Daily Market Color

Markets React to Dovish Tone in Yellen Testimony

US stocks rallied while Treasuries sold off marginally as investors digested Fed Chair Yellen’s speech before the House Financial Services Committee.  In her prepared remarks, Yellen spoke more explicitly about the downside risks to the US economy than the January FOMC statement.  She acknowledged tightening financial conditions driven by falling stock prices, uncertainty in China, and a global reassessment of credit risk, but she believes US fundamentals will allow the Fed to continue to pursue “gradual” adjustments to monetary policy.  Yellen’s comments indicate the next move will be a hike even though the pace could be slower relative to what the FOMC envisioned just a few months ago.  A few developments that could mitigate the downside risks include ongoing employment gains, faster wage growth, and cheaper oil prices providing a boost to the US consumer, while highly accommodative monetary policies abroad could also boost the global growth outlook.  Technically the door is still open for an interest rate increase in March, but she didn’t say anything to indicate it’s a likely scenario.  Yellen will give a repeat performance tomorrow before the Senate Banking Committee as part of the semi-annual Humphrey-Hawkins testimony.

Shares in financial stocks rebounded after reports that Deutsche Bank is considering a bond buyback to reassure investors over the bank’s liquidity.  The move would likely focus on senior bonds and exclude the riskier CoCos (contingent convertibles) which became a popular way for European banks to raise tier-1 capital.  The buyback is expected to be multiple billions in size and comes as Germany’s finance minister Wolfgalf Schäuble said he has “no concerns” about the bank.  The news helped European stocks rise for the first time in eight days.

The US data calendar is light today yet again, but the Treasury market gets supply in the form of a $23 billion 10-year note auction.

Ready to start a conversation?

We offer free consultations and platform demos.

Let's Talk