Yellen strikes a dovish tone after FOMC meeting

Thursday, June 18, 2015

An encouraging outlook for US interest rates was laid out in yesterday’s FOMC statement and accompanying press conference. Fed Chair Janet Yellen, in her fifth post FOMC Q&A session with the press, struck a confident tone as stronger wage growth and hiring activity bolstered the outlook for the labour market. However, as we have come to expect from central bankers around the world the optimistic outlook was footnoted by a word of caution with the improvements “not yet definitive”. The dollar dropped against a basket of major currencies on these “tentative signs”, losing 0.7% after struggling to hold onto near term support around 95, selling off below 94.300. Activity this morning has seen the greenback remain under pressure after the more dovish than expected comments at yesterday’s release.

Treasury yields saw wide swings yesterday as initial optimism which pushed 10 year yields back towards 2.4% on improving risk appetite gave way to a fresh drive for safety, as investors piled back into the government backed securities. Sentiment seems to have shifted and while it certainly isn’t bearish the tempered outlook has spooked some investors as the Fed downgraded its 2015 outlook. Pegging growth for the year between an estimated 1.8-2.0% from its March forecast of 2.7% the outlook for an eventual interest rate rise was also pared back. Policymakers anticipated two rate hikes this year but the medium-longer term outlook was markedly more dovish than comments from previous meetings.

Contagion fears as the stalemate continued between Greece and its creditors threatens to derail the significant progress that eurozone economies have made since the financial crisis. Peripheral economies in the eurozone are facing significant increases to borrowing costs as benchmark yields on long dated government bonds rise to their highest levels this year. 10 year Spanish government bond yields have increased 0.76% since the start of the year with 0.55% of that increase since the start of this month alone. It seems that even the ECB’s massive €1.1tn QE programme isn’t enough to subdue the panic that is quickly setting in among investors.

US 10 year treasury yields drop on improving demand

USGG10YR Index US Generic Govt 2015 06 18 07 49 21

DXY falls on dovish outlook

DXY Curncy DOLLAR INDEX SPOT 2015 06 18 07 45 23

Eurozone stocks extend declines as stalemate continues

SX5E Index EURO STOXX 50 Price 2015 06 18 08 03 27

Peripheral borrowing costs rise on contagion fears

GSPG10YR Index Spain Generic Go 2015 06 18 08 05 26

Events for today

0930

UK

May

Retail Sales

1330

US

May

CPI Core

1330

US

w/e

Jobless Claims

1500

US

Jun

Philly Fed

1500

US

May

Leading Index

1530

US

w/e

EIA Nat Gas

Topics: US Fed, EUR, DXY, Yields
More from: Kash Kamal