Yellen hints at H2 2015 rate rise

Wednesday, February 25, 2015

Fed Chair Janet Yellen set the stage for a potential interest rate rise this year, bringing an end to the historically low repo rates that have prevailed in recent years. In her testimony to a Senate subcommittee yesterday Yellen projected a fairly optimistic outlook for the US economy, citing a strong recovery in the labour market as a particular catalyst for an eventual rates rise. She went further to state that the Fed would modify its guidance to reflect a potential rates rise at any meeting and that the FOMC would begin tightening monetary policy when it was “reasonably confident” that inflation would move back towards its 2% objective. Given the highly accommodative policy outlook which has been in place for over six years the Fed will need to carefully balance their forward outlook for stronger growth and subsequently higher interest rates against the backdrop of falling inflation. However, in a move that appeased market participants for the meantime Yellen offered further clarification and commented that the Fed would not make a move for at least two subsequent meetings of the FOMC.

Asian benchmark stock indices rallied higher overnight extending gains that have pushed stocks to fresh highs after comments from Janet Yellen offered investors an insight into the Fed’s outlook. With rates not expected to rise at least until the second half of the year investors were encouraged by the positive outlook which saw the yen briefly trade towards 119.84 against the dollar as investors rushed into the greenback. However, after a brief spike the yen traded back towards 118.70 as the initial euphoria subsided. Activity overnight and early this morning has seen the yen trade tentatively below the 50 day MA which has proven to be a stable level of support while immediate resistance around 119.00 hold firm.

HSBC’s China manufacturing PMI reading pushed back above 50 in February with the preliminary reading coming in at 50.1 after spending the past two months below the level that separates expansion from contraction. Market participants polled by Bloomberg had expected a modest slip to 49.5 from January’s reading of 49.7 and the stronger manufacturing activity could go some way to alleviate concerns of a slowing economy. However, caution must be exercised as domestic demand remains sluggish and as of yet export demand is uncertain given the outlook in the eurozone. Speculation that policymakers will step up efforts to support the housing market could be a potential boon for risk assets, however, an interest rate cut late last year and relaxing of requirements have failed to give the property sector a much needed boost and accordingly policymakers will have their work cut out for them.

JPY briefly trades towards 120.00 against the dollar

JPY Curncy Japanese Yen Spot 2015 02 25 07 55 28

China's manufacturing PMI rebounds in February

MPMICNMA Index HSBC China Manuf 2015 02 25 08 09 50

Events for today

0145

CN

Feb

HSBC Manufacturing PMI (P)

1500

US

Jan

New Homes Sales

1530

US

w/e

EIA Energy Stocks

All times UK Local Time

 

Topics: US Fed, USD, PMI, Inflation, JPY
More from: Kash Kamal