Yellen boosts dollar despite “considerable period”
City Index December 18, 2014 4:55 AM
<p>The final Fed meeting of the year triggered a 40-point rally in the S&P500, posting the biggest percentage gain since October 2013, courtesy of an […]</p>
The final Fed meeting of the year triggered a 40-point rally in the S&P500, posting the biggest percentage gain since October 2013, courtesy of an unexpectedly dovish FOMC statement. Fed chair Yellen sounded more hawkish at her press conference, when she indicated rates could be raised after a couple of meetings, leaving some to conclude that rates could be hiked as early as April. This last phrase fired up the US dollar on all cylinders without diluting any of the explosive rally in stocks.
The dovish surprise of the Fed statement was the maintaining of the “considerable period” phrase, in reference to keeping rates at current levels, while also adding the “Fed can be patient” in reference to “beginning to normalize the stance of monetary policy”.
This was the bigger surprise as the Fed made a minor change of wording in recognizing the deepening slowdown in inflation. The FOMC removed the previous phrase expecting “inflation in the near term will likely be held down by lower energy prices and other factors” and the indication that “the likelihood of inflation running persistently below 2 percent has diminished somewhat…”, replacing them by the “…inflation to rise gradually towards 2 percent as the labour market improves further and the transitory effects of lower energy prices and other factors dissipate”.
An additional sentence followed, stating the Fed continues to “monitor inflation developments closely”, which suggests this is now the Fed’s top priority.
On jobs & growth
Mildly upgraded its wording on labour market conditions by removing “somewhat” to describe the improvement and omitting “gradually” with regards to the diminishing of underutilization of labour resources.
Softer on dots
As opposed to the September meeting when the Fed’s published dots forecasts draw tremendous attention, the current forecasts went relatively unnoticed. The Fed lowered its median fed funds forecast for end of 2015 to 1.125% from 1.375% in the September forecast, while keeping its long run view remained unchanged at 3.75%. GDP median central tendency for 2015 also remained unchanged at 2.6%-3.0%, while the unemployment rate view was lowered to 5.2-5.3% from 5.4-5.6. Core price consumer expenditure (Fed’s inflation measure) was lowered to 1-1.6%.
Stocks will no longer defy inflation gravity
Since the Fed neither stepped up its concern with disinflation risks, nor removed the “considerable period” phrase, this suggests that it preferred to await further evidence for the course of oil and the resulting impact on inflation. The Fed’s relatively unfazed stance may have a been a surprise after the November CPI showed the sixth slowdown in seven months and 0.3% decline was the biggest m/m contraction since November 2008. But today’s bounce in oil prices was the first increase in five days and only the third increase in three days, while the Russian ruble finally rose after seven straight declines.
Just as ECB president Draghi preferred to wait until January to deliver the sovereign-bond-attack-on-deflation, Yellen chose to await more evidence before further distancing itself from the tide of most major central banks’ policies. In the meantime, China will continue to export disinflation until stocks are no able to diverge with global inflation and the “catch-down” act accelerates dangerously in Q1. Beware.
StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.