It has been more of the same this morning as the dollar extended its advance on the still undeteremined Trump reflationary policy measures after Yellen signaled an interest-rate hike could be imminent, while bond yields around the globe rose again, metals declined, European stocks advanced and futures were modestly in the red just shy of all time highs.
A quick recap of what Yellen said: she reinforced the message that the Fed was close to raising rates, noting that the case for hiking ‘relatively soon’ would continue to strengthen as long as incoming data held strong. She also signalled the need for the FOMC to avoid delaying rate increases for too long, as “it could end up having to tighten policy relatively abruptly” in the future if the economy began to overheat. Yellen also quelled some fears that the pace of rate hikes would speed up in the future by noting that the FOMC expected that the economy would warrant only “gradual increases” in rates, reasoning that monetary policy was only moderately accommodative at the moment and the risk of “falling behind the curve” in the near future was limited. Yellen also noted her intention to serve out her full four-year term as Fed Chair – thus ending speculation that she might resign following Trump’s criticism of her policies during the former’s presidential campaign. There was some political tension in her remarks though as she defended financial regulations that President elect Trump has sought to partially reverse.
She also cautioned against Congress providing the economy with too much of a budgetary boost and suggested that they should target any stimulus towards the long run productivity of the economy. All in all markets have taken her testimony as signalling a near certain rate hike at the December meeting, with such a scenario now priced in at 96% on Bloomberg (vs. 94% yesterday).
As a result of Yellen’s hawkishness, overnight the dollar DXY index rose as high as 101.43, a new 13 year high, sending the offshore Yuan to record lows above 6.90, and unleashing a Yen selling frenzy, before moderating some of its gains after the European open. The Bloomberg Dollar Spot Index climbed 0.4 percent to trade at its highest level since February. The yen retreated 0.4 percent.
“Right now it is a dollar-dominated story,” Philip Borkin, a senior economist in Auckland at ANZ Bank New Zealand Ltd., said in a client note. “But beyond a Fed rate hike next month, many questions remain over the path of policy going forward – for both fiscal and monetary.”
Japan’s Nikkei 225 Stock Average entered a bull market after it extended its rally from a June low to more than 20 percent after the S&P 500 Index came within four points of a record on Thursday. Equities in Europe rose for a second day. The greenback’s gain weighed on oil, gold and copper, with the industrial metal set for its first weekly slide in four weeks. Global bonds headed for their steepest two-week loss in at least 26 years.
The latest driver of USD strength was Janet Yellen, who In her first public statement since the U.S. election told lawmakers that the Fed is close to hiking rates. The comments torpedoed Treasuries, while American financial stocks pushed their rally since Donald Trump’s presidential victory back above 10 percent Thursday. Speculation that he will boost fiscal stimulus continues to lift industries that are perceived to benefit from economic growth.
“The fact that she didn’t push back against market expectations for a December hike is perhaps the most significant takeaway,” said Jack Spitz, managing director for foreign exchange at National Bank of Canada in Toronto, referring to Fed Chair Yellen. “The dollar is higher as a result.”
In early trading, European equities rose with the Stoxx Europe 600 Index adding 0.3%, heading for a 1.2% weekly advance. Industrial shares contributed the most to the measure’s Friday rally, while mining companies fell with commodities prices. Shippers and carmakers led gains on the Topix index in Tokyo, which rose 0.4 percent. The Nikkei 225 closed at its highest level since January. Telecommunications and consumer stocks drove Australia’s S&P/ASX 200 Index up 0.4 percent, while South Korea’s Kospi index slipped 0.3 percent. Hong Kong’s Hang Seng China Enterprises Index advanced 0.2 percent, while the Shanghai Composite Index dropped 0.5 percent on the mainland.