Markets React Uneasily to Yesterday’s Remarks by Fed Chair Janet Yellen

May 7, 2015

The big uncertainty for some time has been whether markets and economies could handle a rising trend in the federal funds rate and whether inability to do so might deter Fed officials from getting the policy stance to where it wants.  The gist of Yellen’s remarks on Wednesday is that there is no alternative to policy becoming less accommodative.  It will be done and, yes, market turmoil may ensue.  But know, too, that market valuations on bonds and stocks look elevated, so a correction there is unavoidable.

Equities in Asia fell 1.8% in China, 1.3% in Hong Kong, and 1.2% in Taiwan and Japan, which reopened after Golden Week holiday closures on Monday-Wednesday.  Stocks also dropped by 0.8% in Singapore and Australia, 0.7% in Indonesia and South Korea, 0.6% in New Zealand and 0.4% in India.  In Europe, while Greek stocks are up 3.4%, declines have occurred elsewhere of 1.1% in Great Britain, 1.0% in Switzerland, 0.9% in France, 0.7% in Spain 0.4% in Germany and 0.2% in Italy.

Ten-year sovereign debt yields rose by seven basis points in Japan and France and by 0.5 bps in Germany.

The dollar is mixed, with a drop of 0.4% against the Swiss franc and 0.3% relative to the yen, no change versus the yuan, and upticks of 0.4% against the kiwi, 0.2% versus sterling and the loonie, and 0.1% relative to the euro and Aussie dollar.

Among commodities, gold fell 0.6% to $1,183.30 per ounce, and oil edged 0.1% higher to $60.96 per barrel.

Central bank policy meetings were held in Norway, Malaysia, and the Czech Republic.  Each resulted in no change in the policy interest rate level, respectively at 1.25%, 3.25% and 0.05%.

After back-to-back surges in Australian employment exceeding 40K in February and March, such dipped by 2.9K last month.  The unemployment rate, which had fallen from 6.4% in January to 6.1% by March, edged up to 6.2% in April.  Australia’s construction purchasing managers index fell back 3.1 points to a 2-month low of 47.0 in April. 

A 0.9% rise in German industrial orders during March reversed a similar-sized decline in February.  Likewise, a 1.5% drop in the first quarter followed a 1.5% increase in the final quarter of 2014.  Orders were 1.9% greater in March than a year earlier.  Between February and March, domestic demand jumped 4.3%, but export order demand fell by 1.6%.

Germany’s construction purchasing managers index printed at a 3-month low of 51.0 in April.

The eurozone’s retail PMI rose closer to the 50 no-change level in April, reaching a 12-month high of 49.5 after 48.6 in March 46.9 in February and 46.6 in January.  While Germany’s retail PMI of 52.6 was at a 2-month low, those of France (46.2) and Italy (49.0) rose to 4- and 12-month peaks.

Russia’s service sector purchasing managers index of 50.7 exceeded the 50 no-change threshold in April for the first time since September.  The composite Russan PMI jumped 4 points to a reading of 50.8, signaling stabilization in that economy.

The Japanese services PMI climbed to a 3-month high of 51.3 in April following sub-50 readings in both February and March.  The composite Japanese PMI was 50.7, which also is a 3-month peak, following 48.4 in March and 50.0 in February.  But growth in Japan’s monetary base (MB) is still not accelerating following augmented quantitative stimulus undertaken a half year ago.  The MB grew 35.2% on year in April, same as in March and down from 36.4% in 1Q15, 37.3% in 4Q14 and 39.4% in the third quarter of last year. 

Consumer confidence in Switzerland was unchanged at a -6 reading last month.

Dutch consumer prices went up 0.6% in the year to April.

J.P. Morgan’s estimate of the global purchasing managers index was 0.4 points lower in April at 54.2 than in March.  Orders and input prices also expanded more slowly.

U.S. consumer credit and weekly jobless claims data arrive today.  So do Canadian building permits and Mexican consumer prices.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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