basis points overnight to 2.27%. Global yields elsewhere mainly took their lead from moves in Treasuries the previous day with German Bund yields down 1.8 bps to 1.41%. Australian CGS yields also fell, down 7.3 bps to 2.57%. Part of that fall reflects markets starting to price back a chance of the RBA cutting rates in the next year on the back of the softer labour force data – now a 16% likelihood whereas the day before there was nothing priced in.

As for commodities, oil was down with the WTI measure down 0.7% to $45.24 a barrel. Markets remain sceptical about an impending OPEC agreement to cap production – formal meeting to be held on Nov 30 – despite continued optimistic remarks from Saudi Ministers. As for Australia’s key export prices, iron ore was up 1.6% to US$73.6, while coal was mixed with coking up 0.5% to US$298.8 and thermal down 1.5% to US$104.9.

Finally Mexico hiked its key policy rate as expected by 50 bps to 5.25% – its highest level since 2009. The moves are centred on countering the inflationary impact of the sharp fall in the Peso following the US election.

Coming Up

The most significant event today is likely to be an upcoming speech by ECB President Draghi at a European Banking Congress in Frankfurt at 7.15pm AEDT. Otherwise it is a very quiet day ahead.

Datawise, China releases its Property Price Index, Germany the PPI, and the Eurozone the Current Account. There may be some interest in Canada’s October CPI, while the US has the Kansas City Fed Manufacturing Activity Index which may garner some interest with the chance it contains some reaction to the election of Trump.

Fed jive talkin also continues today with voters Bullard and George scheduled to speak. Given the multitude of Fed speakers so far this week, in particular Yellen last night, these speeches are unlikely to offer any new insights into the Fed.

Finally, on the weekend APEC leaders meet Saturday and Sunday which may garner some headlines.


On global stock markets, the S&P 500 was +0.35%. Bond markets saw US 10-years +5.16bp to 2.27%. In commodities, Brent crude oil -0.60% to $46.35, gold-0.8% to $1,215, iron ore +1.6% to $73.55. AUD is at 0.741 and the range since yesterday 5pm Sydney time is 0.7412 to 0.7487.

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