Yellen Shifts Markets

Yellen Shifts Markets

Janet Yellen in her Congressional Testimony today suggested that the Fed was poised to raise rates if the economy continued on its current trajectory. Yellen went to great lengths to explain why the Fed did not have to wait for an analysis of Trump’s Fiscal Policy. Yellen is confident that inflation is increasing along with a tightening labour market. As expected Yellen said that the Fed was expecting to lift rates several times this year. Some critics have suggested that the Fed has to be careful otherwise it could snuff out growth before any real gains are made.

There was an interesting opinion piece today penned by Robert Shiller (Yale Economics Nobel Laureate) that suggested that the US equity market was at risk because of the erratic course that Trump and his team are following. The argument goes something like this: P/E ratios in the developed markets are higher than P/E’S in emerging markets because of economic certainty, policies and a low level of uncertainty. The trailing P/E for the US is roughly 17.6 and the P/E for developing markets is about 15.6. The trailing P/E for emerging markets is 10.6. The difference in P/E is all about risk and the developed market is seen as less risky. The standard deviation for the US market has risen sharply recently.

Meanwhile the firing of Mike Flynn are seeing an unusual response from Russia which throws even more uncertainty over Trump’s Cabinet and perhaps threatening stability. The removal of Flynn is seen as a slight against Russia in what could best be described as highly unusual.

There was also some discussion of Trump changing his approach on currency manipulation. It is suggested that he won’t mention China by name but allow those US companies that feel that they are losing out to currency manipulators to seek relief in the US Courts. This could open a can of worms as such an action could be against WTO Rules and open the US to similar charges given the Fed’s influence on currency markets and the US economy.

Trump has an opportunity to press his claims on infrastructure by becoming involved with the looming Oroville Dam disaster in California. The dam is situated in a Republican stronghold and has been the center of controversy for at least 10 years because of concerns over the dam wall. Being decisive would help Trump’s standing with Congress. If he falters it may cause some Congressmen to stand up and question his policies.

On the day equities continued their positive run closing again at an all-time high, bonds weakened and yields on the 10 year Treasury rose to about 2.47% . In other news it appears as though foreign purchases of US Treasuries are diminishing as Trump’s erratic mood shifts appear to concern foreign investors.

Aussie Market Today.

The US 10 year closed about 2.47% as a result of Yellen’s comments and the weakness should cause further falls in the Aussie Bonds. The equity markets were higher and with commodities slightly higher on the day. Iron ore was slightly weaker but the slight decline won’t have a major impact on the Aussie equity market.