US Stocks and Bonds Extend Gains After Dovish Yellen Comments

US stocks and Treasuries both rallied while the dollar fell as markets reacted to dovish comments from Fed Chair Yellen.  Yellen, in a speech to the Economic Club of New York, argued that the Fed should “proceed cautiously” in raising interest rates due to heightened risks for the global economy.  Yellen specifically cited uncertainty over slowing growth in China and the outlook for commodities (oil in particular) as the main threats to the US economy.  Yellen believes that with the federal funds rate as low as it is, it’s better to run the economy hot rather than raise rates prematurely and risk stalling growth because “the FOMC’s ability to use conventional monetarily policy to respond to economic disturbances is asymmetric”.  Yellen’s comments appear to contradict the views of other central bankers who have recently argued that a rate hike is warranted at one of the next meetings.

While Yellen’s speech drew most of the attention, US economic data quietly beat expectations.  US consumer confidence rose more than forecast in March (96.2 vs 94.0e) and February’s numbers were upwardly revised, while a separate report showed US home prices continue to grow.  Home prices are currently rising at a pace of more than twice the rate of inflation, thanks in part to high demand and limited inventories.  The Pacific Northwest continues to be on fire, with San Francisco, Seattle, and Portland reporting the highest YoY price gains.

All three major US stock indexes are currently trading in the green, while Treasury yields and swap rates are 4-8 bps lower across the curve.