Daily Market Color

Risk On Trade Back in Vogue After Hawkish Comments from Fed Chair Yellen

What a difference a day makes.  Global stock markets rebounded while Treasuries sold off across the curve after yesterday’s speech by Fed Chair Yellen boosted confidence in the US economy.  Most of her speech focused on the history of US inflation, but she caught everyone’s attention when she said “Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter”.  This clearly confirms that the FOMC believes it’s on track to hike rates in either October or December (or both).  Yellen mentioned that she doesn’t expect the recent financial turmoil stemming from a slowdown in China to significantly alter the Fed’s policy, which clears up some confusion from the September FOMC statement.  Yellen acknowledged that inflation is running “way below” the Fed’s 2% target, but she reiterated that the Fed should tighten monetary policy before inflation reaches 2%, since there is typically a substantial lag before the effects of monetary policy take hold, a point Vice Chair Fischer made in August.

Surprisingly strong sales from Nike in China (up 30%) and better-than-expected US data also boosted risk sentiment.  The Commerce Department’s GDP report revealed the US economy expanded at a faster pace than previously expected in the second quarter.  The 3.9% annual rate of growth surpassed the previous estimate of 3.7% growth, largely due to gains in consumer spending and construction.  A separate report from the University of Michigan showed consumer sentiment increased to 87.2, beating Wall Street consensus of 86.5.

Aside from the data, there are two Fed speakers scheduled today, St. Louis President Bullard and Kansas City President George.  Both are considered hawks and they are voters in 2016, but not 2015.

Have a great weekend.



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