Stocks, Treasury Yields Rise on Central Bank Commentary

Yellen Reinforces Inflation Expectations – Speaking at the International Monetary Fund’s annual meeting, Fed chair Janet Yellen presented her view that “these soft readings will not persist”, in reference to the current period of below-target inflation which she described as the “biggest surprise in the U.S. economy this year”.  Similar to her rhetoric at recent FOMC meetings, Yellen supported the need for a gradual tightening of monetary policy, a sentiment that the leaders of both the ECB and BOE seemed comfortable with given the firm global economic growth experienced this year.  In a report last week, the IMF raised its forecast for economic growth from 3.2% to 3.6% in 2017 and 3.7% in 2018.  BOJ Governor Haruhiko Kuroda was more dovish in his commentary, stating that “The Bank of Japan will consistently pursue aggressive monetary easing with a view to achieving the price-stability target at the earliest possible time,” although “achieving the 2% [inflation] target is still a long way off.”

 

 

Yellen’s remarks helped shift Treasury yields higher during today’s trading session, as yields/swap rates increased 2-6 bps across the curve. The 10-year note yield is currently up 3bps to 2.30% as the odds of an FOMC rate hike in December remains near 77%.

Oil Climbs Amid Iraqi Conflict

WTI crude oil prices rose as much as 1.8% during today’s session, amid the latest military struggles between Iraqi government troops and Kurdish forces which led to a crude production shutdown at two facilities in Kirkuk.  The conflict began on Sunday when Iraq launched an operation into the region following heightened tensions between Baghdad and the Kurdish Regional Government (KRG) triggered by last month’s independence referendum.   The area is currently responsible for nearly 600,000 barrels per day of production and more than half of that amount was affected by the clashes.  Both WTI and Brent crude are currently trading near 3-week highs of $51.85/barrel and $57.85/barrel, respectively.

 

 

The gain in crude prices boosted energy shares, which helped to propel all three major US stock indices to new record highs today.  The DJIA finished 0.4% higher while the S&P 500 and Nasdaq posted gains of 0.2% and 0.3%, respectively. The US dollar edged a modest 0.2% higher on the day against major currencies, led by a 0.3% increase vs. the Japanese yen to 112 JPY per USD.