While you were sleeping: Yellen cements hike bets

Thursday 3rd December 2015

US stocks and bonds were lower after Federal Reserve Chair Janet Yellen cemented expectations the central bank is gearing up to lift its target interest rate for the first time since 2009 at a meeting later this month.

“On balance, economic and financial information received since our October meeting has been consistent with our expectations of continued improvement in the labour market,” Yellen said in a speech to the Economic Club of Washington.

“And, as I have noted, continuing improvement in the labour market helps strengthen confidence that inflation will move back to our 2 percent objective over the medium term.”

“That said, between today and the next FOMC meeting, we will receive additional data that bear on the economic outlook,” Yellen added.

Indeed, the key nonfarm payrolls report is due on Friday, which is expected to show US employers added 200,000 jobs in November. An ADP Research Institute report on Wednesday showed US companies hired a higher-than-expected 217,000 workers in November, up from an upwardly-revised 196,000 increase in October.

The Federal Open Market Committee begins its next two-day meeting on December 15.

Yellen also warned of the risk of keeping the federal funds rate near zero.

“Were the FOMC to delay the start of policy normalisation for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals,” according to Yellen.

“Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession,” she noted. “Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and thus undermine financial stability.”

US Treasuries dropped, sending yields on the 10-year note five basis points higher to 2.19 percent.

“She’s plainly making a case for the start of normalisation of interest rates,” Christopher Sullivan, the New York-based chief investment officer at United Nations Federal Credit Union, told Bloomberg.

Wall Street fell. In 1.05pm trading in New York, the Dow Jones Industrial Average fell 0.24 percent. In 12.50pm trading, the Standard & Poor’s 500 Index declined 0.29 percent. The Nasdaq Composite Index gained 0.20 percent.

"Yellen gave a fairly positive assessment of the economy that would be consistent with the Fed raising rates at their December meeting," Vassili Serebriakov, currency strategist at BNP Paribas in New York, told Reuters

Yellen is set to testify to US lawmakers on Thursday.

Declines in shares of Chevron and those of Exxon Mobil, last trading 2.3 percent and 1.9 percent weaker respectively, helped propel the Dow lower. Oil is lower ahead of Friday’s meeting in Vienna of OPEC.

In Europe, the Stoxx 600 Index finished the day with a decline of almost 0.1 percent from the previous close. France’s CAC 40 Index slipped 0.2 percent, while Germany’s DAX Index shed 0.6 percent. The UK’s FTSE 100 Index rose 0.4 percent.

A report showed inflation in the euro zone unexpectedly remained unchanged in November, underpinning expectations that European Central Bank President Mario Draghi will announce additional stimulus after the central bank’s meeting on Thursday.

“It’s all about central banks now, but there’s still substantial upside for the markets,” Teis Knuthsen, chief investment officer at Saxo Bank private-banking unit in Hellerup, Denmark, told Bloomberg. “The problem is that Draghi has to deliver something quite big. Markets don’t just want a rate cut, they’re also looking for an extension of QE in terms of volume, asset classes and also timeline. He needs to give us that combo.”

BusinessDesk.co.nz

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