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After Yellen's testimony, US GDP - Desmond Chua

After Yellen's testimony, US GDP - Desmond Chua

US equity markets rallied the last time Fed Chairwoman Janet Yellen testified, and yesterday was no exception. Stocks rose while treasuries yields and the dollar fell, signalling that markets think the Fed is keeping a close eye on developments in the market, and may consider pushing back the tapering schedule if conditions were to worsen materially.

S&P registers a record close

Gains of 0.5% pushed the S&P 500 above its record close while the Dow edged higher by 0.45%. The recent deluge of weak data had even the Chairwoman talking about the weather, stating that ‘unreasonable cold weather has played a role in much of that’. She also indicated that officials will seek clarity in terms of what is attributable to the weather and what is due to a weaker outlook. This is not surprising given the data inconsistencies, where some areas hit by the harshest winter actually saw better data. Although she did not quickly dismiss the recent weakness as resulting from temporary seasonal factors, she also wasn’t about to jump to conclusions quickly. She stuck by her guns that the Fed will continue to reduce asset purchases at a measured pace, and that the bond buying program is likely to end in the fall. From her reiteration that the unemployment rate is an insufficient statistic for the state of the labour market, we continue to think that the benchmark rate may be dropped in the coming months, in favour of a broader range of indicators.

Durable goods orders and jobless claims

Elsewhere before the testimony, we saw durable goods orders falling only by 1% in the month of January, which is slightly ahead of the 1.7% drop initially estimated. Stripping out the transportation component, durable goods actually rose more than 1%, pointing once again towards weather effects. Meanwhile, jobless claims came in higher than expected at 348k versus expectations of 333k for the week ending 22nd February, to hit a one month high. In the currency space, the dollar lost gains from the European session after Yellen’s comments drew risk appetite back into the market. Following the flurry of market activity from Yellen’s testimony overnight, trading activity will not abate, with a slew of data due for release tonight. The Q4 GDP second release, Chicago PMI, Pending home sales and UOM consumer confidence data are due tonight. Analysts are expecting a revision lower to the GDP figures, from 3.2% to 2.6%, while anything lower may spur a sell-off in the dollar. A wave of risk-haven flows saw the yen trading strongly against the dollar during the European session yesterday, after tensions between Ukraine and Russia escalated. While those effects may have subsided, this morning’s better-than-expected data from Japan failed to prop up the Nikkei, and hence the USD/JPY. This morning we saw Japan’s industrial production rising to a three-year high while retail sales rose 4.4%, with shoppers spending ahead of a consumption tax hike. Inflation, which had been the main guiding post of the BOJ, maintained at 1.3% although the forward-looking Tokyo CPI measure inched up by 0.1%.

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