After Yellen Speech Markets Are Preparing for March Rate Hike
After Federal Reserve Chair Janet Yellen's speech late last week, markets are increasingly expecting to see a US interest rate hike this month. In her speech in Chicago on Friday (03/03), Yellen said the Fed will adjust its monetary policy (specifically the fed funds rate) in case US employment and inflation continue to evolve in line with the Fed's expectations. The next Federal Open Market Committee (FOMC) meeting is scheduled for 14-15 March 2017 and therefore it is believed only disastrous US labor market data can block an interest rate hike this month.
Over the next trading week, key data on the US labor market that are set to be released include the ADP private employment report on Wednesday (08/03), weekly jobless claims on Thursday (09/03), and the government's monthly payrolls on Friday (10/03). These reports are now key for the Federal Reserve to determine whether interest rates can go up (two inflation reports are set to be released in the following week). If economic data remain sound, some see the Fed raising rates three times in full-year 2017.
After June 2006, the US Federal Reserve has only raised rates twice (in December 2015 and December 2016) as policymakers kept in place an accommodative monetary policy to allow for further economic recovery. In her speech, Yellen also stated that risks in the global economy have been reduced. Hence, strengthening confidence in both US and external conditions now pave the way for higher US interest rates.
Lastly, Yellen added the Federal Reserve remains committed to the strategy of raising rates gradually (provided economic data allow for such decisions) in order to avert any economic overheating and maintain price stability. However, the process of scaling back accommodation will most likely not be as slow as it was in the 2015-2016 period.
At the end of last week, the Dow Jones Industrial Average was flat. US bank stocks were lifted considering higher rates would provide them an opportunity to boost margins, but property stocks fell as higher borrowing costs would make it tougher for consumers to buy property.
Asian futures hint at a bleak and mixed day on Monday (06/03). Negative sentiments could originate from Chinese Premier Li Keqiang's statement to trim China's 2017 economic growth target to 6.5 percent (y/y) over the weekend. Moreover, North Korea fired several ballistic missiles from a missile base in Tongchang-ri giving rise to concern about stability in the region. However, considering North Korea fires such missiles on a regular basis, it should already be priced in the market.