World Week Ahead: Spotlight on Yellen

Monday 22nd August 2016

After global markets swung last week amid changing bets on the odds of a US interest rate hike this year, investors will scrutinise Federal Reserve Chair Janet Yellen’s comments at the annual meeting of top central bankers on Friday.

“Economic data have improved since the last time Yellen had a public speech,” Art Hogan, chief market strategist at Wunderlich Securities in New York, told Reuters.

While minutes of the Fed’s July meeting, released last Wednesday, eased bets of a US rate lift this year, recent comments from Fed officials put investors on notice.

Last Friday, San Francisco Fed President John Williams told reporters, following a speech in Anchorage, Alaska, that next month’s Federal Open Market Committee meeting is “in play” for a rate rise, according to media reports.

"I continue to see evidence that, overall, the economic expansion remains on track,” Williams said in prepared remarks for the speech in Anchorage. “Consumer spending is strong, the labour market is running apace, and household balance sheets are improving. All in all, I see a strong domestic economy."

“In the context of a strong domestic economy with good momentum, it makes sense to get back to a pace of gradual rate increases, preferably sooner rather than later,” Williams said.

And on Sunday Fed Vice Chair Stanley Fischer said: “We are close to our targets” on employment and inflation. Fischer made the comments in prepared remarks for a speech in Aspen, Colorado.

“For the record, I note (a) that looking ahead, I expect GDP growth to pick up in coming quarters, as investment recovers from a surprisingly weak patch and the drag from past dollar appreciation diminishes, and (b) that I am an optimist,” Fischer noted.

The next two-day FOMC policy meeting starts on September 20.

Amid all the talk about Fed hikes, US Treasuries slid last week. However, Bank of America sees positive returns ahead even when the Fed decides to move rates higher.

“Our results bury the myth that a rising rate environment would deliver severe losses for bond investors over multiple decades,” Ralf Preusser, Bank of America’s global head of rates strategy in London, and his team wrote, according to Bloomberg. “Portfolio rebalancing at rising rates soon starts to dominate, with income return generating total returns fairly quickly.”

The latest US economic data slated for release this week include the Chicago Fed national activity index, due today; new home sales, and the Richmond Fed manufacturing index, due Tuesday; FHFA house price index, PMI manufacturing index, and existing home sales, due Wednesday; durable goods orders, weekly jobless claims, Kansas City Fed manufacturing index, due Thursday; GDP, international trade in goods, PMI services, and consumer sentiment, due Friday.

Last week, the Dow Jones Industrial Average slipped 0.1 percent, the Standard & Poor’s 500 Index dipped 0.01 percent. The Nasdaq Composite Index, however, gained 0.1 percent.

In Europe, the Stoxx 600 Index dropped 1.7 percent for the week.

Despite the latest optimistic assessment by Fed officials, some disagree about the outlook for the US and abroad.

“There continue to be widespread concerns about the US and global economic recoveries,” Jim Paulsen, chief investment strategist at Wells Capital Management, wrote in a note to clients Friday, according to Bloomberg. “Globally, Brexit concerns are lingering and US investors still remain anxious about US company earnings results and very weak US real GDP reports during the first half of this year.”

In Europe, the latest economic reports on tap include euro-zone manufacturing and services PMIs, and euro-zone consumer confidence, due Tuesday; Germany’s GDP, due Wednesday; Germany’s IFO business sentiment, due Thursday; and Germany’s GfK consumer confidence, due Friday.

BusinessDesk.co.nz

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