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    Yellen Demurs, Markets Infer

    Fed Chair Janet Yellen had a delicate job at Wednesday's Congressional testimony. She had to confirm market sentiment that the likely next rate hike has moved into the second half of the year or 2017, without exciting excessive turmoil, or admitting that the Fed was overly worried.

    Her solution was to suggest that the central bank might delay its planned rate increases without abandoning the policy. Yellen said the market turbulence in the New Year had "significantly" tightened financial conditions by pushing down stock prices, pushing up the dollar and raising some interest costs.

    Equities were disappointed, the Dow fell 99.64 points, 0.62 percent closing below 16,000 for the first time since January 27th at 15914.74. But as the odds for a March rate hike have dropped to near zero in the futures market, the outcome was hardly unexpected. The S&P 500 was unchanged losing less than a point to 1851.86. The Nasdaq was the big winner gaining 14.83 points to 4283.59.  

    Currencies responded to the prospect of fewer, if any rate increase this year by selling the dollar.

    The U.S. currency sank as low as 113.12 against the yen in late New York trading. That is the highest the yen has been against the U.S. dollar since November 2014.  

    The repudiation of the Bank of Japan’s limited negative interest rate policy announced on January 29th is remarkable. The yen has gained 4.6 percent against the dollar and 1. 5 percent versus the euro, in the face of a policy specifically designed to weaken the Japanese unit. Part of the strength of the yen is due to safety flows from China stemming from concerns on the state and immediate future of the Chinese economy. 

    Bond markets saw their interest rate view affirmed. Even since the Fed raised the Fed Funds rates for the first time in nearly adequate on December 16th, Treasury rates have moved steadily lower.

     The 10-yer Treasury has lost 60 basis points since then, slipping from 2.2640 just before the FOMC meeting to 1.6681 today. Likewise the 2 year has shed 28 points to from 0.9679 to today's close at 0-.6860.

    While Ms Yellen touted the success of the U.S labor economy in creating jobs she noted that international developments, if persistent could disrupt the outlook for U.S growth. 

    Back in December FOMC policy makers had forecast four 0.25 percent hikes in 2015 bringing the year end Fed funds rate to 1.5 percent.

    But financial markets since then have been rocked by a series of shocks, from a second depreciation of China’s currency and a large flight of capital from the country, to a further steep fall in oil prices, a sharp decline in world trading volumes and a recent rapid sell off in financial stocks around the world.

    These economic and financial developments have made economists and investors wary about the prospects for global economic growth this year and next.

    It seems clear that the Fed had joined that worried consensus. 

    Joseph Trevisani

    Chief Market Strategist

    WorldWideMarkets Online Trading

    Charts: Bloomberg

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