FX: Here are the Top 10 Takeaways from Yellen Testimony After all of the fanfare around Janet Yellens semi-annual testimony on the economy and monetary policy, she ended up causing very little action in currencies, equities and Treasures. Of course, this is the best-case scenario for central banks that go to lengths to avoid triggering unnecessary volatility for the financial markets. The U.S. dollar ended the North American trading session slightly higher against all of the major currencies except British pound while the Dow and 10 year bond yields were unchanged. Yellen provided absolutely no guidance on when rates would rise and despite the rally in the greenback, the general tone of the FOMC statement was dovish. The bottom line is that even with the improvements in the labor market, the Fed is not convinced that the economy is performing better. As a result of their uncertain economic outlook, plans for monetary policy are still dependent on data. If the labor market continues to improve, rates could rise sooner but if it deteriorates, more stimulus is possible (though not probable). The dollars resilience in the face of the Feds continued reluctance to raise rates and disappointing retail sales data indicates that trading ranges remain intact. Growth is expected to accelerate in the third quarter with investors happy to see manufacturing activity in the NY region rise sharply in the month of July. Yellen said details on an exit strategy will come later this year and we believe that will be in September when their economic forecasts are updated and Yellen holds her next post monetary policy meeting press conference. Producer prices, the Treasury International Capital Flow report, industrial production and the Federal Reserves Beige Book report is scheduled for release tomorrow. We expect the various Fed districts to report a continued improvement in economic activity. How the dollar performs the rest of the week will depend on U.S. earnings and Chinese data. Here are the Top 10 Takeaways from Yellen Testimony 1. Feds overall view of economy is positive, but their GDP projections have been too optimistic 2. But even with improvements, unemployment is still very high 3. Slow wage growth is a problem, inflation is subdued 4. Very little progress on housing 5. Fed says Q2 growth rebound bears watching, looking for moderate growth this year 6. Risk of money fund runs remains significant 7. Expects to keep rates low for extended period after QE ends, high degree of accommodation needed 8. No decisions made on exit strategy but details to come later this year - SEPT? 9. Economy must be on solid footing before rates rise 10. Increase in Fed Funds rate will likely occur sooner and be more rapid if labor market continues to improve. If it deteriorates, more stimulus is possible as well. Bottom Line: Fed is not convinced economy is doing better despite stronger labor data Economic outlook remains uncertain so everything is data dependent. Best Regards, Iyanu Oye-Festus
Posted on: Wed, 16 Jul 2014 07:54:02 +0000