Yellen Has Spoken

Jackson Hole-Wyoming (Aug 28)  Ahead of her keynote speech at Jackson Hole, markets appeared to be pricing in a dovish message from the US Federal Reserve Chairman. US stock indices were pushing higher as were precious metals, while the dollar was weaker against the majors.

This was despite comments from St Louis Fed President James Bullard earlier in the day. The FOMC-voting member said the Fed's September meeting may be a good time to raise rates. If anyone was taking him seriously, this should have led to a pick-up in the dollar and a pull-back in gold and equities.

However, it was Dr Yellen who the markets were waiting for, and the headlines from her speech were undeniably hawkish. She said the case for a rate hike had strengthened in recent months. Also, that the US economy continues to expand and has reached maximum employment with price stability. Nevertheless, she said she anticipates that gradual rate hikes would be appropriate.

This saw the dollar pop higher and precious metals fall. But as is so often the case, the initial market reaction can be misleading. As traders scanned below the headlines for the meat in the speech, perceptions over Dr Yellen’s thinking changed. Equities, oil, gold and silver surged as the dollar slumped. Possibly this was connected to her comments that the overall economic situation remains uncertain.

In addition there was also a line in there saying: "future policymakers may wish to explore the possibility of purchasing a broader range of assets” and that additional tools may be needed to help promote a stable and healthy economy. So, once again the Fed Chair managed to keep all options open and provide something for both the doves and hawks. It is also clear that any decision is data-dependent.

Consequently, investor focus now turns to the upcoming data releases ahead of the Fed’s September meeting. Next week we have the Core PCE (Personal consumption Expenditures) Price Index. This is the FOMC’s preferred inflation measure and differs from the CPI (Consumer Price index) as it only measures goods and services targeted towards and consumed by individuals.

Prices are weighted according to total expenditure per item which gives important insights into consumer spending behaviour. It’s worth noting that July’s headline CPI was unchanged on the previous month. Year-on-year (including food and energy) it rose just 0.8%. The August update comes out on 16th September.

Next Friday we get the latest update on Non-Farm Payrolls. The last two readings have surprised to the upside, so cancelling out May’s disastrous reading. This showed a payroll increase of just 38,000 on expectations of a rise of 159,000. However, the recent pick-up has ensured that the six month average comes in at a respectable 200,000 jobs.

There’s no consensus expectation out as yet, but analysts at RBC capital Markets expect the number to drop back a touch and come in around 175,000. They point out that this is still “substantially above the rate of job growth that keeps the unemployment rate steady.”

Other key data releases include the ISM Manufacturing and Non-Manufacturing PMIs, Producer Prices, Retail Sales, Industrial Production, Building Permits, Housing Starts and, of course, CPI. These all have the potential to move markets given that Janet Yellen’s speech has kept open the possibility of a September hike.